Pennsylvania House Bill No. 1401, which would create a severance tax and significantly change oil and gas royalty payments, recently failed to pass an important legislative hurdle.
The bill imposes a 3.2% severance tax, or drilling tax, on unconventional natural gas extraction. This tax would be in addition to the Act 13 impact fees already levied upon natural gas producers. According to drafters of the bill, the severance tax and the impact fees would equal approximately 5% of the value of natural gas sold in Pennsylvania. Additionally, the bill would alter the required minimum royalty payment under and oil and gas leases so that the lessor would not receive less than 12.5% of the gross proceeds received by the lessee on production under the lease. Under the terms of the bill, a deduction or allocation of costs, expenses or other adjustments could not be deducted from the gross proceeds before calculating the amount of royalty due to the lessor. This provision would severely limit, and at times eliminate, an operator’s ability to deduct pro-rata post-production costs from royalty payments.
Late Tuesday night, supporters of House Bill No. 1401 failed to acquire the necessary votes to push the bill to the House floor so that debate on the legislation could resume. The motion, which required 101 votes to succeed, instead received 100 votes in favor. The bill has been subject to numerous amendments which has stalled its progress.
Although this represents a setback for the bill, it is possible that further legislative action may be taken to pass it. At this point, however, it now appears that passage will be more difficult.
Senate Bill 576 (SB 576), introduced in the West Virginia Senate to address the oil and natural gas industry’s effort to efficiently develop production of natural resources, died in the last week of the regular session of the West Virginia Legislature, which concluded on April 8, 2017.
For an analysis of the original version of SB 576, click here, and for an analysis of the significantly revised version that was sent to the West Virginia House, click here. Before passing the Senate, an amendment agreed to by the industry provided for a graduated severance tax provision that increased the severance tax rate as the price of natural gas increased. Click here for the text of the amendment.
Unfortunately, a frantic last week of the regular legislative session, highlighted by contentious budget battles and House debate over a medical marijuana bill, resulted in many bills never reaching the House floor for a vote, with SB 576 being among those. Given that the Legislature needs to be called back into special session to pass a budget that is presently being negotiated, there is speculation that SB 576 may be put on the agenda for that special session. Unless that happens, however, co-tenancy and lease integration is dead in West Virginia until February 2018.
StateImpact Pennsylvania reports that Pennsylvania Governor Tom Wolf wants natural gas drillers to pay a 6.5% severance tax on natural gas production, which he estimates will bring in $217.8 million dollars for the 2016/2017 fiscal year, a fraction of the billion dollars he projected last year’s severance tax proposal would generate.
The newest enactment of the proposed severance tax will keep the state’s impact fee, but will offer producers a credit for those fees which would reduce their severance tax payments. That proposal was not included in last year’s unsuccessful attempt to impose a tax of 5 percent plus a separate fee of 4.7 cents per thousand cubic feet of gas each well produces. The proposal has been met with fierce opposition from industry leaders, who state that Governor Wolf is ignoring market realities of low oil and gas prices which have recently forced producers to cut capital expenditures.
During his March 3, 2015 budget address, Pennsylvania Governor Tom Wolf again proposed higher energy taxes. In response, the Marcellus Shale Coalition issued a statement, reiterating the vast benefits that have been realized by the Commonwealth as a result of natural gas development, including job creation and tax revenue. According to MSC President Dave Spigelmyer, the proposed budget “would undercut Pennsylvania’s positioning in the global fight to attract capital investments and stunt this economic momentum rather than fully capitalize on it.” Spigelmyer also stressed the concerns shared by small businesses, labor unions and local governments alike that higher energy taxes could result in job losses and revenue losses. In light of the fact that Pennsylvania voters overwhelmingly support policies that lead to the creation of affordable energy supplies and local jobs, the MSC stated that it will continue to collaborate with Governor Wolf and the General Assembly to help advance policies that seek to grow and expand opportunity.
Pennsylvania Governor Tom Wolf proposed a 5% severance tax on natural gas production. Though specific details are not yet available, Wolf recommended a tax modeled after West Virginia’s severance tax, which currently taxes gas at a rate of 5% and imposes an additional fee of 4.7 cents per 1000 cubic feet of extracted gas. Wolf believes the proposed tax could generate $1 billion in new revenue for the state. The bulk of this revenue would go to fund education. Wolf said the tax would not be levied in addition to Act 13’s well fees, but rather, the well fees would be rolled into the tax.
Responding to Wolf’s tax proposal, David Spigelmyer, president of the Marcellus Shale Coalition, criticized the proposal and noted that the natural gas industry already pays significant taxes in Pennsylvania. Spigelmyer believes the new energy tax will discourage capital investment and make Pennsylvania a less competitive market for the natural gas industry. Spigelmyer stressed that the investments made by the energy companies act as a driving force for the Pennsylvania economy and tax base – accounting for more than $700 million in royalties paid to landowners and more than 200,000 jobs created. Spigelmyer believes Wolf should focus on the creation of new jobs rather than new taxes.
A bill that would amend taxation on oil and gas drilling was referred to the Pennsylvania House Committee on Environmental Resources and Energy on Monday. House Bill 2508, which was introduced by Margo Davidson (Democrat, Delaware County) and others, seeks to impose a severance tax of 5% of the gross value of units severed at the wellhead during a reporting period, plus 5 cents per unit severed. Filing of a tax return would be required within 15 days following the end of a reporting period. Oil and gas producers would also be required under the Bill to apply to the Department of Revenue for a severance tax registration certificate prior to conducting operations, which must include, among other items, a declaration of all producing sites and nonproducing sites used by the producer for severance of natural gas. The Department may refuse to issue or revoke a registration certificate, and the Bill provides a process for appealing such determination. The violation of such provisions under the Bill would result in a producer being found guilty of a summary offense and sentenced to pay a fine. The Bill includes additional provisions regarding assessments, interest, and penalties. The Bill in its entirety can be found here.
Marcellus Drilling News reports that the Pennsylvania House and Senate passed a budget that did not include a Marcellus Shale severance tax. Governor Tom Corbett withheld his signature while he continues to work with lawmakers on pension reform.