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Pennsylvania's Top Oil/Gas Executives Caution Against Severance Tax

As Pennsylvania's budget impasse approaches its fifth month, some of the state's leading oil and gas executives have stepped up their fight against enacting a severance tax on unconventional natural gas production in a signal the issue still remains in play as negotiations drag on.

Seventeen executives representing some of the state's most active exploration and production and midstream companies, including Consol Energy Inc. CEO Nick Deluliis; Chevron Appalachia LLC President Nigel Hearne and others from MarkWest Energy Partners LP and Columbia Pipeline Group Inc., sent a letter last week to Democratic Gov. Tom Wolf and ranking lawmakers in the general assembly. The correspondence advised the leaders to act against a severance tax.

Saying "it defies good economic policy to single out a key industry and economic engine," the executives asked the leaders to stop a severance tax from advancing, calling it “onerous” and adding that it would generate little revenue in the current commodity price environment.

The letter comes more than two weeks after the Republican-controlled state House of Representatives voted down Wolf's adjusted proposal to tax unconventional production at 3.5% plus a 4.7 cent/volumetric fee (see Shale Daily, Oct. 7). That vote was symbolic, scheduled by Republican leaders to determine if there was enough support for the proposal to advance. Wolf campaigned on the severance tax and has pushed heavily for it to generate more revenue to fill a more than $2 billion state deficit.

As the industry grapples with low commodity prices and a broad retrenchment, the state's business leaders have also expressed concerns about a new tax and its potential impact on the economy, consumer energy prices and landowner royalty payments, among other things (see Shale Daily, May 19). The executive letter was delivered last Thursday in a marked shift from the op-eds, television commercials and trade group comments that have characterized the industry's fight against the tax.

Wolf has lowered his proposal from 5% to 3.5% and kept the volumetric fee. But the state has gone without a budget for nearly five months and Moody's recently downgraded the state's credit outlook as the stalemate continues. When the House voted down the severance tax proposal earlier this month, it also voted down another Wolf proposal to increase the personal income tax rate to 3.57%. Wolf has also withdrawn his proposal to increase the state sales tax in an effort to compromise with Republican lawmakers.

Under his previous 5% proposal, Wolf's administration said a new tax could generate up to $1 billion for the state's ailing public education system (see Shale Daily, Feb. 11). After his administration received the letter, a spokesman indicated that Wolf continues to work with both chambers on a "common sense tax." Earlier this month, at an event with local news media in Washington County -- a hotbed for shale drilling -- Wolf said lawmakers need to consider more revenue-generating options for the budget.

"It's time for Republican leaders to put forward a serious proposal -- for the first time -- that will balance our budget, fund our schools, provide property tax relief and get Pennsylvania back on track," he said. "The realities of Pennsylvania's budget deficit and education funding crisis have not changed, but Republicans still refuse to take on the status quo."

After they voted against Wolf's tax proposals on Oct. 7, Republican leaders said they would meet with Wolf and Democratic leaders to get a budget passed as soon as possible.

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