Severance

To avoid the unavoidable price volatility that accompanies oil and natural gas development, states that have become dependent on energy revenues should consider creating permanent trust funds that overcome boom-and-bust price cycles, the Brookings Institution said Tuesday.

To avoid the unavoidable price volatility that accompanies oil and natural gas development, states that have become dependent on energy revenues should consider creating permanent trust funds that overcome boom-and-bust price cycles, the Brookings Institution said Tuesday.

West Virginia’s Republican-controlled legislature concluded this year’s 60-day regular session on Saturday without passing a balanced budget. Democratic Gov.Earl Ray Tomblin indicated he would likely have to call lawmakers back for a special session to resolve the impasse. The state’s general revenue budget has grown rapidly over the last decade, and lawmakers are gridlocked over how to balance the $4.3 billion budget and plug a nearly $400 million deficit. The state Senate shelved a House-crafted budget over the weekend that would have relied on $72 million in spending cuts for state agencies, while the House has rejected a Senate proposal that would raise $139 million in tax increases on tobacco products, among other things. The state has long relied on its coal and natural gas severance taxes to balance its budget, but the commodities downturn is now straining its finances. Overall severance tax collections rose by 2% through the first nine months of fiscal year (FY) 2015 but fell 31% through the final three months, reflecting coal’s ongoing downturn and a drop in oil and gas prices. The state has projected that FY 2016 severance tax collections could fall nearly $192 million short of projections (see Shale Daily,Oct. 7, 2015). The House last week shelved a bill passed by the Senate that would have lowered the coal and gas severance taxes (see Shale Daily,March 8).

The West Virginia Senate passed a bill on Wednesday that would sharply reduce the state’s severance tax rate on oil, natural gas and coal production.

Pennsylvania’s leading oil and gas trade groups on Wednesday renewed their commitment to fighting Democratic Gov. Tom Wolf’s latest proposal to enact a severance tax on production, saying operators can’t absorb more costs during the downturn and repeating that there can’t be a compromise.

Pennsylvania Gov. Tom Wolf on Tuesday continued to push for broad spending increases that would be funded by a suite of new taxes, renewing a proposal during his 2016-2017 budget address that calls for a 6.5% severance tax on natural gas production.

It appears a resolution to Pennsylvania’s months-long budget impasse is in sight, and so far it doesn’t include a new severance tax on the state’s natural gas industry.

As exploration and production (E&P) companies cut back spending in order to stay afloat in a low commodity price environment, the downturn has many oil and gas states feeling the budget squeeze as well.

As Pennsylvania’s budget impasse approaches its fifth month, some of the state’s leading oil and gas executives have stepped up their fight against enacting a severance tax on unconventional natural gas production in a signal the issue still remains in play as negotiations drag on.