The four top natural gas producing states in the Lower 48 states — Texas, Oklahoma, Louisiana and Wyoming — are collecting severance taxes on their dry gas of between 14.7 and 18.5 cents/Mcf based on recent gas prices, according to a review of regulations and taxes by Washington, DC-based Resources for the Future’s Center for Energy Economics and Policy (CEEP).
The rates translate to 7.5% (18.45 cents/Mcf) in Texas; 7% (17.22 cents/Mcf) in Oklahoma, 6.7% (16.4 cents/Mcf) in Louisiana, and 6% in Wyoming (14.76). New Mexico, another state with annual production counted in the Tcfs, collects a severance tax of 9.23 cents/Mcf at a rate of 3.75%.
Since some states levy their severance tax in fixed dollar amounts and some in percentages, the CEEP survey calculated the state severance tax rates both ways, converting percentages to cents/Mcf based on a gas price of $2.46 cents/Mcf. The severance tax calculation is one part of an overall “Review of Shale Gas Regulations by State” in which CEEP also examined the scope of state regulations in 31 states “that have significant shale gas reserves or where industry shows interest in shale gas development.”
Regarding the disclosure of fluids used in hydraulic fracturing (fracking) the survey found that about half of the states (14), including all those with significant shale production, require disclosure of fluids used in fracking. Another 13 states do not have disclosure rules; two states are considering rules and the study was unable to classify California and Utah.
In the Southwest, the states with required disclosure are Texas, Oklahoma, Louisiana, Wyoming, New Mexico, Colorado, Montana, North Dakota and Arkansas. In the Northeast, Pennsylvania, Ohio, West Virginia, Maryland, and Michigan require fracking fluid disclosure. New York and Illinois have proposed disclosure rules. The study by CEEP, an independent researcher of issues involving the environment and natural resources, found the disclosure rules vary as to volume and concentration measurements.
On severance taxes, CEEP estimated the national average at 11 cents/Mcf. Registering in the middle close to the average, at about 5% or about 12 cents/Mcf, were mid-range volume producers Colorado, Utah, Kentucky, West Virginia, Arkansas and Michigan. Pennsylvania collects a 5% “impact fee.”
Among the states with less production, Montana currently is levying the highest severance tax on producers at 22.14 cents/Mcf (9%). It is closely followed by Kansas and Alabama, both with severance tax rates of 19.68 cents/Mcf, or 8% of the value of the gas extracted, and Mississippi with a tax of 14.76 cents/Mcf or 6%. Ohio, which potentially could see increased production from the Utica Shale, now collects 2.5 cents/Mcf (1%). Other states included in the review with minimal production had rates at around 1%, except for Maryland, which allows individual counties to set the rate.
In calculating the severance tax, some states use a hybrid approach in which the percentage tax varies among different levels based on the gas price, CEEP noted. Rates may also vary based on production, well vintage or other factors.
“For example, in Montana, the tax rate is 0.5% for the first 18 months of a well’s operation (compared to 9% thereafter). In Utah, if the price of gas is below $1.51/Mcf, the tax rate is 3%, and in Colorado the tax rate is set based on total net gross income, with the lowest rate (2%) pertaining to total net gross income less than $25,000 and the highest (5%) pertaining to total net gross income greater than or equal to $300,000.
“Some states (such as Maryland and Virginia) leave the question of severance taxes to local governments, though Maryland is debating a 4.5% statewide severance tax, which would be imposed on top of any local taxes. Virginia limits local severance taxes to 1%,” the analysis said. “Several states offer incentive programs that can reduce severance tax burdens. Louisiana, for instance, offers discounts for ‘incapable’ wells; Montana offers a decreased rate for ‘nonworking interests.’ Oklahoma lowers the tax according to the price of gas at market; and Texas can lower taxes for high-cost wells and inactive wells.”
“Because the current gas price is low by historical standards, one would expect those states with percentage taxes to have relatively low taxes in dollar terms compared to the other states. But this is not the case — the average per-Mcf tax in percentage-tax states is more than 1.5 cents/Mcf greater than the national average,” CEEP said.
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