Pennsylvania Severance Tax Gets Real – March 1, 2015

Today we discuss five things that happened the week of February 23, 2015.

  1. Oil And Gas Task Force Comes Up With Something
  2. Report Says Local Bans Don’t Matter Much in the Big Picture
  3. Golden Scenarios from The Economist
  4. New Report on Gas Creating Chemical Jobs
  5. Congress is Doing Something

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For our interview with week we talk about the proposed Pennsylvania severance tax with Tom Shepstone, a planning and research consultant who runs the blog Natural Gas Now.

1.  Oil And Gas Task Force Comes Up With Something

Last week the Colorado Oil and Gas Task Force finished up its work of making recommendations for industry oversight.  The group was born from a desire to remove from harsh fracking restrictions from the ballot in November 2014.  The most critical issue is that many localities in Colorado wanted the power to ban drilling, but neither industry nor the state wanted bans.

The task force was created to try to make peace in that power struggle between state and local governments, and their first three recommendations all went to the heart of the issue:

Recommendation One:

The Colorado Oil and Gas Conservation Commission should define and adopt a process for enhancing local government participation in the permitting process.  It would also define a large scale oil and gas facility, and then create a process for siting those large facilities that would include mitigation measures for operations near communities.  The rule would not make any changes to the authority of state and local regulators.  This entire process “would not apply” in cases where an operator and the local government have already negotiated a memorandum of understanding (MOU) or similar agreement.  If an MOU is not in place, the state regulators will try to facilitate one, and if that does not work out the state regulators will make drilling-location decisions with local input in mind.

Recommendation Two:

State regulators should require operators to register with local government designees and provide information regarding future drilling plans.  The idea is to incorporate drilling into local government comprehensive land use plans.

Recommendation Three:

State regulators should ensure that Colorado’s local government designee programs are fully utilized.  These are local individuals who represent localities in the state permitting process.  Unlike the first two recommendations, which were unanimous, this one received three “no” votes.

Other Recommendations:

  • Four – State environmental regulators should hire 12 new employees
  • Five – State health regulators should increase monitoring and create a health complaint information line
  • Six – State health regulators should create an oil and gas information clearing house
  • Seven – State regulators should convene a working group to reduce truck traffic
  • Eight – The General Assembly should keep temporary rules on air quality
  • Nine – State regulators should create a compliance-assistance program for industry

Stakeholder Reaction

Gov. John Hickenlooper (D), the man who put the task force in motion, seemed quite happy in a report by Colorado Public Radio:

Hickenlooper said the nine recommendations “probably should be enacted,” and he will rely on regulators and lawmakers to fine tune and implement them. The fact that nine proposals garnered such substantial support — with several passing unanimously — shows the task force did its job, he said.

“There were an awful lot of people that said nothing is going to come out of this, we’re not going to make any progress,” the governor said. “That turned out not to be the case.”

Rep. Jared Polis (D), the driving force behind the anti-fracking ballot measures, was less impressed:

“While a strong majority of the Commission rose to the occasion and supported common sense measures to address these issues, unfortunately the oil and gas industry proved they weren’t interested in a compromise or solving the problem,” Polis said. “Coloradans deserve better and I ask Governor Hickenlooper to finally hear their pleas.”

Environmental groups were not happy, but ABC News reports some confusion over whether they will go back to the ballot initiative.

Karen Dike of Coloradans Against Fracking said the group has not ruled out a campaign to put a ban on the 2016 ballot if the governor doesn’t act.  “He should do the right thing and protect Colorado citizens, but if he doesn’t, we’ll look at other ways to achieve our goal, and our goal is to ban fracking in the state of Colorado,” she said.

Dike previously said Coloradans Against Fracking planned to launch a petition drive to get a ban on the ballot after it became clear that a task force convened by Hickenlooper would not include a ban among its recommendations to ease conflicts caused by drilling. On Thursday, Dike said she had misspoken.

“We can’t find examples in Colorado, or more than one or two examples, where fracking has caused harm or been sufficiently dangerous to the public that would justify us to ban it,” Hickenlooper told Colorado Public Radio in an interview broadcast Thursday.

Sarah Kyle of The Coloradoan reports that the task force members themselves are split along similar lines.  She reports that Sara Barwinski, a task force member from the community group Weld Air and Water, said “Should we have gone further? I wish we had.”  The Denver Post editorial board backed the recommendations.

