The latest state budget from Ohio Gov. John Kasich renews his effort to increase the severance tax for oil and natural gas. And once again, that proposal is meeting with opposition from some state lawmakers and leaders in the state’s oil and gas industry.
The proposal would impose a fixed rate of 6.5 percent for crude oil and natural gas when sold at the wellhead, and a lower rate of 4.5 percent at later stages of distribution for natural gas and natural gas liquids. Two years ago, Kasich sought the same rates in the 2015 budget.
“These rates are lower than those levied by other major state producers, such as Texas, Oklahoma and North Dakota, and will place Ohio squarely in the middle of the pack of all state rates,” according to a fact sheet provided when the 2017 budget package was released.
Ohio’s current rate of 20 cents per barrel of oil and 3 cents per thousand cubic feet (Mcf) of natural gas is “already at the ground floor with regard to how much they tax this industry,” noted Ted Auch of FracTracker Alliance. “They’re giving this stuff away.”
Nonetheless, Ohio House Finance Committee chairman Rep. Ryan Smith (R-Bidwell) called the proposal “ironic” and compared it to the 1993 movie Groundhog Day.
“Because the same thing is coming back budget after budget after budget,” Smith said. He spoke about the proposal at a conference hosted by Vorys Advisors and the law firm of Vorys, Sater, Seymour and Pease in Columbus on January 31.
‘A very delicate place’
“We want Ohio to be a competitive state… . We want people to be able to move here and participate in and open businesses and have businesses thrive,” Smith said. “A lot of that has to do with the cost of energy.”
Although Ohio has a long history of conventional petroleum drilling, the largest quantities produced since 2008 have come from the deep Marcellus and Utica shale layers. Extraction of that petroleum has become economically feasible with a combination of horizontal drilling and hydraulic fracturing, or fracking.
That petroleum is “a natural resource for the state of Ohio, but to tax this, to slow down the play, so we can put $20 in everybody’s pocket through the income tax” is unacceptable, Smith said. “I’m a bit insulted.”
His $20 statement refers to a proposed income tax cut that is also part of Kasich’s budget plan. If passed, that cut will also be accompanied by some other taxes and a 0.5 percent jump in the state sales tax. Sales taxes on most products are generally deemed to be regressive because poor people pay a larger share of their income for them than wealthier people pay.
Natural gas industry representatives who spoke at the January 31 program also oppose the proposed severance tax increase. Low market prices triggered by OPEC actions after mid-2014 have already pushed product prices below earlier levels.
“We’re in a very delicate place right now,” said David Hill, an independent oil and gas producer in Byesville. Fortunately, recovery is underway, he noted. “We’ll all create a bunch of jobs,” he said, including jobs in other sectors. “There’s going to be a renaissance in the manufacturing industry because we’re finding all this oil and natural gas.”
“But now is not the time to say, ‘We need to tax these guys. We need to regulate these guys,’” Hill warned. “Just let these guys do their work.”
“We are sitting on top of the world’s largest natural gas field,” said Shawn Bennett of the Ohio Oil and Gas Association, referring to the combined Marcellus and Utica shale under parts of Ohio, Pennsylvania and West Virginia. In his view, the industry is about “producing a renaissance in the economy. We produce a product that can better the economy in Ohio.”
Higher taxes would be one more problem for the industry when prices are already well below companies’ breakeven points, noted Bob Krcek of Antero Resources. Most of his company’s wells in Ohio’s Utica shale will provide less than a 20 percent return if the selling price is below $3.50/Mcf.
A big part of boosting that price is to get more product to other markets, Krcek and other speakers said.
“This is about getting gas out of the basin,” Bennett explained. Although shale gas is plentiful in Ohio, “we are producing too much gas to use in the basin. So you have to find those markets” that will command a higher price.
Some of the excess supply can be used up by attracting more manufacturers and building more natural gas-fired power plants. But producers also need to increase takeaway capacity to move natural gas outside the state, Krcek said.
Bennett agreed, but added that exporting more natural gas wouldn’t drive prices up too high for Ohio customers. “When you’re closer to the source, your gas is always going to have a discount,” he said.
‘Escalating costs for communities’
Ideally, a severance tax is “supposed to give back to the state from which natural resources are being taken,” said Auch. “These companies are profiting from this stuff beneath the ground in Ohio. It stands to reason [the state] should recoup some of that revenue.”
Severance taxes for natural resources also offer protection against boom-or-bust cycles that can leave areas economically depressed after heavy drilling or mining activity levels off or declines, Auch explained. “In order to buffer the state and the community against boom-bust, you need to tax these things.”
The communities in eastern and southeastern Ohio where the Marcellus and Utica plays extend are already struggling, noted Melanie Houston at the Ohio Environmental Council.
“Ohio’s existing severance tax on oil and gas production is among the lowest of all oil and gas producing states, yet shale development has come with escalating costs for local communities,” she said. “There are increased road maintenance needs, new demands for emergency services, negative impacts to air and water quality, and greater need for oversight and regulation of the industry. Residents of impacted communities also complain of increased traffic, destruction of the landscape and concern over potential lasting damage to their water supply.”
Because of those factors, Houston does not think funds from an increased severance tax should support an income tax cut.
Instead, increased severance tax revenue should “support the cost of increased oversight for the industry” by the Ohio Department of Natural Resources’ Division of Oil and Gas, she said. “Additionally, we want to see this funding used to make communities whole from the local impacts from the shale gas boom.”
“At least $170 million in immediate needs have been presented by local community leaders in past testimony to state legislators,” Houston continued. “These needs include infrastructure (water, sewer, roads and bridges), emergency response needs, affordable housing, and planning to ameliorate expected negative impacts, and protect public health and safety.”
“This notion that Ohio is crippling this industry is false,” Auch added, noting that severance taxes are only a tiny portion of companies’ costs. Borrowing costs for capital have gone up, along with costs for steel, proppant (frack sand) and other materials, he noted.
“The other thing is, where else are they going to go?” Auch asked. Various other states have higher severance taxes, and companies are already drilling and producing in those places.
Auch acknowledged that companies could well decide to allocate more capital and resources to other states if they thought the potential for profit was greater. However, he added, “if they thought they needed to have more weight in those places, I’m sure they would do that, regardless of what the severance tax is.”