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How Marcellus Shale gas came to be tax-exempt in Pa.

Desperate for revenue, Gov. Rendell chose not to tax the “gold rush.”

West Virginia Gov. Joe Manchin III (left) told Gov. Rendell that his state's 5 percent tax on Marcellus Shale gas did not deter drilling. Rendell, who had proposed an identical tax, ended up convinced otherwise. (Ron Edmonds / AP)
West Virginia Gov. Joe Manchin III (left) told Gov. Rendell that his state's 5 percent tax on Marcellus Shale gas did not deter drilling. Rendell, who had proposed an identical tax, ended up convinced otherwise. (Ron Edmonds / AP)Read more

HARRISBURG - All through Pennsylvania's 101-day budget impasse, Gov. Rendell spoke of pain.

A recession-weary state had to tighten its belt. Revenues had to rise - income tax, sales tax, new taxes on whole industries. "We can't get this budget resolved," Rendell said, "without everyone feeling some pain."

But when the budget was finally signed Oct. 9, one industry came away pain-free.

The natural-gas industry's leaders and lobbyists beat back Rendell's proposal to tax gas as it is pulled to the surface from the rich black-rock reservoir known as the Marcellus Shale.

So, as drilling rigs are sprouting in the state's northern tier and southwestern corner, the gas those rigs are extracting still isn't taxed. That makes Pennsylvania unique among the 15 states that produce the most natural gas.

What's more, the industry persuaded Harrisburg to lease more public land to gas drillers - even as the state's budget for environmental protection was being sharply cut.

What happened to Rendell's gas-tax proposal?

He says the industry made good arguments for staving it off. He did not want to slow the "gold rush," as he called it, of jobs and commerce the drillers would bring.

One legislator came away with a more cynical view.

"The same old influential interest groups getting their way," said State Rep. Greg Vitali (D., Delaware). "It was just another day in Harrisburg."

What follows is a closer look at some key moments in the short life of Rendell's proposal to help balance the budget by taxing natural gas.

Tapping "the gold rush." As Rendell prepared his Feb. 4 budget address, a boom was under way. Natural-gas industry representatives were fanning out across the state, securing leases and drilling wells at twice last year's pace.

Rendell, a policy wonk, did his homework. He spoke with Gov. Joe Manchin III of West Virginia, a state that also sits atop the Marcellus Shale and has taxed natural gas for years.

In his budget address, Rendell proposed to tax gas extracted in Pennsylvania.

Rendell said Manchin, a fellow Democrat, had assured him that West Virginia's tax did not "inhibit gas extraction and that it is continuing at a record pace, and it's reaping critically needed revenues so the state can provide services to its citizens."

Rendell's plan matched West Virginia's - a 5 percent tax on the value of natural gas at the wellhead, plus 4.7 cents per 1,000 cubic feet of natural gas extracted.

By Rendell's estimates, such a tax could raise $107 million for Pennsylvania in its first year, helping fill a billion-dollar budget gap.

In a recent interview, Manchin described what he said to Rendell months ago.

"The Marcellus Shale is a tremendous producer. A severance tax will not deter" the drillers, Manchin said. "Believe me, if we didn't have the gas, they wouldn't be here."

Manchin said he had faced industry complaints in 2005 when he proposed to expand the tax, with some companies threatening to leave.

He offered to have the state buy up their leases "so you don't lose one penny." No one took him up on his offer.

Skin in the game. By spring, Rendell's tax proposal was the talk of the industry. In a June 1 panel discussion held by a New York investment firm, four executives spoke of what might happen next in Pennsylvania.

They talked of the Marcellus "play" - industry parlance for a focused drilling campaign. Rich Weber, president and chief operating officer of Atlas Energy Resources of Pittsburgh, pooh-poohed Rendell's tax proposal.

"I think the shot over the bow from the governor was just that. He wanted to spark discussion," Weber said, according to a published transcript. "I think the legislature is going to kill it for this year. It may be inevitable down the road but who knows."

Jim Fraser, senior vice president of Talisman Energy Inc. in Calgary, Alberta, did some math. "We have encouraged the state to lease some more of that land," he said, adding that his "back of an envelope" figures showed the state could raise more money by leasing land to drillers than by taxing the gas.

Chad Stephens, senior vice president of Range Resources Corp. of Texas, weighed the pros and cons.

"Maybe at some point in the far-out future if they introduce a severance tax, once the play gets some legs, that's a different story," he said. "But if they do implement the tax, at least the government will have some skin in the game." State officials might become "more cooperative and try to help the play along."

Murry S. Gerber, chairman and chief executive officer of EQT Corp., spoke next.

"Chad said it right. Skin in the game," Gerber said. "The local governments need to get some of this money back. I mean, we are on their roads."

But the state had to be flexible, he said. "If it's all take and no give . . . we should just say no as long as we can."

The meeting. Four days later, Gerber sat with his aides and state officials in his company's sixth-floor conference room in Pittsburgh. His guests included Rendell.

Gerber knew the governor well. He'd donated $30,000 to Rendell's 2006 reelection fund, records show. Last October, Rendell went to Pittsburgh with a check of his own - $2.8 million in state grants and tax credits to help Gerber's company expand operations and add 354 jobs.

