Taxing issues
In the area of taxes, however, the report seems to indicate that drillers are getting a very good deal in Ohio, which currently taxes the production of gas at 2.5 cents per thousand cubic feet (mcf) of gas produced, or about 1% of the gas' market value. That's much less than the 18.45 cents per mcf, or 7.5%, that Texas charges with its severance tax, or the 17.2 cents per mcf (7%) that Oklahoma charges, the report found. The study used a price point of $2.46 per mcf in order to convert absolute taxes to percentages.
Drillers, who are fighting Ohio Gov. John Kasich's ongoing efforts to increase severance taxes in Ohio, have argued that a tax increase would have a chilling effect on drilling in the state, pushing companies to move their rigs to other states.
However, the report shows that some states with the highest severance taxes also have the highest number of wells drilled.
Texas has among the highest overall tax rates on oil and gas production but leads the nation with more than 95,000 total gas wells and twice the shale gas production of any other state. But Texas is a very large state in terms of its land area. But even relatively small West Virginia, with a tax rate of 12.3 cents per mcf, or about 5% of the total proceeds from the sale of its gas, has more than 52,000 gas wells, all of them old-style conventional wells, data in the report show.
Oklahoma, similar in size to Ohio and with taxes about seven times higher, still has 44,000 gas wells and is the third-largest producing state in terms of shale gas, the report finds.
Data like that might be helpful to state legislators as they try to decide whether to back their governor's tax request. But both Mr. Richardson and Tom Stewart, executive vice president of the Ohio Oil and Gas Association, warned that comparing how states tax gas drilling isn't always as simple as just comparing rates.
“There may be a lower tax on initial production in some states (such as Texas),” Mr. Richardson said. “The problem with that is, on shale gas wells, that's a substantial part of your tax revenues.”
He said that's because shale gas wells tend to produce more gas per day initially, right after they are drilled and production has begun, than they do months or even days and weeks afterward.
Scratching the surface
Mr. Stewart said he's looked at several other states that, on the surface, have higher taxes than Ohio — and found that there are mitigating circumstances in many of those states that result in taxes that are effectively lower, especially for horizontal drilling of shale gas wells that produce gas only after they are fracked, like the wells in Ohio. Texas, for example, charges its base tax rate on drillers accessing conventional deposits of oil and gas, but discounts the rate significantly for high-cost shale gas, he said.
Other states have similar mitigating circumstances, Mr. Stewart said. For example, Michigan has a tax rate of 5%, which is about five times higher than Ohio.
“But, what we don't often read is that a producer paying that 5% in Michigan gets to offset that against his normal state business taxes. ... So it's a fair deal,” Mr. Stewart said.
Other states should not be used as examples, because their tax strategies aren't working, he said.
“Arkansas put in a severance tax in 2008, gave a small abatement period of a couple of years — and ever since then, the drilling rate has dropped by as much as 50%,” Mr. Stewart said.
“And West Virginia? I'm not sure why anyone in Ohio public policy would want to mimic the state of West Virginia,” he said, noting that drillers are ignoring parts of West Virginia, while drilling in nearby Pennsylvania is going strong.
Pennsylvania charges drillers an impact fee to compensate local governments for wear and tear on their infrastructure but has no severance tax, he said. “That really hasn't worked out for the great state of West Virginia,” Mr. Stewart said.
Mr. Stewart said he's fine with Ohio's regulations. Indeed, he contends, they are the result of about a century of drilling in Ohio and represent challenges that were met along the way with new laws that often were supported by the oil and gas industry.
But higher taxes are something the industry remains dead set against, he said. A tax of just a few percentage points on a drillers' gross receipts could end up being a tax on as much as half of their profits, because margins are tight, Mr. Stewart said.
“And anyone who believes that taking half of the net profits won't have an impact on the drilling rate is nuts,” he said.
By DAN SHINGLE
Partial Article CCB
4:30 am, September 4, 2012
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