Looking to shore up county, municipal and school district budgets without raising taxes on residents, Pennsylvania House Majority Whip Bill DeWeese (D-Greene County) is turning to Marcellus Shale oil and natural gas producers to foot the bill. He has introduced legislation that would allow counties to assess value to natural gas, oil and coalbed methane resources before they are produced and tax the producers.

"The polling data is clear: Pennsylvanians are overwhelmingly against allowing counties to increase their sales tax by 1%," DeWeese said. "However, like the commonwealth, local governments are facing budget shortfalls and need assistance for their coffers. I believe the burgeoning natural gas drilling industry that is rampant across the state can provide that financial aid without a cost to local taxpayers."

However, with natural gas and oil currently being sold at some of the lowest prices in years, spurring producers to reduce exploration and development, the timing on the call to raise taxes on oil and gas production in the state couldn't come at a worse timer for producers. Front-month natural gas futures prices dipped earlier this month below $4/Mcf for the first time in more than six years.

Last week a group of FBR Capital Market analysts said total domestic oil and gas production spending has to fall through 2010 to rebalance the market. However, the analysts noted that shale spending -- and corresponding shale rig counts -- would likely rebound faster than oil or conventional gas operations (see related story). "We expect the shale (Barnett, Fayetteville, Haynesville, Marcellus and Woodford) rig count to decrease by a third in 2009 and then increase 14% in 2010 and 20-30% in 2011 and 2012."

Producers did not have a particularly good week in the prolific Marcellus Shale, which runs below portions of Pennsylvania, New York, West Virginia and Ohio. A New York official, joined by several environmental groups last week, called for a ban on gas drilling in the state's section of the shale to protect its watershed from potential contamination (see related story).

DeWeese said producers need to be taxed. "Gas operators have been drilling natural gas and methane gas wells throughout the western part of the commonwealth and they do so virtually tax-free," he said. "Proposals to drill for gas through the vast Marcellus Shale formation are spreading this phenomenon far beyond southwestern Pennsylvania."

He noted that before Dec. 19, 2002 these natural resources were being taxed at the local level, similar to the way coal and other mineral resources are assessed. However, on that date, the Pennsylvania Supreme Court decided in Independent Oil and Gas Association of Pennsylvania, et al., v. Board of Assessment Appeals of Fayette County that the general assembly had not explicitly recognized gas and oil as a taxable interest.

"The legislation that I am reintroducing this session would correct that oversight to the benefit of counties, local municipalities, school districts and their taxpayers. The additional revenue that the local entities would receive from the drillers would be just one step in helping to prevent future local tax increases," DeWeese said. "We are only asking the owners of these natural oil and gas resources to pay the same local property taxes as other property owners in the commonwealth do."

DeWeese clarified that the tax would be assessed against the developer or driller, not the landowner or farmer on whose property the wells are located. DeWeese said nearly every state taxes natural resources; therefore, allowing such an assessment at the county level would not drive the drilling companies to neighboring states.

The legislation is supported by the County Commissioners Association of Pennsylvania, Pennsylvania State Association of Township Supervisors, Pennsylvania State Association of Boroughs and Pennsylvania School Boards Association.

DeWees cited recent technological advances, which have provided the ability to extract from the Marcellus Shale natural gas formation, in vastly increasing estimates for the assessed value of gas and oil in Pennsylvania from between $10 billion and $20 billion to closer to $1 trillion. The Marcellus Shale underlies approximately two-thirds of Pennsylvania (54 of 67 counties) and portions of New York, West Virginia and Ohio at a depth of 5,000 to 8,000 feet and is believed to hold trillions of cubic feet of natural gas.

Penn State University geoscientist Terry Engelder recently told those attending the first Pennsylvania Natural Gas Summit in State College that there are 363 Tcf of recoverable gas in the Marcellus Shale, enough to supply all of the nation's natural gas needs for 14 years.

The Pennsylvania Department of Environmental Protection said the total number of well permits granted in 2008, which includes gas, oil and coalbed methane, was 7,927. It said it expects to issue more than 11,000 permits in 2009.

DeWeese said House Bill 10 has 28 co-sponsors.

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