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Marcellus Producers Warn PA Governor of Tax Fallout

Raising concerns that a proposed broad-based oil and natural gas severance tax could damage production growth in Pennsylvania, Marcellus Shale producers have come together to lobby against the state's plans, noting that royalties and bonuses over time would be more beneficial to all involved.

The Marcellus Shale Committee (MSC), which represents the oil and gas industry in Pennsylvania, said the severance tax, as outlined in the Commonwealth of Pennsylvania's fiscal year 2009-2010 budget address, would make development in Pennsylvania less appealing than in other large gas-rich states.

"Pennsylvania is blessed with rich natural resources, including a potentially large natural gas field in the Marcellus Shale," the MSC said. "Although the MSC strongly opposes a broad-based severance tax, especially while the development of the Marcellus Shale is in its infancy, the industry remains willing to work through the commonwealth's current financial challenges with the governor and the legislature."

In laying out the state's 2009-2010 budget, Gov. Ed Rendell has proposed a tax to generate $107 million a year from natural gas production within the state. "Pennsylvania has immense natural gas reserves -- in an area known as the Marcellus Shale -- that are now being tapped by private companies," Pennsylvania's budget said. "These companies will extract an estimated 57 Tcf of gas from the Marcellus Shale over the next 25 years, and in the 2009-10 budget Pennsylvania joins the 28 other states that ensure that the public receives a share of the proceeds from the use of these resources."

The MSC said it believes the state could be better compensated in a different way. "The committee believes some of these challenges would be better addressed through an expansion of developing natural gas resources on state-owned land that would yield substantial immediate bonus payments and long-term royalty income for decades," the MSC said. "This option would not only help create new jobs, it would also provide an immediate economic benefit that does not hinder growth and development, especially in these difficult macroeconomic times.

"While West Virginia may have a similar severance tax, West Virginia does not have the same regulatory challenges that exist in Pennsylvania," the committee continued. "We strongly believe the governor and the legislature want Pennsylvania to be a leader in the development of this important energy source. As such, it is essential to point to development models in Texas and Arkansas, two of the largest shale gas producing states. Both states have far more favorable tax approaches, and Pennsylvania is competing against these states for investment in equipment, technology and other aspects of natural gas development. The Marcellus Shale could provide an economic boost for the Commonwealth for many generations, but not if it is prohibited from developing through a hastily imposed severance tax."

The committee, sponsored jointly by the Pennsylvania Oil and Gas Association and the Independent Oil and Gas Association of Pennsylvania, includes national companies and independent producers with expertise in Pennsylvania oil and gas fields.

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