To Severance Tax or not to Severance Tax, that is the question!

By Ted Auch, PhD – OH Program Coordinator, FracTracker Alliance

Million Cubic Feet (MCF) as measured over industry standard test periods.

Barrels of Oil Equivalents (BOE) as measured over industry standard test periods.
Figure 1. Ohio’s Producing Utica Wells & Primary Shale Geology – plus non-reporting, drilled, or producing Utica & Marcellus Wells.
“Million Cubic Feet” (MCF) as measured over industry standard test periods.
“Barrels of Oil Equivalents” (BOE) as measured over industry standard test periods.

The economic opportunities provided by Ohio’s Utica Shale play via hydraulic fracturing have been cited repeatedly by the Ohio Oil and Gas Association and industry think-tanks like IHS Inc [1]. Numbers published by the latter last October [2] predicted 143,000 Ohio jobs and $18 billion in state revenue by 2020. However, these projections are accompanied by substantial amounts of error. Given that the state’s Utica Shale well movement is now more than 500 wells permitted strong, we thought it was time to take a closer look at the demographics and economics of the Utica Play, given that there will be a strong geographic component being inserted into the “To Drill Or Not To Drill” and waste disposal debate here in Ohio. This is an especially important issue given that the state is wrestling with either implementing an ad valorem [3] tax or raising the state’s industry-low severance taxes, which currently stands at 0.5-0.8% but would be raised to 1% under the governor’s budget. In contrast, proposals from Policy Matters Ohio and northeast Ohio Democrats seek 5% – 7%, respectively.

In comparison to most other states producing oil and gas, even 5% may be a trivial amount, or what The Cleveland Plain Dealer called “indefensibly low.” It amounts to 97 cents per Ohioan (i.e., $275 mi2) [4]. According to an Ernst & Young analysis of eight states that produce dry gas and natural gas liquids and/or dry gas and oil…

  • Ohio currently imposes the lowest combined state and local taxes of the states included in the analysis.
  • …Ohio’s overall effective tax rate (measured as total taxes divided by sales) is 80% below the average rate for the other 7 states for a well producing dry natural gas and natural gas liquids.
  •  For a well producing dry natural gas and oil, Ohio’s effective tax rate is 65% below the other-state average…
  • With the [proposed] increase, Ohio’s effective severance tax rate (ETR) would be 16% lower than the other states’ average for the well producing dry natural gas liquids and 4% lower than the other states’ average for the well producing dry natural gas and oil.

The governor’s proposed “Severance Tax Changes” will not apply to any Marcellus Shale wells, even though the state is home to five producing Marcellus wells (two in Monroe County) and eight permitted wells across Belmont and Monroe Counties. Additionally, the governor and his staff included a severance tax exemption for all “small-volume gas wells” (gas wells with average daily production of under 10 million cubic feet [MCF] would be exempt from the tax). If early industry production reports – and the Ohio Business Roundtable requested Ernst & Young report – are any indication, only 19% of wells will be subject to this tax. Our own analysis revealed that of the 32 industry reported production wells, the average production value is 7.5 MCF (Figure 1).The Kasich administration admitted the exemptions would apply to – by their estimation – 45,000 gas wells.

Another nuance of the Kasich administration’s severance tax complicated mélange is that rates will be 1% for natural gas and 4% for oil, natural gas liquids, and condensate. However, according to the administration:

… there will be a lower tax rate of 1.5 percent for the first year of production, in order to allow producers to recover the cost of preparing the well site and drilling the well.

Coincidentally, “the first year of production” is generally the time of greatest gas yields. Anonymous sources in Ohio’s Utica sweet spot have spoken of 50% declines in royalties within 6 months of production.

The Ohio Oil and Gas Association, the industry’s lobbying arm, has weighed-in against higher severance taxes, stating that:

a 4% severance tax on oil and gas would be equivalent to a 40% income tax and 16 times more than the commercial activities tax (or CAT). It would also burden economically challenged area throughout the state and landowners who want to lease their land and receive royalty streams.

(Total of 4,037 individual donations, Data courtesy of Common Cause Ohio’s “Deep Drilling, Deep Pockets: Campaign Cash and Fracking Regulation in Ohio” spreadsheet)

Figure 2. Ohio’s Big Energy individual or Political Action Committee (PAC) political donations from 2001 to 2011. (Total: 4,037 individual donations. Data courtesy of Common Cause Ohio’s Deep Drilling, Deep Pockets spreadsheet.)

