This analysis provides very helpful context to Gov. Kasich’s proposed severance taxes on new, large-volume horizontal wells – particulary as part of the Governor’s broader plan to reduce state income taxes while broadening the sales tax base and imposing sales and use taxes on various types of “services.”  These observations and recommendations are very thoughtful and are worth reading.  A direct link to the summary is provided above as  well as here.

Ohio’s current severance tax rates are $0.20 per barrel of oil and $0.03 per million cubic feet (MCF) for natural gas; there is no separate state severance tax on “gas liquids” or the other hydrocarbons that can be found in Ohio’s Utica shale.  The proposed severance tax would apply only to high-volume horizontal wells operating in Ohio’s Utica shale formation – the tax structure for conventional wells would be mostly unchanged, with a new exemption for small-volume gas wells (with average daily production under 10 million MCF) that would exempt almost 45,000 currently taxable conventional gas wells.  For horizontal wells, the tax rates would be 1% for natural gas, and 4% for oil, natural gas liquids, and condensate.  But a lower tax rate of 1.5% would apply for the first year of a well’s production, in order to allow producers to recover site preparation and drilling costs.

The Governor’s office estimates that its severance tax proposal would produce an estimated $45 million of revenue in fiscal year 2014, $155 million in fiscal year 2015, $305 million in fiscal year 2016, and $415 million in fiscal year 2017.  This blog will continue to monitor the progress of Governor Kasich’s severance tax plan as the state legislature considers his overall budget proposal.

All of these bills were slated for hearing before the session closes, but none are expected to pass the Republican-controlled chambers.  The proposed bills are: 

SB 318, sponsored by State Senator Capri Cafaro, would require wells in urbanized areas to comply with zoning requirements, to revise the setback distances of a well from an occupied dwelling, to require the disclosure of all chemicals and substances used in hydraulic fracturing, to eliminate mandatory pooling, to apply the Consumer Sales practices Act to lease agreements for the exploration for the development  of oil and gas on residential property and to require a surety bond for an injection well.  The bill would also fund a training program including employee training grants to oil or gas well owners.

SB 212, sponsored by Senator Mike Skindell, would establish requirements governing well stimulation, brine disposal, and water that is used in the drilling and operation of oil and gas wells on state land, including a requirement that oil and gas permittees pay a five per cent overriding royalty for each well that is stimulated.

SB 213, also sponsored by Sen. Skindell, would establish a moratorium on horizontal stimulation of oil and gas wells until the USEPA publishes a report containing the results of a study of the relationship of hydraulic fracturing to drinking water resources and the Chief of the Division of Oil and Gas Resources Management issues a report analyzing how Ohio’s rules address issues raised in the USEPA report.

HB 500, sponsored by Rep. Ron Gerberry, would authorize a fee on the recycling of brine from oil and gas operations to benefit local governments.

HB 596, sponsored by Rep. Robert Hagan, would revise the requirements concerning an oil and gas permit application, an oil and gas well completion record, designation of trade secret protection for chemicals used to drill or stimulate and oil and gas well and disclosure of chemical information to a medical professional, require an owner to report all chemicals brought to the well site, and to make other changes in the Oil and Gas Law.

HB 537, also sponsored by Rep. Hagan, would authorize a political subdivision to enact and enforce health and safety standards for oil and gas drilling and exploration and to revise the setback requirements in the Oil and Gas Law.

HB 493, sponsored by Rep. Mark Okey, would establish additional requirements governing wells that are drilled into the Marcellus shale formation or a deeper formation, to establish governing oil and gas land professionals, including the registration of such professionals and the creation of seller of mineral rights and to make other changes in the Oil and Gas Law.

HB 528, sponsored by Rep. John Carney, would require the lessee of an oil and gas lease to provide to the lessor monthly oil and gas production statements, to specify the minimum information that must be included in a monthly statement, and to establish procedures and requirements in accordance with which a lessor may conduct an audit of the lessee’s records and documents related to production or post-production costs under the lease.

Specifically, House Bill 2399 would designate $25 million each fiscal year to the Department of Community and Economic Development (DCED)for the Marcellus Shale Job Creation Tax Credit.  A company would be eligible to receive the job creation tax credit if it can demonstrate to DCED:  financial stability and the proposed project’s financial viability; its express intent to maintain operations in Pennsylvania for five years from the date the company submits its tax credit certificate; and the company’s conformity with industry laws and regulations.  Priority would be given to applicants that place workers who have completed an approved apprenticeship training program, have been dislocated, have been unemployed for at least six months, or are underemployed.

