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Lawmakers Mute as Industry Fights Pennsylvania NatGas Severance Tax

There has been little debate in the Pennsylvania General Assembly about Democratic Gov. Tom Wolf's proposal for a 5% severance tax on natural gas production as lawmakers work to pass a budget by July 1, according to a top trade group with a heavy lobbying presence at the state capitol.

Stephanie Catarino Wissman, executive director of the Associated Petroleum Industries of Pennsylvania, a chapter of the American Petroleum Institute (API), said support has waned among Republican lawmakers since Wolf pitched his proposal as part of a broader $30 billion budget aimed at shifting the state's tax burden and increasing funds for public education (see Shale Daily, Feb. 11). Wolf's plan calls for a 5% flat rate multiplied by the market value of natural gas in addition to a 4.7 cent/Mcf volumetric fee. It would also establish a minimum floor of $2.97/Mcf to better insulate state revenue from price swings.

The state House of Representatives and Senate have instead focused on their own initiatives to bring in revenue and reduce the state's budget shortfall. The Senate is expected to vote Wednesday on a bill that would overhaul the state pension system by eliminating guaranteed benefits for state and school employees. The House has already voted for a bill to privatize the state's liquor stores.

"The proposed [tax] package as a whole is not popular with the Senate or the House of Representatives at this point," Wissman said. "As I understand it right now, both the leadership of the House and Senate have established some working groups to talk about some different aspects of the working budget. I believe that they are in organizational mode right now with regard to those subcommittees."

Still, Wissman's organization, along with other trade groups in the state, continue to fight the proposed severance tax. API-PA held a conference call with reporters last week following the release of a study that showed exploration and production companies in the state are already taking a beating with low commodity prices. Wissman said more taxes could mean even more job cuts, a slowdown in development and less revenue for the state in the long run.

Commissioned by the API, the study was based on price scenarios recently forecast by the Energy Information Administration. It examined the historical reactions of Pennsylvania operators during similar downturns, said Senior Economic Advisor Geoffrey Brand. The study found that the proposed severance tax would reduce the number of wells drilled in the state by 1,364 from 2016 to 2025, leading to a cumulative drilling investment loss of $11.5 billion.

"What you have to look at is the pricing environment that our members are dealing with right now," Wissman said. "What you're already seeing without an additional severance tax is a significant reduction in the number of wells drilled and a reduction in capital expenditures by these operators because of this depressed natural gas environment. So, to propose another tax under these pricing conditions could absolutely have a detrimental impact on the industry."

The study also found that the proposed tax could reduce related industry employment in the state by nearly 18,000 jobs by 2025. Wissman said that although support for Wolf's proposal is minimal among leadership in the state House and Senate, API's latest study is partly geared toward reversing public opinion about the issue, which has trended in support of a severance tax.

"I think when Pennsylvanians see what this tax scheme could do to a vibrant industry here in the state, they're going to think twice about it," Wissman added.

Wolf spokesman Jeffrey Sheridan called the study misleading and said it was no surprise that it came from API. He added that it was time for oil and gas companies to start paying their fair share.

API's study estimates that a severance tax would also reduce Pennsylvania's natural gas output by more than 900 MMcf/d as early as 2021. GlobalData analyst Sebastian Sojka said in a similar study released last week that Wolf's severance tax proposal could threaten the shale gas boom in Pennsylvania.

"The act sets a minimum price that gas production should be taxed on: $2.97/Mcf for the first year," he said. "This is above recent Henry Hub spot prices around $2.60, and well above that of local hubs in the state, many of which are below $2. With the Leidy Hub price at around $1.50, the effective severance tax rate would be 13% and the overall state effective tax would be 21.7%."

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