Global Shale Law Compendium: Shale Governance in Michigan

Written by Chloe Marie – Research Fellow

The Global Shale Law Compendium series addresses legal developments and other issues related to the governance of shale oil and gas activities in various countries and regions of the world. In this article, we will focus to legal, policy, and governance issues related to shale gas development in the United States, and more specifically in the state of Michigan.

The state of Michigan holds significant oil and natural gas fields and development has been focused on Michigan’s northern Lower Peninsula. According to the U.S. EIA, the Antrim Gas Field, located in the northern Lower Peninsula, is one of the top 100 natural gas fields in the country and ranked 29^th for proved reserves. The Antrim Gas Field also is home to approximately 1 Tcf of shale gas resources.

The technique of hydraulic fracturing is not new in Michigan as it was first used in 1952. Since that time, the Oil, Gas, and Minerals Division (OGMD) within the Michigan Department of Environmental (DEQ) has granted permits to hydraulically fracture approximately 12,000 wells. According to the DEQ’s map identifying high volume hydraulic fracturing activities, 39 wells have utilized the technique since 2008.  The largest cluster of wells is in Kalkaska County.

Numerous energy companies have shown interest in developing the Collingwood Shale, also located in Michigan’s northern Lower Peninsula. A subsidiary of Encana Corporation drilled its first exploratory well in 2010 in Missaukee County, which well later produced about 2.5 million cubic feet of shale gas per day for a period of 30 days. Based on the production levels and falling natural gas prices, Encana’s subsidiary decided to step aside from shale gas development in the area in 2014 to focus on projects more economically viable outside Michigan.

In Michigan, oil and gas activities, including the use of hydraulic fracturing, are governed primarily by Part 615 and Part 617 of the Natural Resources and Environmental Protection Act of 1994. Under this Act, the Michigan DEQ OGMD is responsible for overseeing the oil and gas permitting process.

A well operator is required to submit a permit application to OGMD and must comply with additional requirements when seeking to use hydraulic fracturing. These additional requirements include providing a list of all chemical compounds to be used in a high volume hydraulic fracturing operation. Applicants must make publicly available information on all chemical additives used during hydraulic fracturing through the FracFocus Chemical Disclosure Registry.

In addition, any permittee is required to file a special request with OGMD in order to withdraw a large volume of water for hydraulic fracturing using the Michigan Water Withdrawal Assessment Tool (WWAT). The regulations also require anyone involved in high volume hydraulic fracturing to develop a plan for the baseline sampling of water wells.

Shale Law in the Spotlight: Oil and Natural Gas Severance Taxes in the United States (Michigan, Alaska, Nebraska, and California)

Written by Chloe Marie – Research Fellow

This series addresses severance taxes on oil and natural gas imposed by various states, and this sixth article will review the severance tax systems for the states of Michigan, Alaska, Nebraska, and California. In prior articles, we addressed the severance tax systems for the states of Pennsylvania, Ohio, and West Virginia; for the states of Texas, Oklahoma, Louisiana, and Wyoming; for the states of North Dakota, Arkansas, New Mexico, and Colorado; for the states of Kansas, South Dakota, Montana, and Utah; and for the states of Indiana, Kentucky, Alabama and Mississippi.

Michigan

The Michigan legislature (MCL 205-301 to 317) provides for a tax on oil and gas severed from the Michigan soil at a rate of 5% of the gross cash market value of the total production of gas and at a rate of 6.6% of the gross cash market value of the total production of oil. Crude oil produced from stripper or marginal wells is taxed at a reduced rate of 4% of the gross cash market value of the oil total production. As of March 30, 2014, oil or gas produced from a carbon dioxide secondary or enhanced recovery projects also is taxed at a rate of 4% of the gross cash market value.

The Michigan Severance Tax Act also provides for a tax exemption for certain production from the Devonian or Antrim Shale.

At least $1,000 or 2% of the revenue received from the severance tax goes to the Orphan Well Fund created under Part 616 of the Natural Resources and Environmental Protection Act, while the remaining revenue is allocated to the state general fund.

