Giving Away the Golden Egg: Shale Tax Revenue Could Top $1 Billion by 2015-16

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Here’s one estimate that Pennsylvania exceeded in 2014—gas production in Pennsylvania’s Marcellus Shale region came in ahead of projections for the first half of the year. Had Pennsylvania adopted a severance tax - a prospect still on the table as late as June - the Commonwealth would have $1 billion in revenue by 2015-16, and $780 million in new funds. That’s enough to make a serious dent in two key areas: restoring cuts to public schools and closing an expected $1.7 billion budget gap in 2015-16.

The Pittsburgh Tribune-Review reported that Pennsylvania produced 1.9 trillion cubic feet of natural gas in the first half of 2014, a 14% increase from the prior six-month period. Because of rising natural gas prices, the value of gas produced grew from $6.4 billion to $9.6 billion in the same period.

The Trib reports that the number of new producing wells fell in Pennsylvania, but production grew, particularly in the northeastern part of the state: Susquehanna, Bradford, and Lycoming counties topped the list, with Washington and Greene in the southwestern corner rounding out the top five.

Dave Spigelmyer, Director of the Marcellus Shale Coalition, predicts that Marcellus wells will produce 4 trillion cubic feet of natural gas in 2014. That would mean production will grow by 29% over 2013’s output. While production is growing, the number of new wells fell from an average of 675 over the previous reporting periods to less than 500 in the first six months of 2014.

Source: Pittsburgh Tribune – Review Analysis of DEP Data

Pennsylvania remains the only significant gas-producing state that does not have a severance tax. With the new production numbers we estimate that a 5% severance tax could raise over $1 billion by 2015-16 and almost $1.5 billion by 2018-19. Assuming all current impact fee uses (local governments, housing, environmental programs) are fully funded, the additional revenue would grow from $780 million in 2015-16 to $1.2 billion in 2018-19. 

Pennsylvania’s impact fee falls short in several critical ways:

  • The impact fee is based on the number of new producing wells, not production. As the Trib article points out, drillers are improving technology, increasing per well production and reducing the need for new wells. As a result, Pennsylvania will receive less impact fee revenue than was expected. How smart is that?
  • Pennsylvania is losing out as natural gas prices rise. Over the winter natural gas prices increased from $3.50 to $6 a thousand cubic feet – so gas producers enjoyed a windfall. The impact fee doesn’t adequately capture the growth in gas prices, so Pennsylvania doesn’t benefit when gas prices spike.
  • As the price increases, fee revenue declines as a share of the economic value of the gas. The impact fee –by design— is barely affected by production or price. As a result, production doubled between 2011 and 2012 while impact fee revenue declined from $204 million to $202 million. This means that the gap between what the impact fee and a severance tax generates will grow even greater than was previously estimated.

Pennsylvania is letting the goose escape with the golden egg, leaving us with an empty nest to clean up. No other state would accept such a deal. North Dakota, in the middle of a shale oil boom, collected $2.5 billion in severance tax revenue in 2013 while Pennsylvania is getting less than a tenth of that from its impact fee.

Enacting a severance tax, despite the obvious advantages, will be tough. Ask our friends in Alaska  – Sarah Palin came to the governor’s office, believe it or not, as a reformer who fought the big oil companies to secure more revenue for state services and increased payments to residents. Her replacement, an oil company lobbyist, undid the reforms. Alaskans went to the polls on August 19 to vote on a ballot initiative to end the sweetheart tax breaks. The proponents of the change were outspent 10-1, and it looks as though the reform measure has gone down to defeat




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