Ohio Gov. John Kasich reportedly is considering higher severance taxes and an impact fee on oil and natural gas operators, as well as imposing new taxes on natural gas liquids (NGL) extraction.

“Bad idea. Very bad idea,” said Tom Stewart, executive vice president of the Ohio Oil and Gas Association (OOGA), of the report. The impact fee could be as much as $20,000 per permit application and would be payable whether a well is drilled or not, he said.

“We know that [the Kasich administration] has been working on a variety of proposals to destruct capital and pull money out of the oil and gas industry,” Stewart told NGI. “[But] this play is at its very beginning. One of the worst ideas anybody can do is to try to tax capital investment, particularly at a time when we don’t understand the rock mechanics and the reservoir.

“Everybody needs to keep in mind what natural gas prices are these days. They’re not too healthy, and the margins are very thin and very tenuous.”

According to a report by the Columbus Dispatch, Kasich is considering an impact fee to help pay for repairs to roads and bridges that could be damaged by oil and gas drilling. The Republican governor did not disclose the price of the impact fee he was considering, which would be submitted as a bill to the Ohio General Assembly.

However, Kasich spokesman Rob Nichols emphasized that there currently are no formal proposals to make any changes to the tax regimen or to enact an impact fee. “We’re looking at other states, evaluating what they are doing,” he told NGI. “There’s no plan, no decisions have been made…[and] any speculation on how these things will be treated is completely premature, purely speculative.”

Another idea purportedly under consideration is to raise the state’s severance taxes and to start including natural gas liquids (NGL) in the tax mix. Ohio has the lowest tax rate among states with shale gas potential: 10 cents/bbl for oil and $0.02.5/Mcf for natural gas. The Ohio Tax Commission said the state brought in an estimated $2.53 million in severance taxes in 2010: about $2.06 million for natural gas and $474,886 for oil.

Stewart said it was the wrong time for the state to consider a severance tax on NGLs.

“It is still fundamentally a natural gas play, although everybody is hoping for the liquids,” Stewart said of the eastern Ohio region where the Utica and Marcellus shales overlap. “There is a possibility of liquids uplift, but even that marketplace is very tenuous. These wells are very expensive, the risk is high and they haven’t done the science yet to even understand if the play works.”

Stewart said the industry was also irked that Kasich may divert funds generated by an impact fee, and any increased severance taxes, for purposes other than the state’s oil and gas regulatory program — namely to local municipalities. He said that alleged plan runs counter to SB 165, which the Ohio General Assembly passed in 2010 (see NGI, Aug. 29, 2011).

“The severance tax funds were to be lock box dedicated to support the oil and gas regulatory program, which is a proper function for these things to do,” Stewart said. “We have indications that [Kasich] wants to socialize it, spread it across and give it away to other people. That’s misguided. He doesn’t understand the [exploration and production] process. The market is not favorable toward heavy investment [and] this is the wrong time to take money out and give it to somebody else. What they need the industry to do is take their capital and invest it in the ground so that this play can prosper.”

Trent Dougherty, an attorney for the Ohio Environmental Council (OEC), said the oil and gas industry would oppose diverting funds to municipalities and would cite SB 165 as the reason.

“They stepped up to the plate two years ago, adding and agreeing to additional severance fees and other fees to help fund the program that permits them,” Dougherty told NGI. “But in the past two years this vast influx of shale drilling has thrust more and more weight upon these local municipalities. It’s becoming an unfunded mandate to watch over oil and gas operations in their local jurisdictions, but they’re not getting anything to fund their first responders and infrastructure.”

Dougherty predicted that if Kasich was serious about raising severance taxes or enacting an impact fee, the proposals would be included as part of a biennial budget bill in March.

Nichols said the governor and his staff were preparing for the State of the State address, which is scheduled to be delivered Tuesday (Feb. 7) in Steubenville, OH, a town in the middle of the Utica and Marcellus shale region. “And energy issues are likely to be a big part of it,” Nichols said.

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