The bill would set a maximum credit of $2500 per new job created and up to the maximum specified on an individual basis by DCED.  The credit would apply to 100%  of the company’s corporate net income tax, capital stock and franchise tax or the capital stock and franchise tax of a shareholder of the company, if the company is a Pennsylvania S corporation, personal income tax or personal income tax of shareholders of a Pennsylvania S corporation or any combination thereof.

The base period is considered the three years immediately preceding the date on which a company may begin creating new jobs.  If the company has been in business in the Commonwealth for fewer than three years, the period which it has been in business in the Commonwealth is considered the base period.  A new job is defined by the bill as a full-time job, the average hourly rate that, excluding benefits, must be at least 350% of the Federal minimum wage.  It must also be  created within a municipality located by a company within three years from the start date.  The term includes a job which was previously held by a nonresident and is filled by a resident.

House Bill 2399 was introduced by Rep. Rick Mirabito (D-Williamsport) and was referred to the House Committee on Environmental Resources and Energy for consideration.  This blog will monitor the progress of HB 2399 and additional legislative developments in Pennsylvania as they relate to the Marcellus and Utica shale plays.

Republican State Rep. Ron Amstutz, chairman of the House Finance and Appropriations Committee, announced that the tax provisions of the mid-biennium budget review Kasich unveiled on March 14 would be stripped out of a bill to overhaul the state budget.  Rep. Amstutz commented that he does not expect his Committee to focus on the severance tax provisions in the next few weeks because there is not time to deliberate the proposal as he believes it should be deliberated.  He further stated that the severance tax could be part of a larger tax reform discussion, but that discussion would likely not take place during this year’s legislative sessions.

Governor Kasich noted that he will continue to advocate for his severance tax proposal.  This blog will continue to monitor the issue and will provide timely updates if and when the Governor’s proposal moves forward.

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Ohio Governor John Kasich announced today that he plans to “change Ohio’s severance tax for oil and gas production” in his Midterm Budget Review Bill and use the additional revenue to fund an across-the-board income tax cut.

The current severance tax is 20 cents on a $107 barrel of oil and 3 cents per $2.62 MCF of natural gas.  These figures are based on the February 29, 2012 closing prices for crude oil and natural gas on the NYMEX futures exchange.

The Governor’s proposed changes to Ohio’s tax system for oil and gas production are intended to complement upcoming revisions to Ohio’s environmental, health and safety regulations that are designed to keep pace with new technologies for high-volume horizontal oil and gas wells in Ohio’s shale formations.  The Governor added that updates to Ohio’s severance tax policies will keep rates competitive with other oil and gas-producing states while generating new revenue that will go directly to Ohio taxpayers, in the form of an income tax cut.

Specifically, small natural gas wells producing less than 10 MCF per day would no longer pay any severance taxes on natural gas production.  This eliminates taxes for approximately 90% (44,500) of Ohio’s conventional natural gas wells.  For conventional natural gas wells producing above this level, the new 1 percent rate would apply, with a cap of 3 cents per MCF.

High volume horizontal wells would be subject to a low initial severance tax rate of 1.5 percent or both natural gas liquids and crude oil.  This rate would apply for the first year to allow producers to recoup their drilling costs, which can range from $6 to $12 million per well, and can be extended for one additional year if drilling costs haven’t yet been recovered in the first year.  After the initial cost-recovery period expires, the standard rate of 4% would go into effect for both natural gas liquids and crude oil.

Severance tax rates for natural gas produced by high-volume horizontal wells would be changed from the current 3 cents per MCF to 1% (price x production volume).  At the current natural gas price (approximately $2.60 per MCF), this represents a tax cut for producers.

Severance tax rates for crude oil from conventional wells would remain unchanged at the current 20 cents per barrel rate.

Ohio currently does not apply a separate severance tax on natural gas liquids produced by conventional wells.  That would not change.  No separate tax would be applied to natural gas liquids produced by conventional wells.

Up-front fees of $25,000 per well would be paid by oil and gas companies to local governments to offset impacts on local governments.  The fee will be returned over time; this represents an acceleration of these impact fees.

This blog will provide additional details when the Governor’s proposed statutory language is made public.