Rendell plan to tax Marcellus shale gas in doubt

The red-hot drilling boom set off two years ago by the discovery of a massive natural-gas field more than a mile below Pennsylvania soil has clicked back to a low simmer.

Even when Gov. Rendell was touting the gas "gold rush" and eyeing it as the source of possible tax revenue earlier this year, the recession and plummeting natural-gas prices had already slowed the drilling frenzy in the rich vein that courses from New York to West Virginia.

The industry slowdown could not come at a worse time for the state. Noting the gas field's "tremendous potential value," Rendell proposed a first-ever tax on extracted gas as a way to help plug the widening budget hole, saying it could generate $100 million in the next fiscal year starting July 1.

But that plan - part of his budget proposal being debated in Harrisburg - is meeting resistance from Republican lawmakers in the Senate, who say it could cripple an industry in its infancy. Last week, the Senate passed a version of the budget without this tax.

Senate Appropriations Chairman Jake Corman (R., Centre) said it was too early to discuss taxing natural-gas extraction from what is called the Marcellus shale; he said he considers Rendell's proposal "off the table" until the industry is established.

"And if we look at the Marcellus shale, or any industry for that matter, as ways to grow our revenue to plug a short-term budget problem, we're going to stunt the growth of this industry significantly, and really blow a once-in-a-generation opportunity," Corman said at a Pennsylvania Press Club luncheon speech last month.

Virtually all of the Marcellus wells are still in the exploratory stage, with only one in southwestern Pennsylvania sending gas into a production pipeline.

The Pennsylvania Budget and Policy Center, in a report released late last month, supported the governor's proposal, saying severance taxes are common across the United States as a way to cover the public costs - most notably environmental ones - created by resource extraction.

All of the 14 states with greater natural-gas production than Pennsylvania levy a so-called severance tax or a conservation fee. The report concludes that without a tax, the costs of drilling would be shifted to local taxpayers.

"Lawmakers are protecting industry, not taxpayers," said Sharon Ward, director of the nonpartisan policy-research center. "There's no evidence at all that a severance tax will kill the industry. In fact, the evidence shows little impact on production."

Rendell's proposed tax rate is 5 percent of the value of the natural gas at the wellhead, plus 4.7 cents per 1,000 cubic feet of natural gas extracted. Rendell projected that the tax would generate up to $632 million in four years, based on information provided by industry geologists and other states.

But Rendell's proposal came as prices had fallen to below $4 per 1,000 cubic feet from more than $13 a year ago, triggering a national slowdown in drilling operations.

"Nationwide, things have slowed down 75 percent since last August and, as far as rigs being active, the same is true in Pennsylvania," said Steve Rhodes, president of the Pennsylvania Oil and Gas Association.

The 365 million-year-old layer of rock that contains the gas underlies 54 of Pennsylvania's 67 counties and is believed to hold 363 trillion cubic feet of natural gas worth $1 trillion. By some calculations, 10 percent of that could supply the gas needs of the United States for two years.

More efficient and economical methods of drilling have allowed exploration at depths of 5,000 to 8,000 feet that were previously out of reach. Close to 30 drilling companies have set up operations in the commonwealth, snapping up drilling rights on tens of thousands of acres of land and giving a boost to the economies in many depressed rural areas across the northern half of the state.

Rhodes said taxing the shale gas at this point would bring in less than half of what Rendell projects. "There's nothing to tax," he said.

Nonetheless, the state is on track to issue a record number of Marcellus permits this year. From Jan. 1 through April 17, the Department of Environmental Protection has issued 2,028 drilling permits, 394 of which are specifically for exploration of the Marcellus shale.

During that period, there were 666 new wells drilled, 96 of which were in the Marcellus shale. Since 2005, when development of the Marcellus shale began, 971 drilling permits have been issued and 350 wells have been drilled into the formation.

Rhodes said it was unfair of the Rendell administration to target natural gas when other energy resources, including coal and corn for ethanol, are not similarly taxed.

Still, facing a $3 billion deficit this budget year, Rendell and Democratic leaders say limited taxes such as the Marcellus shale levy are even more vital. Rendell spokesman Chuck Ardo said the governor would continue to push for a gas tax, but he said a revised proposal was in the works that would address industry concerns about equity.

Tom Murphy, an energy educator with the Penn State Cooperative Extension, said there are signs the slump in gas production may be turning around. He said that after a six-month lull, companies are again approaching land owners seeking gas rights and leasing contracts, and subcontractors are positioning themselves for the activity to return.

"Energy companies take the long view," he said. "When the economy turns around, the demand will come back."