Friday, October 22, 2010

Pennsylvania Gas Severance Tax "Dead" (???)

Gov. Ed Rendell pronounced "dead" the efforts to enact a natural gas severance tax in Pennsylvania this year.  It's a missed opportunity in my mind.  It seems that intransigence and election year politics killed it, but it is a situation that will harm rather than help Pennsylvania long-term as drilling in the Marcellus Shale continues to heat up and the state's budget continues to crater.

A reasonable state severance tax on mineral extraction is an accepted way of doing business in other gas producing states.  There are related costs to supporting mining and extraction industries that are not covered by gains from job creation.  (The honest truth is that not all E&P jobs are locally generated - many jobs are filled by experienced outside contractors.)  While mineral production is an opportunity, it is also a burden for which states must be fairly compensated.  

Obviously there has to be a balance so that the tax is high enough to be able to fairly compensate the state but not so high that it is a naked money grab.  It sounds like the leaders of Pennsylvania were more concerned with other agendas to see the best way forward for their state.  

The Marcellus Shale arguably has the best economics of any shale play in the country.  The shale is relatively shallow (about half as deep as the Haynesville) and royalty rates are in the mid-teens compared to 20+% in our area.  Contrary to tax opponents, a reasonable severance tax will not drive away investment and activity.  Believe me, it is already being considered in the producers' financial models.  

The Marcellus Shale resource is an amazing opportunity, and a reasonable tax will not drive away business.  I hope for Pennsylvania's sake that more time to consider the options will lead to a well-reasoned tax and regulatory regime, but I've got serious doubts.  I also have my doubts that the issue is truly dead, but we'll see.

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