'Fracking' Fees Buoy Some States

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As discussion intensifies about drilling for natural gas in the Marcellus Shale region spanning four eastern states, a major talking point is suitable compensation for the counties and municipalities where drilling takes place.

In Pennsylvania, two-thirds of which covers the ancient geological formation that has attracted scores of drilling companies taking advantage of new technology, debate has heated up over whether to impose a tax or severance fee for extracting, or “severing” natural gas from the earth.

Pennsylvania is the only major drilling state with no such tax.

On Friday, a 30-member shale panel commissioned by Gov. Tom Corbett in March and chaired by Lieut. Gov. Jim Cawley, recommended imposing an impact fee, as opposed to a tax, on drilling companies to offset local infrastructure and environmental costs.

The commission did not address fee specifics such as costs, while leaving open the definition of “local impact.”

The group will issue a full report, due next Friday, that will essentially steer the future of natural gas development in Pennsylvania.

During debate last month over the state’s $27.1 billion budget, some lawmakers pushed for a severance tax. All such bills died in committee with Corbett saying he would veto any measures passed before his own panel completed its report.

Corbett, a Republican, has generally opposed a severance tax while saying he is open-minded about an environmental impact fee. His predecessor, Democrat Ed Rendell, triggered the debate over a severance tax when he first proposed one early in 2009.

“There is still much more work left to be done. We can get money from the Marcellus Shale,” Rep. Tim Briggs, D-King of Prussia, said during the budget debate.

Rep. Bob Freeman, D-Northampton, added: “There are serious concerns that need to be addressed in order to protect Pennsylvania’s environment. We need better regulations and oversight of the drilling process and we need to impose a severance tax on the drillers.”

While severance tax advocates have been largely Democrats, a leading Republican, Senate President pro tempore Joseph Scarnati of Warren, favored the local-government impact fee to provide affected communities with the revenue to support needed changes and improvements.

While many rural areas, especially in western Pennsylvania, are poised for growth, Janney Capital Markets envisions challenges down the road.

“Without a severance tax, municipalities may be strained to keep up with infrastructure or education requirements,” it said in a report, maintaining that natural gas drilling could pose credit risks, especially for local governments in the Keystone State.

“We remain concerned that unaccounted expenses could prove to be burdensome to local governments in [the] future if not planned for now.”

The Corbett administration counters by saying drilling companies already pay their full share. Cawley, citing Department of Revenue statistics, said companies connected with natural-gas drilling activities in Pennsylvania have paid more than $1.1 billion in state taxes since 2006.

That has grabbed New York’s attention.

“It would be unreasonable for New York State government to disregard the economic benefits that are being achieved below the state line in Pennsylvania,” the business-oriented Public Policy Institute of New York State said in a report released Thursday. It said shale drilling could create nearly 38,000 jobs in New York annually.

Anti-drilling interests, citing concerns about the environmental impact of new gas-drilling techniques, have effectively delayed shale gas exploration in New York. David Paterson, governor at the time, ordered a moratorium in 2010.

However, the state’s Department of Environmental Conservation, in a preliminary impact study it sent to new Gov. Andrew Cuomo two weeks ago, said shale-gas drilling, with safeguards in place, would not contaminate drinking water. Pro-drilling interests saw that report as a breakthrough.

The Marcellus Shale lies underground, from 300 to 6,000 feet below the surface, covering 95,000 square miles from the Southern Tier of New York, across Pennsylvania, and into parts of West Virginia and Ohio. It derives its name from a visible exposure of the shale near Marcellus, N.Y., in the central part of that state.

Technology emerging within the past 10 years has enhanced the ability to extract the gas through hydraulic fracturing, or “fracking.” Such advances and high natural gas prices have prompted energy companies to start mining from such areas as the Marcellus Shale and the Barnett Shale in Texas.

In Pennsylvania, the Marcellus Shale essentially covers all but the state’s southeastern portion. Drilling has increased substantially over the last three years.

Cawley, during a visit two weeks ago to the U.S. headquarters of Canada’s Talisman Energy Inc. in Warrendale, near Pittsburgh, said the natural gas industry and related businesses generated more than 72,000 new hires in Pennsylvania over the last 18 months alone.

Timothy Considine of the Laramie, Wyo., consultancy National Resource Economics Inc., cited the lack of a severance tax as reasons for Pennsylvania’s drilling growth.

“The imposition of any significant severance tax on Marcellus natural gas output could induce a redirection of investment flows to other shale plays or other profitable investments,” Considine, a former Pennsylvania State University professor, wrote in a report on the economic impact of the Marcellus Shale for Pennsylvania, New York and West Virginia.

New York does not have a specific gas severance tax, but instead has a significant property tax based on gas production value.

Maintaining that local governments would benefit from new tax revenue, the Public Policy Institute of New York State estimated that the town of Owego, in the Southern Tier, would generate $345,025 in combined real property tax revenue for Tioga County, the town and school districts.

Natural gas severance-tax collections in West Virginia totaled $52.8 million for fiscal 2011, according to Mark Muchow, deputy secretary for the state’s revenue department.

West Virginia’s acting governor, Earl Ray Tomblin, last week signed an executive order that directs the Department of Environmental Protection to issue emergency rules largely focused on fracking, in an attempt to clarify the regulatory process for industry and environmental groups in the state.

“Drilling operations in the shale play have increased the amount of state tax collections received from the industry but have also raised new policy questions,” a University of West Virginia report said in December.

West Virginia has two separate natural gas severance-tax dedications to local governments, Muchow said. The state shares 10% of net natural-gas severance tax proceeds with both producing counties — 75% of the total — and all counties and municipalities, with 25% distributed based upon population share.

The most recent distribution share, slightly more than $5.7 million, was sent out last month for calendar year 2010 ­activity.

The state, said Muchow, also dedicates up to the first $4 million per year in severance tax receipts from coal-bed methane gas wells to producing counties.

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