Pennsylvania lawmakers have until Oct. 1 to keep a pledge that they would enact a severance tax on natural gas production from the Marcellus Shale. Observers say whether that will happen is uncertain while pressure intended to shape the outcome is coming from all sides, including the energy industry.

Republicans in the state senate late last week began drafting an overhaul of the oil and gas law, which would include a severance tax on Marcellus gas production. Earlier this year the House Environmental Resources and Energy Committee approved bills that could have provisions similar to what Republicans in the Senate are working on, including a tax. The Democratic majority in the House has not brought the bills to the floor for a vote yet, according to the Associated Press.

Meanwhile, Citizens for Pennsylvania’s Future (PennFuture) has planned a series of citizen rallies across the state to keep the pressure on for enactment of a tax.

“The drilling companies are spending enormous amounts of money to stop the severance tax,” said PennFuture CEO Jan Jarrett. “They have hired lobbyists of every stripe — including former Gov. Tom Ridge — and are working hard to keep the voice of the people from being heard. The drillers will make enormous profits from the natural gas they take from our land — it’s only fair that they pay a reasonable tax that will go to protect our environment and local communities that ‘host’ the drilling, fund our natural resource agencies, and help balance our budget.”

Gov. Ed Rendell set an Oct. 1 deadline for a tax plan that would take effect in January, but some lobbyists at the state capital say getting a bill through the out-of-control legislature will be a problem. “They couldn’t even agree on a budget, and there are a wide range of views on the tax,” one lobbyist said. Rendell has said he will not make a deal with the producer community on forced pooling and spacing in exchange for the tax. But “that’s just the governor. The legislators are all over the map on this.”

Part of the problem is timing. Prior to the November elections the state senate has scheduled 10 days in session and the house 12 days. What about next year? The leading candidate for governor is a Republican who has signed a pledge saying he will approve no new taxes.

Pennsylvania is the largest gas-producing state in the country that does not tax production. Speakers at a recent conference on Marcellus Shale opportunities said gas producers should be prepared to pay a severance tax.

“Quite frankly, the argument that’s been made against the severance tax has been that this is an infant industry that needs to find its legs in Pennsylvania,” John Quigley, secretary of the state’s Department of Conservation and Natural Resources, said at the conference. “Poor little infant Exxon; my heart bleeds for it…This industry’s not going anywhere. It’s the most productive play in the world — at least has the prospects of it — and the industry’s not getting taxed out of the state by the very, very reasonable proposal that the governor has put into place.”

According to PennFuture, a recent poll shows that nearly everyone in the state supports a tax. “Three out of four voters in both Pittsburgh and Philadelphia want the legislature to pass a severance tax,” Jarrett said. “The support is even stronger in rural areas, with 84% supporting the tax. Three out of four Republicans support the tax, and 79% of Democrats want the tax passed.”

A severance tax is only fair compensation for extraction of the gas resource, and the revenue would be a bulwark against recession, according to an analyst’s recent paper. However, a gas industry organization blasted the paper as coming from a left-leaning, union-backed source with questionable credibility.

“Based on current prices, Pennsylvania could set a [severance tax] rate between 30 and 35 cents/Mcf and be more than competitive with other gas-producing states,” wrote Michael Wood, research director for the Pennsylvania Budget and Policy Center (PBPC). “A higher rate could be justified as Pennsylvania, unlike these other states, does not levy property taxes on oil or natural gas deposits.”

Travis Windle, spokesman for the producer-backed Marcellus Shale Coalition (MSC), dismissed Wood’s assertions and questioned his impartiality. PBPC is affiliated with the Keystone Research Center, whose board includes several labor union representatives, Windle noted. “This is big labor saying, ‘Give us more,'” he said.

Windle also alleged that Wood, who until 2007 was budget manager for the city of Harrisburg, PA, allowed the city’s budget to become a “shambles.” (Like some other municipalities around the country, the city is facing a budget crisis. In part, Harrisburg is suffering from debt it issued to finance an incinerator project.)

“It sure seems like Mr. Wood’s budgetary background leaves a lot to be desired,” Windle told NGI.

Wood’s report is titled “How to Structure a Severance Tax That Is Fair to Pennsylvanians.” In it he said every state with “mineral wealth” except Pennsylvania has a severance tax. States with a severance tax include Texas, Alaska, Wyoming, Louisiana, Arkansas, Oklahoma and West Virginia, all of which have “booming extraction industries,” Wood said.

“During the recent recession, the states with severance taxes fared much better than those without, as relatively high energy prices generated significant tax revenue. The Center on Budget and Policy Priorities notes that North Dakota and Montana were able to avoid budget shortfalls because of revenue from severance and other energy taxes.”

If Pennsylvania were to tax natural gas at a rate similar to West Virginia, the state would have raised $71 million in 2010-2011 and could raise $400 million per year by 2014-2015, according to Wood’s projections.

On a fixed-rate basis, the tax rate for natural gas in West Virginia ranged from 26 to 35 cents/Mcf in 2010, but rates in some states are much higher, Wood said. At a price of $6/Mcf, Oklahoma’s rate is 43 cents/Mcf; the rate in Texas is 45 cents/Mcf, and New Mexico’s rate ranges from 52 to 57 cents/Mcf, according to his analysis.

Windle said any tax in Pennsylvania should be structured in a way comparable to what exists in other shale gas-producing states. He said MSC has not published any analysis of what a tax should be but its members are “working closely with leaders in Harrisburg each day.” The MSC wants to prevent any tax that would stifle investment in the Marcellus Shale play, he said.

Lawmakers should be careful to draft a severance tax plan that does not allow loopholes for the gas industry, Wood said.

While the industry has lobbied for lower taxes in the first years of a well’s production, Wood is opposed. “This sort of tax break is both unnecessary and costly,” he said, citing a “tax break” the industry receives from the federal government: the expensing of intangible drilling costs in the year that they are incurred rather than over the life of the well.

“The natural gas industry wants to deduct production, processing, and transportation costs from its tax calculations,” Wood said. “In other states, these types of deductions have created loopholes which the production companies have exploited.” The tax should be easy to administer and reduce the likelihood of costly litigation.”

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.