A Maryland panel is recommending that the state impose both a fee and a tax on shale gas development, as well as shift more costs to industry, but it did not propose specific details for any changes.

In a report released Tuesday, the 14-member Marcellus Shale Advisory Commission (MSAC) recommended that the General Assembly impose a fee on natural gas leases and a statewide severance tax to offset the cost of managing development. It also said the state should get rid of its current limits on bonding; pass a bill creating presumptive liability for damages occurring near development; create a mediation process for disputes; and pass laws to protect surface owners.

The report does not mean Maryland will be allowing shale drilling any time soon, though. “The state has not yet determined whether gas production can be accomplished without unacceptable risk, and nothing in this report should be interpreted to imply otherwise,” the authors wrote.

The proposed fee would cover the cost of state reviews during the permitting process and monitoring during the development process for specific operators. The proposed severance tax would create a Shale Gas Impact Fund to offset costs that are attributed to the industry at large.

Although Maryland does not yet have a state-level severance tax on natural gas, the report noted that Garrett and Allegany counties, two rural counties in the western panhandle that overlie the Marcellus, already levy county-level taxes: 5.5% in Garrett and 7.7% in Allegany. Using U.S. Geological Survey estimates that the Maryland portion of the Marcellus holds as much as 2,383 Bcf of technically recoverable gas, each 1% of statewide severance tax would bring in between $27.9 million and $93.7 million at a constant gas price of $3.93/Mcf, according to the report.

The MSAC did not recommend a tax rate but said the structure should be designed to offset the cost of state activities related to development, both site-specific and regional impacts.

Pennsylvania is working to pass a fee to offset the impacts of development, although some lawmakers believe the fee should fund other programs (see Shale Daily, Dec. 21, 2011). West Virginia recently increased its permitting fee to $10,000 per well (see Shale Daily, Dec. 15, 2011).

Although not traditionally seen as a revenue source, the report recommended that Maryland remove its bonding limits. Currently, the Maryland Department of the Environment (MDE) may not require a bond of more than $100,000 per well, or a blanket bond for all wells by a permittee of more than $500,000. Pennsylvania is considering increasing its per-well bond to $10,000 and its blanket bond to $250,000, figures some believe are too low (see Shale Daily, Nov. 9, 2011).

The MSAC also recommended several changes to protect landowners near development. These include a provision to hold operators liable for contamination near development unless the operator can prove it is not responsible. Although not offering details, the report said West Virginia currently holds operators liable for contamination within 1,000 feet of drilling, while Pennsylvania is looking to strengthen its provision to 2,500 feet (see Shale Daily, Oct. 4, 2011). The goal is to provide an incentive for operators to pay for baseline testing before drilling. Maryland currently holds operators liable for proven damages.

The MSAC also recommended that lawmakers pass a Surface Owners Protection Act. In addition to requiring operators to notify nearby landowners of activities, the act would set up a process for operators and landowners to discuss upcoming development and mediate potential disputes.

The report is just one part of a long process for Maryland to decide whether it wants to participate in the shale game. The state received its first shale drilling permit application in 2009, but has yet to approve or deny it. Lawmakers introduced severalbills last year to impose a moratorium on permitting to give the state time to study the issue, but those attempts ultimately failed.

Gov. Martin O’Malley subsequently convened the Marcellus Shale Safe Drilling Initiative by executive order last June to help policymakers decide whether and how to allow shale development. The report released Tuesday is the first of the three-part study, looking just at potential sources of revenue from development and standards of liability for the industry. The two future parts, due in August 2012 and August 2014, respectively, will recommend best practices and consider the potential environmental and economic impacts of development.

The MSAC met four times in the second half of 2011 (see Shale Daily, Dec. 14, 2011).

Maryland is still using oil and gas regulations written in 1993, before deep shale development.