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Shale gas tax battles teed up for Ohio, Pennsylvania

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Shale gas tax battles teed up for Ohio, Pennsylvania

The Republican governor of Ohio and Democratic governor of Pennsylvania share a nonpartisan view of the shale gas industry: They need money from severance taxes to fill holes in their new budgets.

Ohio Gov. John Kasich was first out of the box with his proposed two-year budget Jan. 30. Kasich's budget calls for oil and gas production from horizontal wells to be taxed at 6.5% of value at the wellhead and NGLs at 4.5% after processing. Currently, Ohio levies a 10-cent-per-barrel tax on crude and 2.5 cents per Mcf on natural gas. There is no tax on NGL volumes.

Pennsylvania Gov. Tom Wolf said he will ask again for a severance tax when he introduces his budget for fiscal 2017-2018 on Feb. 7, but he has been mum on the details. Pennsylvania has no severance tax on natural gas. Wolf has not been able to get a severance tax added to either of his two previous budgets.

Pennsylvania producers do pay a per well impact fee that has been declining as a virtuous circle of improvement in well design means fewer wells are drilled for the same amount of production.

Both governors have consistently tried to get their Republican-controlled legislatures to pass or expand a severance tax as production from the Utica and Marcellus shales boomed, but lawmakers have stymied those efforts, paying more heed to industry arguments that commodity prices are too low and margins are too thin for producers to be able to absorb another cost.

Kasich is asking for a package of sales, severance and other taxes to keep Ohio's budget in balance while providing more funding to schools and social services and cutting personal income taxes. His budget projects $447.2 million in oil and gas severance tax revenue over two years.

Wolf has said he would direct the new gas tax revenue to schools and to towns and counties outside the Marcellus fairway. Impact fee revenue is now distributed to the small towns and counties that are directly affected by drilling.

Industry groups are uniformly opposed to any tax increase as drillers continue to feel the effects of a two-year price downturn.

"Once again the [Kasich] administration's severance tax proposal is not in tune with the current market realities surrounding oil and gas production in Ohio," Ohio Oil and Gas Association Executive Vice President Shawn Bennett said in a statement that echoes the feelings of the Marcellus Shale Coalition in Pittsburgh. "While this industry continues to struggle from a market downturn, an increase of any kind would stifle development even further."