The windfall from leasing state forests to natural gas drillers demonstrates that it's time for Pennsylvania to tax producers in this lucrative energy boom.
At an auction last week, energy companies bid an average of $4,020 an acre for the rights to drill on 32,000 acres of state forest in north-central Pennsylvania. It earned the state $128.5 million, more than twice the amount called for by legislators.
Just more than a year ago, a similar auction brought average bids of $2,000 per acre. That shows how attractive the state's Marcellus Shale gas deposits are to drillers.
Further proof is that Exxon Mobil last month purchased XTO Energy, a Texas gas producer with large holdings in the Marcellus Shale, for $41 billion. (Ominously, the deal allows Exxon to back out if Congress imposes "impracticable" regulations on the drilling technique, called hydraulic fracturing, which pumps a secret mix of chemicals into the ground. Sen. Bob Casey (D., Pa.) has proposed sensible legislation that would essentially require drillers to abide by the Safe Drinking Water Act.)
Given the clamor by the oil and gas industry to get at Pennsylvania's fields, Gov. Rendell is right to renew his call for a production tax on natural gas wells. He tried to implement this tax last year, but shelved the idea when Senate Republicans resisted during the lengthy budget fight.
The industry has argued that imposing a production tax would discourage energy companies from drilling in Pennsylvania. But the money flowing in this game shows that argument is no longer valid, if it ever was. More than 800 Marcellus wells are now operating in Pennsylvania, with many more expected this year. The boom is on.
In spite of this new gold rush and in spite of the state's budget woes, many Republicans in the legislature still oppose a tax on gas production. Some of them argue that drillers are already paying royalties and other taxes, as if that doesn't happen in other gas-producing states. It does.
Oklahoma taxes oil and gas production, and also imposes a petroleum excise tax. Texas taxes oil and gas production, as well as levying an oil field cleanup fee. West Virginia and Ohio charge severance taxes. Nearly every state with significant oil and gas deposits imposes these taxes.
And the revenue for those states has been significant. In 2007, New Mexico raised $843 million from severance taxes. Oklahoma received $942 million. West Virginia took in $328 million.
By not instituting this tax, opponents are asking ordinary taxpayers to pay a greater share of the bill for state services, while allowing gas producers who are extracting the state's natural resources to pay less than their fair share. It makes no sense.
A production tax also makes better sense than raising money through an unlimited leasing of state forests. About one-third of Pennsylvania's 2.1 million acres of state forest is now open to oil and gas development.
The state needs to take a careful look before leasing more of this precious resource. Conservation policy must not depend simply on how much money can be raised in an auction for drillers.