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Ohio Governor Said Considering Severance Tax Hike, Impact Fee

Ohio Gov. John Kasich is reportedly considering raising severance taxes on oil and natural gas, new taxes for the extraction of natural gas liquids (NGL) and a new impact fee on oil and gas operations.

"Bad idea. Very bad idea," said Tom Stewart, executive vice president of the Ohio Oil and Gas Association (OOGA), of the report. The impact fee could be as much as $20,000 per permit application and would be payable whether a well is drilled or not, he said.

"We know that [the Kasich administration] has been working on a variety of proposals to destruct capital and pull money out of the oil and gas industry," Stewart told NGI's Shale Daily on Tuesday. "[But] this play is at its very beginning. One of the worst ideas anybody can do is to try to tax capital investment, particularly at a time when we don't understand the rock mechanics and the reservoir.

"Everybody needs to keep in mind what natural gas prices are these days. They're not too healthy, and the margins are very thin and very tenuous."

According to a report by the Columbus Dispatch, Kasich is considering an impact fee to help pay for repairs to roads and bridges that could be damaged by oil and gas drilling. The Republican governor did not disclose the price of the impact fee he was considering, which would be submitted as a bill to the Ohio General Assembly.

"You can't have the local people out there having their roads undone and say, 'It's not my problem,'" Kasich told the newspaper, adding that he didn't think an impact fee would hamper oil and gas development. "I think we're going to be in a really good place on this."

However, Kasich spokesman Rob Nichols emphasized that there currently are no formal proposals to make any changes to the tax regimen or to enact an impact fee.

"We're looking at other states, evaluating what they are doing," Nichols told NGI's Shale Daily on Wednesday. "Our policy guides are looking into what we think some states are doing effectively, and what other states are not doing effectively. We're talking about it and looking at it. There's no plan, no decisions have been made."

Asked if the newspaper had erred in its reporting, Nichols said, "Shale and wet gas in the Utica Play are new to our state. We're looking at a myriad of options on how this stuff should be treated. But any speculation on how these things will be treated is completely premature, purely speculative. Anyone who suggests that they know exactly what's [under consideration] doesn't know what they're talking about."

Another idea purportedly under consideration is to raise the state's severance taxes and to start including natural gas liquids (NGL) in the tax mix. Ohio has the lowest tax rate among states with shale gas potential: 10 cents/bbl for oil and $0.02.5/Mcf for natural gas. The Ohio Tax Commission said the state brought in an estimated $2.53 million in severance taxes in 2010: about $2.06 million for natural gas and $474,886 for oil.

Stewart said it was the wrong time for the state to consider a severance tax on NGLs.

"It is still fundamentally a natural gas play, although everybody is hoping for the liquids," Stewart said of the eastern Ohio region where the Utica and Marcellus shales overlap. "There is a possibility of liquids uplift, but even that marketplace is very tenuous. These wells are very expensive, the risk is high and they haven't done the science yet to even understand if the play works. And now comes along somebody who wants to tax it."

Stewart said the industry was also irked that Kasich may divert funds generated by an impact fee, and any increased severance taxes, for purposes other than the state's oil and gas regulatory program -- namely to local municipalities. He said that alleged plan runs counter to SB 165, which the Ohio General Assembly passed in 2010 (see Shale Daily, Aug. 25, 2011).

"The severance tax funds were to be lock box dedicated to support the oil and gas regulatory program, which is a proper function for these things to do," Stewart said. "We have indications that [Kasich] wants to socialize it, spread it across and give it away to other people. That's misguided. He doesn't understand the [exploration and production] process. The market is not favorable toward heavy investment [and] this is the wrong time to take money out and give it to somebody else. What they need the industry to do is take their capital and invest it in the ground so that this play can prosper."

Stewart also cited a 92-page economic impact study released in September by Kleinhenz & Associates Inc. for the Ohio Oil & Gas Energy Education Program. The report estimated that oil and gas severance taxes could total $50.85 million by 2015.

"They're going to get their money, if they just let the capital investment take place," Stewart said of state officials. "If they destruct the capital investment, then they actually may lose money. But they don't understand that."

Trent Dougherty, an attorney for the Ohio Environmental Council (OEC), said the oil and gas industry would oppose diverting funds to municipalities and would cite SB 165 as the reason.

"They stepped up to the plate two years ago, adding and agreeing to additional severance fees and other fees to help fund the program that permits them," Dougherty told NGI's Shale Daily on Tuesday. "But in the past two years this vast influx of shale drilling has thrust more and more weight upon these local municipalities. It's becoming an unfunded mandate to watch over oil and gas operations in their local jurisdictions, but they're not getting anything to fund their first responders and infrastructure.

Dougherty predicted that if Kasich was serious about raising severance taxes or enacting an impact fee, the proposals would be included as part of a biennial budget bill in March. "This is a correction that needed to take place long ago," Dougherty said. "Hopefully it will be passed without any opposition."

Nichols said the governor and his staff were preparing for the State of the State address, which is scheduled to be delivered Tuesday (Feb. 7) in Steubenville, OH, a town in the middle of the Utica and Marcellus shale region. "And energy issues are likely to be a big part of it," Nichols said of the governor's speech.

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