Severance tax would backfire, Pennsylvania association leaders warn

Enacting a severance tax aimed at Pennsylvania’s unconventional natural gas activity would substantially harm the commonwealth beyond the industry itself, three oil and gas trade association officials warned.

Gov.-Elect Tom Wolf (D) made such a tax a major part of his campaign as a relatively quick way to increase revenue and begin bringing Pennsylvania’s budget in line. But the commonwealth’s economy has flourished as gas activity grew under the existing system, Associated Petroleum Industries of Pennsylvania Executive Director Stephanie Catarino Wissman said.

“Energy development is sustaining families with new jobs and generating more income for communities,” she said during a Dec. 16 teleconference with reporters. “Don’t fix what is not broken. Don’t break the economic backbone of the commonwealth.”

“The revenue projections that were out there during campaign season were wildly overestimated and can’t be supported by facts,” added Marcellus Shale Coalition Pres. Dave Spigelmyer, who also participated. “Our production is yielding tax opportunities already for the commonwealth. Development on state properties already has generated more than a half billion dollars of royalties and rentals.”

The third association leader, Pennsylvania Independent Oil & Gas Association Pres. Lou D’Amico, said, “Our industry is driven by investment and profit. As it stands today, its profitability is already suffering. We’re facing competition from Ohio, where the Utica shale produces more wet gas and there’s a more favorable regulatory environment.”

D’Amico said Pennsylvania producers already pay an impact fee to help communities directly affected by development meet growing demands for basic services in addition to taxes other businesses pay. “A new severance tax means there will be a further reduction of gas production in Pennsylvania.” D’Amico said. “The number of rigs working here has been cut almost half from 2011 to 2013. Putting a severance tax on top of the impact fee will mean a further drop.”

Limited pipeline access

Pipeline capacity is limited, creating serious access problems that limit profitability, the executives noted. “Our producers receive $1.50-2 less than those in other states,” D’Amico said. “With gas hovering around $3.81/Mcf, that discount means our producers get about 51% less. We also have well over 1,500 wells producing gas that can’t even get into pipelines.”

“To get the kind of infrastructure to move gas that’s produced here, it’s a 2-5 year window,” said Spigelmyer. “Pipelines are a critical part of not only Pennsylvania’s, but the nation’s energy infrastructure,” added Wissman.

But two state senators, John Rafferty (R-Collegeville) and Andrew Dinniman (D-West Chester) say they plan to reintroduce their bill from the last session to impose a community impact fee on new gas pipeline construction, the Pittsburgh Times-Tribune said in a Dec. 17 report.

Spigelmyer said a delegation of producers met recently with Wolf to directly share their stories. “They explained that if a severance tax is placed on top of the impact fee, it will be harder to compete with other states which provide capital recovery periods or other features our tax structure doesn’t have,” the Marcellus Shale Coalition official said. “They also made clear that if a business is heavily taxed, it won’t do as well. I think the governor-elect understands these principles, and he will weigh them.”

Wissman said of Wolf, “During the election, he focused on revenue. We want to turn the discussion from what can be squeezed out of the industry to what [a severance tax] is going to do to jobs and economic growth.”

Many legislative leaders, meanwhile, have said in the past few weeks that they want to focus initially on spending and dealing with issues such as pensions before turning to revenue generation questions, Spigelmyer said. “The economic equation for investing capital in Pennsylvania is a very sensitive one that we’ll need to deal with carefully,” he said.

Contact Nick Snow at nicks@pennwell.com.

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