Shale Law in the Spotlight: Natural Gas Severance Taxes in the United States (Pennsylvania, Ohio and West Virginia)

Written by Chloe Marie – Research Fellow

This series will address severance taxes on natural gas imposed by natural gas-producing states and this first article will review the severance tax system for the states of Pennsylvania, Ohio and West Virginia.

Pennsylvania

The state of Pennsylvania does not levy a severance tax, but rather imposes an impact fee on unconventional gas wells. Pennsylvania Governor Tom Wolf has repeatedly proposed a severance tax on unconventional natural gas extraction, but each time the proposal has failed to advance through the Pennsylvania General Assembly.

For the year 2015-2016, Governor Wolf proposed to impose a severance tax at a rate of 5% on natural gas extracted at the wellhead plus a fixed tax amount of 4.7 cents per volume MCF. This proposal set a pricing floor for producers at $2.97 per Mcf – meaning that each time the average market price was below $2.97, the pricing floor would have been used to calculate the severance tax. In 2016, Governor Wolf proposed a severance tax at a rate of 6.5% of the value of the natural gas. In the 2017-2018 Pennsylvania Executive Budget issued on February 7, 2017, Governor Wolf once again proposed a severance tax of 6.5% of the value of natural gas extracted with the possibility to convert the amount paid in impact fee as credit against the severance tax.

In Pennsylvania, the state Public Utility Commission (PUC) is responsible for administering the impact fee – also called the unconventional gas well fee – as well as overseeing its collection and distribution to local governments and state agencies (58 Pa. C.S. chap. 23). Every unconventional gas producer must pay this fee to the Commission for each well they spud each calendar year. The impact fee is calculated based on the average annual price of natural gas and the age of the well.

All fees must be collected and deposited in the Unconventional Gas Well Fund no later than April 1 of each year and then distributed from the fund no later than July 1 of each year following a specific formula. Prior to the distribution of any funds to local government entities, funds are distributed to state agencies as follows (funds are increased annually based on the Consumer Price Index):

·       PA Fish and Boat Commission - $1,000,000

·       PA Public Utility Commission - $1,000,000

·       PA Department of Environmental Protection - $6,000,000

·       PA Emergency Management Agency – $750,000

·       PA Office of State Fire Commissioner - $750,000

·       PA Department of Transportation - $1,000,000

·       PA Housing Affordability and Rehabilitation Enhancement Fund - $2,500,000

·       County conservation districts - $7,500,000

Once these initial distributions have been made, 60% of the remaining revenue must be distributed to local governments on the basis of the following formulas:

·       36% to counties based on the number of spud wells in each county;

·       37% to municipalities based on the number of spud wells in each municipality; and

·       27% to municipalities based on the number of spud wells in each county based on the proximity to the wells, the total population and the total highway mileage of the eligible municipalities within the county.

The remaining revenue must be deposited in the Marcellus Legacy Fund and distributed to state agencies and projects, including:

·       20% to the Commonwealth Financing Authority 

·       10% to the Environmental Stewardship Fund

·       25% to the Highway Bridge Improvement Restricted Account

·       25% for water and sewer projects

·       15% for greenways, trails, recreation, open space, etc.

·       5% to the Department of Community and Economic Development (DCED); however funds not utilized by the DCED must be deposited in the Hazardous Sites Cleanup Fund.

For drilling in 2016, the Commission collected and appropriated $173,258,900.00, which amount is a small decline compared with previous years.  The Pennsylvania PUC sets forth the previously received amounts as follows:

·       2015 - $187,711,700.00

·       2014 - $223,500,000.00

·       2013 - $225,752,000.00

·       2012 - $202,472,000.00

·       2011 - $204,210,000.000

Ohio

The severance tax is set at 2.5 cents per thousand cubic feet (Mcf) of natural gas extracted. The Ohio Revised Code provides for an annual exemption applicable to landowners using natural gas produced from their own wells; however, this exemption is limited to the extent that natural gas resources should not exceed a cumulative market value of $1,000 per year (ORC § 5749.02(A)(6)).

As for the revenue distribution, 10% is deposited in the Geological Mapping Fund while the other 90% is deposited in the Oil and Gas Well Fund (ORC § 5749.02(B)(4)). Payments are made electronically each quarterly period.

In addition to the severance tax, well owners are subject to an oil and gas regulatory cost recovery assessment, with an exception provided for an exempt domestic well (ORC § 1509.50). The cost recovery assessment is calculated on a quarterly basis using a formula that takes into consideration the amount of severance taxes paid, the amount of oil and gas production, and the total number of wells owned or being reported. The amount of severance taxes is added to the assessment based on production and the resulting sum is then compared to the minimum assessment amount – which is $15 per well. The severance taxes are subtracted from the greater of the two amounts to arrive at the assessment amount due.

West Virginia

In West Virginia, a severance tax has been set at 5% of gross value of natural gas measured at the wellhead (WVC § 13A). Before July 1, 2016, natural gas producers also had to pay an additional severance tax by volume of 4.7 cents to state Tax Commissioner. The money received from this additional tax used to be deposited in the Workers’ Compensation Debt Reduction Fund to pay off debts associated with the state-run workers’ compensation system prior its privatization in 2006. On February 29, 2016, however, Governor signed SB 419 into law terminating the Workers’ Compensation Debt Reduction Act and thus also terminating the payment of this additional 4.7 cent tax as of July 1, 2016.

The West Virginia Code provides for severance tax exemptions applicable to wells producing less than 5 Mcf of natural gas per day and wells not producing marketable quantities for 5 consecutive years, which exemption is for up 10 years.

90% of the revenue from the severance tax is then deposited in the West Virginia General Fund and the first $24 million of the revenue collected is distributed to debt service for infrastructure bonds. The remaining 10% is distributed to counties and municipalities. Of this percentage, 75% is distributed to oil and gas producing counties, and 25% is distributed to all counties and municipalities based on population densities.