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Severance Tax Hike, Oil and Gas Law on Ohio Radar

Two members of the Ohio General Assembly announced Tuesday that they are drafting a bill that calls for raising the state's severance tax on natural gas drilling and would create a fund for localities where drilling takes place.

Meanwhile Gov. John Kasich is reportedly planning to unveil a legislative package in March that contains requests to change existing oil and gas laws.

Robert Hagan (D-Youngstown) and Mike Foley (D-Cleveland) said they want to raise Ohio's severance tax rate by implementing a 7% tax on a well's gross receipts.

Ohio currently has the lowest tax rate among states with shale gas potential: 10 cents/bbl for oil and $0.02.5/Mcf for natural gas, although the state began imposing an Oil and Gas Regulatory Cost Recovery Assessment of 10 cents/bbl for oil and $0.00.5/Mcf for natural gas beginning on July 1, 2010.

"To say that we, as a state, are doing enough to ensure financial fairness in natural gas extraction is a flat out lie at this point," Rep. Hagan said in a statement. "If the governor wants to dance around the issue and say maybe there needs to be some fees, I would say he's less than half the way there...What we're asking for is a pittance."

Tom Stewart, executive vice president of the Ohio Oil and Gas Association (OOGA), blasted the proposed severance tax hike, saying it would seize all potential profits and devastate the industry's plans to develop Ohio's portions of the Marcellus and Utica shales.

"His proposal is going to go nowhere," Stewart told NGI's Shale Daily on Wednesday. "This is all showboat stuff. He's on the far left of the Democratic caucus, and they're always coming up with ideas of what to do with other people's money."

Stewart asserted that numerous studies, including one conducted by the American Petroleum Institute (API), found oil and gas companies in the United States averaged between 6% and 7% profits -- and that was before the collapse of natural gas prices.

"Now they're proposing that all net profits be siphoned off to other purposes, completely forgetting that there are ad valorem taxes flowing to local governments and a severance tax flowing to the state to pay for the regulatory cost," Stewart said. "We're talking about a shale play that is extremely high cost, and where companies are operating in an environment where they are already pulling back from dry gas plays, but it's dry gas net revenue that's providing the capital investment to drill."

Although several media outlets reported that Kasich plans to ask legislators to require operators to begin disclosing the contents of the chemicals used in hydraulic fracturing (fracking), Stewart said the reports were in error because state law already requires disclosure (see Shale Daily, Aug. 25, 2011).

"There's a lot of misunderstanding out there about the current state of Ohio law," Stewart said. "Clearly they don't understand because we have one of the best disclosure systems in the nation. It's more expansive that most other states."

Asked what Kasich planned to request, Stewart said, "I think the administration hopes to see modifications to oil and gas law. They obviously want to seek modifications on taxation. We're more than willing to talk with them about that. I think it will be part of a broader package of many issues, not just oil and gas, but many issues that the administration is concerned about.

"We're trying to understand it. We're in discussions with them right now."

Kasich spokesman Rob Nichols could not be reached for comment Wednesday. Stewart said he thought the governor would unveil his proposal on March 12, with the hope that legislators would pass his recommendations by June 30.

Gary Gudmundson, spokesman for the Ohio Department of Taxation, told NGI's Shale Daily that the state brought in an estimated $2.53 million in severance taxes during the 2010 fiscal year -- about $2.06 million for natural gas and $474,886 for oil -- plus another $613,000 in combined oil and gas assessment costs.

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