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Consensus Building for New Ohio Oil, Gas Tax

The second of several legislative hearings scheduled for the coming weeks on a modest increase in Ohio's oil and gas severance tax was well received by members of Ohio's House and Ways Committee, who heard from supporters of the proposal on Wednesday.

Consensus is slowly building for House Bill 375, introduced in December (see Shale Daily, Dec. 6, 2013) by Republican Speaker William B. Batchelder and Republican Speaker Pro Tempore Matt Huffman, said Mike Dittoe, spokesman for the House Republican Caucus.

"There is no consensus yet, but we're headed in the right direction, though," he said. "This proposal is much more favorable when compared to an earlier one put forth by the governor, and it's seeing significantly more support in that regard. This is what the committee process is for."

For more than two years now, legislators and Gov. John Kasich have debated the best strategy for raising the state's oil and gas severance tax, with arguments spilling over about how to generate additional revenue, where to spend it and how not to impede further development and investment in the Utica Shale. During negotiations for the state's biennial budget, approved in June, Kasich put forward a proposal to tax high-volume horizontal wells at a rate of 1% for gas and 4.5% for oil and natural gas liquids and condensate, with a reduced rate recommended for the first year of production (see Shale Daily, June 11, 2013).

Kasich's proposal failed and Dittoe said House Republicans have been working on the current proposal for more than a year now. At the time it was introduced, Huffman indicated that he wanted to see an aggressive timeline for the bill making its way to the Ohio Senate and off to the governor's desk. Plans had called for delivering the bill to the Senate by the end of this month, but hearings were delayed by the holidays, which means the bill will most likely arrive in the Senate by next month instead, Dittoe said.

"We do intend to see a fairly consistent and steady committee hearing schedule over the next several weeks, and we foresee the bill in the Senate by February," Dittoe added. "We have brought in many stakeholders for this bill and proponent members of the House have been working on this for over a year now."

Wednesday's hearing offered a chance for the bill's supporters to state their claims, with opponents getting a chance in the weeks ahead.

"I thought it went very well," said Thomas Stewart, executive vice president of the Ohio Oil and Gas Association (OOGA), which has supported the bill since its introduction. "What we've done is try to pass an extensive, yet simple and straight-forward tax reform proposal that accommodates the goals of several parties without damaging the industry."

Stewart expects H.B. 375 to eventually be passed into law unlike similar proposals in the past. He believes a debate on how to allocate the revenue generated by the new tax will become a major sticking point in the weeks ahead, though.

"I'm certainly not happy about any increase in taxes, but I've fought these proposals for two and a half years and the legislature has rejected them in a very strong way twice," Stewart said. "Having said that, politics is the art of the impossible, and this issue is not going to go away. We at OOGA came to the conclusion that we need to solve this problem. The bill is attractive at the moment because there's a political will to get it done right now."

OOGA has said that operators need clarity in the face of a recurring severance tax proposal and the latest has been billed as a more holistic approach to some of the ongoing concerns of stakeholders. The legislation would allocate the bulk of any new revenue to help fund regulatory oversight and elevate funding for the Ohio Department of Natural Resources (ODNR), which oversees oil and gas development. Kasich's proposal recommended using a bulk of the revenue to offset income taxes and provide tax relief for Ohio residents.

Kasich has still indicated that he is willing to work with legislators this time around on how the revenue might be spent.

"Ohio's income taxes are too high, and the governor is committed to lowering them so Ohioans can keep creating new jobs and our state's economic recovery can continue," said Kasich spokesman Rob Nichols in an email to NGI's Shale Daily. "Tax reform that includes modernizing our outdated oil and gas taxes can help do that, as well as help local communities meet their own local needs.”

Under current rates, operators pay 10 cents per barrel of oil and more than 2 cents per Mcf of natural gas produced. More than $10.2 million in severance taxes were paid during fiscal year 2012, most of which came from natural gas production.

The current proposal would require a 1% severance tax to be collected on the net value of oil, natural gas and liquids from unconventional wells during their first five years of production. That rate would increase to 2% after that period and swing back to 1% when the wells begin to hit a production decline. At the same time, the bill would decrease higher taxes on oil and gas royalties and reduce taxes for conventional drillers.

According to published news reports, Rep. Mike Foley (D-Cleveland) challenged Stewart's testimony and called the proposed rate hike too low, wondering aloud if a higher tax rate would actually discourage further investment in the Utica Shale given the improving results unconventional operators have recorded in Ohio thus far (see Shale Daily, Jan. 2).

Chris Zeigler, executive director of the Ohio Petroleum Council (OPC) -- the American Petroleum Institute's chief lobby in the state -- said he believes the new proposal does have a better chance than others of being passed because it wears the name of the House Speaker in a Republican-controlled legislature, yet he voiced some concerns about how the legislation is currently written.

"There's a number of issues that we feel could be better, this amounts to more taxes for our membership in Ohio," he said. "We believe some changes can be made to make the legislation simpler to administer and make the rate more explicit in a way that encourages development and investment."

For example, Zeigler said legislation that establishes a different tax structure for conventional and unconventional drillers could create significant confusion. The OPC plans to work closely with lawmakers on a number of solutions in the weeks ahead.

"We want to ensure that our members are clear on how to comply with any new tax structure," he said.

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