Pennsylvania Gov. Ed Rendell said his decision to once again push for a tax on natural gas extraction in the Marcellus Shale followed the results of the state's public lands lease sale, which last week brought in twice the revenue that state officials had expected.

After initially asking the General Assembly last year to enact a severance tax on gas extraction, Rendell dropped the proposed 5% tax plan until producers were "up and running" in the Marcellus Shale play (see NGI, Oct. 12, 2009; Sept. 7, 2009; Feb. 9, 2009). Rendell said then he planned to "revisit" the tax issue this year.

Sixteen energy companies last week bid an average of $4,020/acre to drill on six parcels comprising 32,000 acres of state forest in north-central Pennsylvania. The lease sale's total of $128.5 million generated more than twice the amount called for by lawmakers and generated a windfall of almost $60 million.

Seneca Resources Corp. was the top bidder, offering $71.8 million for two parcels totaling about 18,000 acres. Other top bidders included EXCO Resources Inc., with a $24.4 million bid for 4,639 acres; Anadarko Petroleum Corp., which bid $11.2 million for 2,724 acres; Penn Virginia Corp., with a bid of $13.9 million for 3,698 acres, and Chesapeake Energy Corp. unit Chesapeake Appalachia LLC, which bid $7.2 million for 2,952 acres.

Tudor Pickering Holt & Co. (TPH) analysts in a note to clients Thursday said the bids were "not surprising given the increased amount of information on Marcellus this time around." The most recent transaction in Pennsylvania's Marcellus acreage, they noted, was in December, when Ultra Petroleum Corp. paid $5,000/acre for 80,000 net acres in three counties (see Daily GPI, Dec. 22, 2009). "This lease sale looks comparable to that," they wrote.

There were "new faces" among the qualified bidders this year that didn't participate in the 2008 sale, noted the TPH team. Among those making bids in this auction were ConocoPhillips (COP), El Paso Corp. (EP), Ultra and Williams (WMB), but "none submitted any bids despite applying to qualify. Of these, COP and EP don't currently have acreage in the Marcellus." They expect WMB to increase its Marcellus acreage "in a big way." Williams currently leases 25,000 acres in the play, but TPH expects the producer "to get to more than five times that."

Among the other trends noted by TPH: Chesapeake was the only bidder on all six tracts and the only bidder for a Cameron County, PA, tract. The bids were "surprisingly close on most tracts." And ExxonMobil Corp. bid on two tracts.

A previous auction in September 2008 for 74,000 acres in Pennsylvania generated average bids of about half the amount of the latest bids, or $2,000/acre, from 18 companies, DCNR spokeswoman Chris Novak told NGI. More than 800 gas wells are now active in the state.

Following the lease sale results, Rendell said he would unveil the tax plan during the annual state budget address on Feb. 9.

"This is an enterprise in which the private sector will be profitable," Rendell said, referring to Marcellus Shale exploration. "The people of Pennsylvania should profit from this."

Rendell plans to meet with energy industry representatives to discuss several issues related to the Marcellus Shale, which include not only the tax proposal but also water quality issues related to gas extraction.

Asked if the industry meetings could again cause a change of heart on the tax push, a Rendell spokesman told NGI that the governor referred to ExxonMobil's recent decision to pay $41 billion to buy XTO Energy Inc., which is exploring for gas in the Marcellus Shale (see NGI, Dec. 21, 2009).

"It's hard for the industry to cry poor mouth," Rendell told reporters Thursday. " the most successful company in the history of the world...and it just paid a high price to buy a gas company."

Rendell noted that his approach to developing Pennsylvania's gas supplies has always been to balance the economic opportunities against the state's environmental responsibilities.

"I believe that we must view natural gas exploration as a unique economic opportunity and as a critical part of America's strategy to decrease our dependence on foreign oil and cut down our carbon emissions," said Rendell.

"Ensuring that more natural gas is supplied by Pennsylvania will create jobs here and orders for Pennsylvania companies, but that cannot happen at the expense of our environment. We have beefed up our permitting requirements and pace of inspections, and I continue to believe that we need a severance tax -- just as they are doing in many other states. I will propose that this tax be effective by July, and I hope the General Assembly will embrace this proposal."

A spokesman for Pennsylvania House Republican Steve Miskin told NGI that the tax plan once again would meet resistance in the General Assembly.

"A tax is a tax," said a Miskin spokesman. The state, he said, should look for other ways to lower its budget before it enacts a tax.

Pennsylvania's Senate Republicans last week said they already have an agreement in place to raise up to $180 million from gas leasing in 2011. Rendell also did not rule out directing the state's Department of Conservation and Natural Resources (DCNR) to lease more parcels of land in the Marcellus Shale to generate income for the state's flagging budget.

To date about a third of Pennsylvania's 2.1 million acres of state forest have been opened to energy development.

Rendell acknowledged that the Marcellus Shale region is "a very sensitive area" and said he was concerned that business interests and citizen groups would remain polarized over the drilling issues.

"We don't have to make the false choices of either drawing a line in the sand and saying no more drilling under any circumstances...and cutting off what does have the potential to put tens of thousands of Pennsylvanians to work," Rendell said.

The state could generate the most income in the future by targeting the "most attractive" drilling tracts identified "while at the same time taking significantly less acres of land," said the governor.

Other methods to generate drilling income from the Marcellus Shale also are moving forward, said DCNR's Novak. Pennsylvania now is negotiating to lease rights underlying the Susquehanna River to an undisclosed driller that has leased private land along the waterway. The shale deposits would be accessed through horizontal drilling on adjacent land.

According to the DCNR, the leases under the waterway could generate more than $10 million in initial payments as well as future royalties. The driller would be identified if the transaction is successfully completed, Novak said.

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