2.  Report Says Local Bans Don’t Matter Much in the Big Picture

The Baker Institute at Rice University put out a report entitled “The Market Impacts of New Natural Gas-Directed Policies in the United States,” which took a hard look at the potential market impacts of new natural gas policies in the United States.

Local fracking bans, including a ban on all of Colorado, would not have much impacts on national or world markets:

At one extreme, the federal ban has significant ramifications for domestic production, demand, and pricing. It also has ripple effects around the world, as the US is then no longer a net supplier to the global market. At the other extreme, the institution of a ban in the state of Colorado alone reveals very little impact on the North American market. In fact, as also seen in the case where the ban in the state of New York was lifted, the impacts tend to be localized. In the case where widespread local movements result in bans at a variety of locations simultaneously, the impacts are larger than in the cases where only a single, local ban is implemented, but they are nowhere near as substantial as the case with the federal ban.

On flaring:

The Flaring Prohibited case proxies the impact of local tax changes because it raises costs at various locations, but in a non-uniform way. The Flaring Prohibited case reveals little impact on the overall North American market.

On LNG Exports:

In the US LNG Export Ban case, we simulate the implications of a policy shift in the US—perhaps due to a challenge to the national interest of exports—that revokes all licenses to export LNG. This scenario reveals that the largest impacts are felt by US producers. The price in the US is lower, which also stimulates demand, but the relative elasticity of demand and supply push the impact into the upstream.

On anti-coal regulations:

[E]nvironmental policy targeting coal use in power generation stimulates natural gas demand. In particular, we see, by construction, a large increase in demand from the power sector. This, in turn, raises the price, reduces demand in other sectors, and increases supply. However, the impact on price is limited, not quite reaching $0.20/mcf by 2030, which is a direct result of the relatively high elasticity of supply in North America.

3.  Golden Scenarios from The Economist

The Economist ran an article today called “Golden scenarios,” which discussed the future of natural gas.  It noted that since 2011 studies have been heralding a “golden age of gas,” and big energy companies were excited:

But something unexpected happened. Coal, despised as the dirtiest fossil fuel, underwent an unexpected renaissance, notably in Europe, displacing gas in power generation. This was partly because of plentiful supplies of cheap coal on world markets, and partly because the European Union’s regime for trading in permits to emit carbon dioxide was so flawed that coal was not getting taxed out of the market, as had been intended….

So demand for LNG has been broadly flat for the past three years. The result is a buyers’ market, intensified by the recent weakness in the oil price. Natural-gas prices are plunging….  This is indeed a golden age, then, but for gas consumers. Investors in large gas facilities such as liquefaction plants are hurting. As with the oil price, the gas-price slump is the result of weak demand and booming supply (though without the added ingredient of a collapsed cartel). Millions of tonnes of new capacity are coming on-stream, as projects begun when energy prices were high reach completion….

The current freeze on new projects means that demand growth may begin to outstrip supply growth within a few years (see chart 2). Thereafter the current glut may dwindle, allowing producers to recover pricing power. It will take time, but they should enjoy a gilt-edged future, too.

4.  New Report on Gas Creating Chemical Jobs

The American Chemistry Council (ACC) released a report on chemical exports that was put together by a consulting company called Nexant.  The report was titled “Fueling Export Growth: U.S. Net Export Trade Forecast for Key Chemistries to 2030,” and it provides estimates of annual U.S. trade driven by unconventional oil and gas production.  The report’s key findings include:

  • Gross exports of chemicals could double from $60 billion in 2014 to $123 billion, while net exports are projected to grow from $19.5 billion in 2014 to $48 billion in 2030.
  • On a commodity basis, the biggest driver of the improving U.S. trade surplus will be plastics (reaching $21.5 billion of net exports by 2030, an increase of $15 billion) and specialties (reaching $20.5 billion, an increase of $9.3 billion), with moderate growth in intermediates (reaching $9.15 billion, an increase of $3.1 billion).
  • Regionally, chemicals and plastics will see a significant rise in exports to destinations like China (reaching $11.7 billion by 2030, an increase of $8.7 billion); other Americas (reaching $10.9 billion, an increase of $8.6 billion); Mexico (reaching $13.8 billion, an increase of $5.4 billion); and Europe (reaching $5.4 billion, an increase of $2.6 billion).

5.  Congress is Doing Something

Congress was working last week, but it was mostly talk on the energy front.  The big news from last week is that President Obama vetoed a bill that would have approved the Keystone XL pipeline, as expected.  In a brief message to Congress, the President said:

Through this bill, the United States Congress attempts to circumvent longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest.

