Wolf's gas tax might generate less money than claimed

The federal government this week projected that natural-gas prices would average about 30 percent less in 2015 than last year. That's great news for consumers, but it presents a challenge for Pennsylvania's new governor.

Gov. Wolf has proposed a severance tax on natural-gas production that he says would generate $1 billion for education programs.

But the proposed tax is based on the price of gas. And as long as gas is cheap, it will be hard to hit the revenue target.

"I think the billion you're projecting is not there," State Rep. Garth Everett (R., Lycoming) told acting Revenue Secretary Eileen McNulty this week during a hearing of the House Appropriations Committee in Harrisburg.

Administration officials acknowledged that the severance tax, if enacted as proposed, would only generate $165 million for the 2015-16 budget year because it would be in effect for only the last few months of the fiscal year.

Wolf wants to impose a 5 percent tax on the extraction of natural gas from the Marcellus Shale, plus a flat fee of 4.7 cents per thousand cubic feet of gas produced.

If gas is selling at $4 per thousand cubic feet - the standard unit of gas - the two parts of the severance tax would come to about 6.2 percent. Because of the flat fee, the effective tax rate would rise further as the price of gas drops.

A major complication is that Marcellus Shale gas tends to sell at a deep discount to national benchmarks because of the lack of pipeline infrastructure in the shale region to move the gas to market.

"For that reason alone, the tax proposal from the administration, the dollars just don't add up," said David Spigelmyer, president of the Marcellus Shale Coalition, the industry trade group that is fighting the proposal.

The U.S. Energy Information Administration this week estimated that the natural-gas spot price at the Henry Hub in Louisiana would average $3.07 per 1,000 cubic feet this year, down from $4.39 last year.

It estimated that the Henry Hub benchmark price will rise to $3.48 next year, the first full year that a severance tax would go into effect.

But natural gas currently sells for substantially less on spot markets at Pennsylvania pipeline hubs.

While the Henry Hub price for natural gas last week averaged $2.88 per thousand cubic feet, the price was $1.28 at the Leidy Hub in northern Pennsylvania, one of several Marcellus Shale trading points.

Spigelmyer, the Marcellus Shale Coalition president, said Pennsylvania shale gas is selling for an average of $1.60 a unit this month.

At the current production level of four trillion cubic feet a year, the severance tax would generate about $508 million at a $1.60 price. If production increased to nearly five trillion cubic feet, as Wolf's budget advisers estimate, the tax would generate $632 million at the current price.

Where gas prices go is an educated guess, but few experts a year ago forecast their dramatic fall.

The Pennsylvania Budget and Policy Center, the progressive think tank that has supported imposition of a severance tax, projects that gas production next year will climb to between 4.4 trillion and 4.6 trillion cubic feet, said Michael Wood, the center's policy director.

If Marcellus Shale gas sells next year for a dollar discount to the federal government's estimated $3.48 price, the governor's proposed severance tax would generate up to $787 million, Wood said in an e-mail Wednesday.

"There is a lot of variation in the price of gas over time, so predicting prices a year out from now with any degree of certainty is difficult - even for people who do this type of prediction for a living," Wood said.

No matter the price, Wood's group maintains that a severance tax would be a better deal for Pennsylvania than the three-year-old Marcellus Shale impact fee, which assesses a set fee per well. The impact fee, which would be replaced by the severance tax, is expected to generate about $225 million this year.

"The longer the tax is delayed, the more money the commonwealth is leaving on the table - even at the current low prices," said Wood.

Spigelmyer, the gas industry spokesman, argues that the severance tax would punish a business that has been one of the few growth industries in Pennsylvania during the years following the 2008 recession.

At current prices, Wolf's proposed severance tax would amount to about an 8 percent assessment on gas - highest in the nation, he said.

In a low-price environment, natural gas drilling companies are slowing production. Many have announced budget cuts for drilling this year. The drill rig count has dropped from 137 at the peak in 2011 to 45. Six rigs have shut down since January.

"If you're going to put a whopping big tax on gas, you've got to know you're going to see less drilling," said Spigelmyer.