The anonymous BizzyBlog took the OOGA position one step further proclaiming that energy companies “won’t do business in a state with a newly-enacted punitive severance tax.”

Such arguments against a “hefty tax increase” don’t have much empirical support. OSU oil and gas development expert Douglas Southgate called such taxes “definitely affordable for the industry.” Even with the increases proposed by some, Ohio would still rank lowest among the eight shale gas producing states investigated by Ernst & Young in 2012.

Whereas an ad valorem tax would be redistributed directly back into the communities from which the hydrocarbons are extracted, a severance tax would be distributed throughout the state, even to communities and counties that prohibit Utica Shale drilling and/or injection activity. Theoretically, the entire state could benefit from the toils and environmental risks taken on by Ohio’s Appalachian region. According to a Quinnipiac pole, Ohioans support (52 to 38%) an increase in drilling-related severance taxes. Bipartisan voter support for a severance tax increases (60 to 32%) when the prospect of offsetting state income taxes is proposed.

Either levy – an ad valorem tax or severance tax – would be based upon the industry’s headline well production, even though USGS research recently spoke to the substantial well-to-well production variability in the Appalachian Shale Basin: 250-600% [5]. There are quite a few short- and long-term costs and benefits associated with exploitation of the Utica Shale; however, as it stands the risk burden is disproportionately being shouldered by Appalachian Ohio. Thus, the severance tax being proposed by the governor and House Democrats could add to the regional schisms evident in the state.

But maybe geography is immaterial. The likely big winner of the tax decisions will be energy companies and, according to data on recent campaign contributions, those politicians they deem worthy of their political donations – many of whom are on the fringes or completely outside the Utica Shale (Figure 2).

[1]  IHS Global Insight is the brainchild of Daniel Yergin.

[2] This work was funded by the US Chamber of Commerce’s Institute for 21st Century Energy, the American Petroleum Institute, the American Chemistry Council, America’s natural Gas Alliance, and the Natural Gas Supply Association.

[3] Ad valorem taxes are assessed according to the value of the natural gas extracted.

[4] The Kasich “Ohio’s Jobs Budget 2.0: Jobs. Momentum. Transformation” highlights this aspect of their proposed severance tax, explicitly noting that it “has researched the severance tax structures of other states with significant oil and gas production, particularly those states with shale resources, and has found that even with a 4 percent tax rate, the tax burden on the revenues from these horizontal Utica wells will be lower than in other states.”

[5] According to the USGS, production from the most productive wells in the Appalachian Basin’s shale formations is commonly 50 times larger than the poorest producing wells, with the same value being 250-600 times larger for the Marcellus Basin. However, the only numbers presented to individual landowners – but less frequently to collectives given that energy firms are increasingly aware of the legal advice that land aggregators are seeking out – when the subject of royalties comes up are near-term gushers. For example:

  1. GPOR’s “’King’ of Utica Well” the Shugert 1-1H at 4,913 barrels of oil equivalents per day (BOEPD),
  2. CHK’s Buell well in Harrison County, OH producing 1,040 BOE[5],
  3. GPOR’s Boy Scout 1-33H in Wagner, Harrison County producing 3,456 BOE, the Ryser 1-25H producing 2,914, or the Groh 1-12H producing 1,935 BOE,
  4. Anadarko’s 9,5000 BOE, and
  5. The Wagner 1-H well producing 4,650 BOE. Yet, wells like the Frank unit in Stark County owned by Enervest producing 515 BOE or the non-producing wells across Ashland and Medina Counties are barely discussed – what a JP Morgan energy analyst called a “funding gap.”
Update from US EPA on Hydraulic Fracturing Study

Summary of EPA Roundtables Available

From the US Environmental Protection Agency:

EPA recently posted a summary of the five technical roundtables held in November 2012 to help inform EPA’s Hydraulic Fracturing Study. Each roundtable focused on a different stage of the hydraulic fracturing water cycle:

  • Water acquisition
  • Chemical mixing
  • Well injection
  • Flowback and produced water
  • Wastewater treatment and waste disposal

Technical roundtables are an important component of EPA’s Study of the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources. The roundtables allow for external subject-matter experts from a variety of stakeholder groups to discuss the work underway to answer the key research questions of the study, and to identify possible topics for technical workshops.