Congress will hold a doomed vote to override the veto, and it is not clear where things go from there.  Speaker John Boehner says the fight is not over:

It is budget season, and that means agencies must go up to Congress and present their annual budget proposal.  Interior Secretary Sally Jewell had a very heated hearing for a number of issues.  Sen. John Barrasso (R-WY) talked about three issues concerning natural gas: (1) proposed fracking regulations for federal land, (2) the potential listing of the Prarie Chicken under the Endangered Species Act, and (3) federal methane regulations.

EPA Administrator Gina McCarthy was also on the Hill pitching her annual budget.  She was criticized for the Clean Power Plan and other regulations that are hurting coal (and helping natural gas).

Also, one of the more talked-about moments from Congress last week came when Sen. Jim Inhofe (R-OK) threw a snowball across the Senate floor while making a point about climate change.

Interview on the Pennsylvania Severance Tax Proposals with Tom Shepstone of Natural Gas Now (Starts at 28:03)

Tom is a planning and research consultant working in Honesdale, Pennsylvania.  He helps municipalities and other entities with economic development.  Tom was initially pulled into natural gas issues after he had the opportunity to lease some of his own land.  He felt that the industry was not doing enough to fend off attacks, so he become an advocate.  He did some work with the pro-industry group Energy in Depth and now advocates for the industry on his own blog Natural Gas Now.  He has written a guide to the proposed severance tax in Pennsylvania, along with frequent posts on the topic.

Pennsylvania imposed a new “impact fee” on natural gas development in 2012.  As a general principle, fees are not supposed to make money, instead fees support the costs of enforcing an ordinance.  Tom said the debate at the time was focused on addressing the impacts of drilling, and it is quite an accomplishment that the fees were limited to that purpose.  He described the debate on the fee as a subdued discussion.  Many local governments opposed the fee, as they were enjoying economic benefits and working with the industry to mitigate traffic and road damage.  Many in the industry recognized, however, that the dense population of the Northeast makes it a difficult place to develop resources and steps should be taken to support communities.  At the end of the day, Tom said the impact fee worked out reasonably well.

Former Republican Governor Tom Corbett pushed an impact “fee” because he did not want to break is “no tax” pledge.  Tom argues that was probably a mistake, as it left open the argument that the industry is not being taxed.  Gov. Corbett went on to earn the unfortunate honor of being the only Republican governor to lose to a Democratic challenger in 2014.  Tom said Gov. Corbett did not lose because of energy issues, however.  Tom said the Governor ran a lousy campaign, and was outdone by current Gov. Tom Wolf’s sunny personality.  Corbett also suffered from the classic problem of having to explain a record while Wolf, as a challenger, could promise most anything.

During the campaign, Democratic challenger Tom Wolf promised a new 5% severance tax to raise funds for education, infrastructure, and renewable energy.  Gov. Wolf’s formal proposal, however, did not specify what the funds would be used for.  He did call his tax proposal the “Pennsylvania Education Reinvestment Act.”  And he announced it at a school and said the “lion’s share” would go to education.  But the plan seems to be lacking details.  Tom said he expects the tax money is going to be spent primarily on the state’s underfunded public employee pension fund.

Gov. Wolf is not the only policymaker supporting a severance tax.  He is quick to point out that two Republicans have proposed their own 3.2% tax on top of the impact fee.  Tom pointed out, however, that those two Republicans are both from high-income areas around Philadelphia.  They are essentially proposing to tax the gas production in low-income rural counties and send that money to high-income school districts.  Several Democrats have also proposed an even higher tax.  There is a good chance that some type of tax will pass.  Tom said it will likely be a lighter tax that does not raise much revenue.

Tom was highly critical of the merits of the Pennsylvania severance tax proposal.  Gov. Wolf justifies the 5% rate as being the same as neighboring West Virginia, but Tom said that proves the tax is a bad idea.  Pennsylvania is doing far better that West Virginia in production, rig counts, and investment.  Gov. Wolf also points out that industry-friendly Texas has a higher severance tax of 7.5%. Tom argues, however, that the overall tax burden for an oil and gas company in Texas is far lower than in Pennsylvania.  Pennsylvania’s comparative tax burden would only get worse by raising taxes.

You can see more of Tom’s work at www.naturalgasnow.org.