Gerber requested the June 5 meeting. He hoped to convince Rendell that the state should consider all the various natural-gas issues - wastewater treatment, leasing royalties - and not just a tax, said Kevin West, managing director of external affairs and one of four EQT executives at the meeting.

Gerber did most of the talking. Rendell asked questions. "You could see the governor turning a little bit" to Gerber's pitch, West said last week.

Rendell did not say he would abandon the tax. At the meeting's end, he said he would create a task force of stakeholders - legislators, environmental officials, industry executives - to examine Marcellus Shale issues.

"We were very pleased with that," said West. "We felt he adopted our position."

The study. As the summer rolled on and the budget impasse deepened, the industry made its case in Harrisburg, spending more than $1 million to lobby legislators in the first half of the year alone, state reports showed.

Foes of the gas tax began citing a Pennsylvania State University study, "An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play."

The study said the tax would backfire.

Marcellus Shale drilling in Pennsylvania was in "the takeoff phase," the study said. It concluded that a severance tax would decrease revenue by reducing drilling and slowing job growth.

Without the tax, the study said, the Marcellus reserve could become a bonanza for the state "if pro-growth policies are pursued that unleash the entrepreneurial spirit."

The study's primary author, Robert Watson, said Friday that the shale contains enough gas to make Pennsylvania "an OPEC nation."

Watson, an emeritus professor of petroleum and natural-gas engineering, also acknowledged that the industry had funded the study.

The Marcellus Shale Committee, a group of more than 50 natural-gas and drilling companies, commissioned the study and paid Penn State about $100,000 for it, he said.

But one version of the study that circulated in Harrisburg did not mention the funding source. Subsequent copies did. Watson said the omission had been simply a mistake made in his rush to publish.

Pennsylvania's environmental community lashed out at the study as a tool of a deep-pocketed industry. Even the state's top conservation official questioned its findings.

At a Marcellus Shale seminar in August, the acting secretary of conservation and natural resources, John Quigley, rose to introduce Watson. Quigley also told the audience - a citizens' advisory panel on environmental policy - that Watson's study was unsubstantiated by facts.

That prompted Watson to stand up and yell, twice, "That's bull-."

Quigley remembers the meeting. "I pointed out that the study was paid for by the industry, and that any suggestion that a severance tax would strangle the infant industry in its crib strains credulity," he said Friday.

Watson stands by his findings. "The procedure we used was scientific," he said. "We would have come up with the same answers regardless of who paid for it."

The surprise. Until August, there was no change in Rendell's public stance. He wanted the tax.

But in a briefing for reporters Aug. 31, the governor said, "It won't be in the mix this year."

Rendell said industry executives had convinced him that imposing a tax now would stunt drilling. Also, he said a drop in the price of natural gas made the tax impractical. And Senate Republicans were so opposed to the tax that it would not pass.

It would have to wait until next year, Rendell said.

"We felt we should let the industry get off to a good start," he said, "and that surpasses our need for money."

His change of position was news to many - including Steve Crawford, Rendell's chief of staff. "The governor's press conferences are always newsworthy," Crawford said last week, "and sometimes they are even newsworthy to those of us closest to him."

His switch also surprised his party's lea   ders in the legislature, who made a last-ditch effort to revive the tax before the budget was signed.

Rendell declined requests for an interview for this article, but he authorized aides to describe several meetings he had with industry officials.

Gary Tuma, Rendell's press secretary, said the governor had changed his mind on the tax in July, but had not told aides at that time.

As for the Marcellus Shale task force that Rendell told Gerber he'd create: The governor abandoned the idea because he'd decided to nix the tax for this year, Tuma said.

The tax fight is over for now. But the industry is still stockpiling resources for future contact with Pennsylvania officeholders.

Range Resources, the Texas driller, recently hired away a top Rendell aide to be its vice president for government relations and regulatory affairs. K. Scott Roy had been Rendell's executive deputy chief of staff and his liaison to the natural-gas industry and environmental groups.

Range Resources also hosted a luncheon this month near Pittsburgh for legislators from both parties. After sandwiches, the dozen legislators toured a drilling site.

Among those at the lunch was State Rep. Timothy J. Solobay (D., Washington), an unabashed natural-gas cheerleader. He's seen drillers transform his district. Steamfitters and welders are getting work. Job-training and truck-driving classes are full.

Natural gas "is the new steel," said Solobay. "They all told me is that severance [tax] is coming," he said of industry executives. "They are only asking for a couple of years to get the infrastructure in place."

State Sen. Jake Corman (R., Centre) has seen drill rigs rising in his district, too. Eventually, Corman said, a tax could help towns defray the related costs. "I think a day will come when there's a severance tax," he said. "I just didn't think that day was today."

Others are less sanguine. "This was the best time to do it," State Rep. David K. Levdansky (D., Allegheny) said of the tax. Next year, he said, "the industry will just dig in their heels even harder in hopes that a Republican governor more sympathetic to their cause wins election."

In June, Range Resources launched a political action committee in Pennsylvania. Nine executives put in a total of $49,500. The PAC's first donation, for $5,000, went to a Republican campaign fund begun by state Attorney General Tom Corbett.

He's running for governor next year.

The investment bank RBC Capital Markets invited institutional investors and corporate executives to a conference on global energy in June. A transcript of the event shows several industry executives discussing, among other issues, Gov. Rendell's February proposal to tax natural-gas extraction. To read the transcript, go to