Map of oil and gas activity in Michigan

New Michigan Map Shows off New FracMapper Functionality

This page was updated in January 2018 to fix the embed code in the map.

Recently, FracTracker has been getting requests from residents in many locations to map large-scale oil and gas operations in their area.  We now have content for Michigan, which happens to correspond with the release of additional map export functionality on FracMapper:

View map fullscreen | How FracTracker maps work

About the Michigan Data

Each state is different in the data it makes available to the public, so it is always interesting to take a look at how new areas approach their duties of data transparency.  After having recently produced maps for New Mexico and Colorado, I confess to being excited to work with data from a state that embraces designating locations in latitude and longitude (and doesn’t release data only with the archaic PLSS notation).  But then, sometimes mapmakers are easy to please.

Far more important is the data made available for wells related to oil and gas development by the Michigan Department of Environmental Quality.  Not only does it include the standard well type designations of “oil” or “gas”, but it also includes observation wells, storage wells, and injection wells.  Altogether, there are 15 categories of well types.

As with many states, there are so many legacy oil and gas wells that mapping them all would overwhelm the online mapping software servers with data requests from over 63,000 wells.  For that reason, the wells are restricted to those marked as being horizontally drilled, which reduces that number to 1,562.  That should include most of the unconventional oil and gas extraction activity from recent years.

Also included in the data are point locations for the tops and bottoms of the well bore, which could be used in the future to map a generalized path of the horizontal wells beneath the surface.

FracMapper Export Feature Enhancement

The Michigan map is the first one produced with our new “Save as PDF” tool, which can be found in the “Export” toolbar.

The "Save as PDF" tool in the the Export Menu creates as landscape oriented 8.5" x 11" document, complete with title, scale bar, and legend. The legend contains only those map icons that are displayed in the view of the PDF.

The “Save as PDF” tool in the the Export Menu creates as landscape oriented 8.5″ x 11″ document, complete with title, scale bar, and legend. The legend contains only those map icons that are displayed in the view of the PDF.

Please note that if you wish to make multiple PDF files from the same map, it is currently required to refresh the webpage containing the map, or it will continue to produce the same map.

In the coming weeks, this functionality will be added to the other FracMapper entries that have already been published.  We are also hoping to roll out additional functionality in the near future.

Trout Unlimited Testing for Water Quality in PA’s Marcellus Region

Trout Unlimited (TU) is one of several organizations that are actively monitoring water quality in Pennsylvania’s rivers and streams.  Currently, TU is collecting data in 99 different watersheds throughout the Commonwealth in an effort to help understand potential impacts of shale gas drilling and related industries on Pennsylvania’s waterways.  Mitchell Blake, TU’s Pennsylvania Marcellus Shale Field Organizer explains:

Trout Unlimited’s Coldwater Conservation Corps (CCC) is a network of volunteer stream stewards who monitor water quality throughout the Commonwealth of Pennsylvania.  With over 350 members trained, hailing from almost every Pennsylvania Trout Unlimited chapter, the CCC volunteers focus on achieving early detection of pollution events during oil and gas drilling and production activities and collecting a baseline inventory of data on important coldwater fisheries.  Using a scientific tool that focuses on trout populations and forecasted Marcellus development, CCC volunteers strategically choose their monitoring locations within their chapter and report and map their data using Trout Unlimited’s water quality monitoring database.  Protection of coldwater fisheries is an integral part of Trout Unlimited’s mission and more than any other segment of society, it is fisherman who spend considerable time on these streams, and thus are well positioned to watch over them.

While the data collection is ongoing, there are several logistical concerns involved with data digitization and distribution before the water quality data can be made available to the general public, but Mr. Blake is hopeful that these issues will be resolved in the coming months.

Watersheds where water quality testing is being conducted by TU volunteers are highlighted in green. For full access to map controls, please click the expanding arrows icon at the top right corner of the map.

At the FracTracker Alliance, we are excited to see TU’s desire to share this data with the public.  It may seem like a thankless task to brave the elements to obtain baseline water quality data, but it is important work that everyone can benefit from.  And while everyone hopes never to find the proverbial “smoking gun” in terms of streams being negatively impacted by industry, data collection efforts such as these are invaluable resources in identifying potential contamination events, should they occur.