Alaska

The state of Alaska levies an annual severance tax on oil and gas produced in the state with a production tax rate set at 35% of the production tax value of the oil and gas as of January 1, 2014. The Alaska legislation also states that oil and gas produced from leases or properties outside the Cook Inlet sedimentary basin that do not include land north of 68 degrees North latitude are taxed at a rate not exceeding 4% of the gross value where production started after December 31, 2012, and before January 1, 2027.

The state legislation provides for various credit programs, such as a carried-forward annual loss credit in the amount of 45% for lease expenditures incurred between January 1, 2014, and January 1, 2016, relating to oil and gas developments located north of 68 degrees North latitude or in the amount of 35% for leases expenditures incurred on or after January 1, 2016. Other credit programs include the alternative tax credit for oil and gas exploration, oil or gas producer education credit, the qualified capital expenditure credit, the well lease expenditures credit, the transferable tax credit certificate, the transitional investment expenditure credit, the new area development credit, the small producer credit, the per-taxable-barrel credit, the Cook Inlet jack-up rig credit, the frontier basin credits, and the cash purchases of tax credit certificates.

On September 19, 2014, Alaska Governor Bill Walker signed into law Senate Bill 138 amending some provisions of the existing legislation, and providing new tax rates as of the year 2022. For oil and gas produced on or after January 1, 2022, the tax rate respectively would be equal to 35% of the annual production tax value of the taxable oil and 13% of the gross value at the point of production of the taxable gas.

Nebraska

In Nebraska, a severance tax is levied at a rate of 3% of the value of non-stripper oil and gas from state lands. The Nebraska Revised Statutes also provide for a tax preferential rate at 2% of the value of stripper oil severed from low producing wells as well as a tax exemption from the severance tax for the oil and gas used only in severing operations or for re-pressuring or recycling purposes.

All the revenue received from the oil and gas severance tax is credited to the Severance Tax Fund and then allocated based on whether the tax collected is coming from school or from all other lands. The balance of the Severance Tax Fund received from school lands is deposited in the permanent school fund and the balance of the Severance Tax Fund received from all other lands is distributed as follows:

-          1% is distributed to the Severance Tax Administration Fund;

-          Up to $300,000 goes to the State Energy Office Cash Fund;

-          Up to $300,000 is credited to the Public Service Commission for administration of the Municipal Rate Negotiations Revolving Loan Fund; and

-          The remaining money is distributed to the Permanent School Fund.

California

According to the California Department of Conservation, there is no severance tax imposed on oil and gas production in California, but there is an assessment on oil and gas produced within the state. The oil and gas assessment rate is based on the Division of Oil, Gas, and Geothermal Resources’ (DOGGR) estimated budget for the ensuing fiscal year and the total amount of assessable oil and gas produced during the prior year. For fiscal year 2017/2018, the oil and gas assessment rate is 50.38349 cents per barrel of oil or 10 Mcf of natural gas produced. The DOGGR states that this rate represents “an increase of 14.12298 cents from the previous fiscal year.”

Under Art. 7, Division 3 of the Public Resources Code, the revenue received from this assessment must be used exclusively for the support of the DOGGR, the State Water Resources Control Board and the regional water quality control boards, and the State Air Resources Board and the Office of Environmental Health Hazard Assessment for their oil and gas related activities.

The Ohio State Grange Releases a Study Addressing Agriculture and Pipeline Transportation

The Ohio State Grange recently released a study entitled “Natural Gas Pipeline Infrastructure and Its Impact on Michigan and Ohio Agriculture” examining the positive impacts of natural gas pipelines construction to the agricultural sector in the Midwest, specifically in Ohio and Michigan where shale gas development is becoming increasingly important.

The researchers highlighted that “high costs, including high energy prices, and a lack of energy options for many rural areas are a genuine problem for agricultural producers” while observing that development of natural gas from shale formations could be greatly beneficial to the agricultural sector for controlling production costs. In comparison with other fossil fuels, natural gas can be used to generate electricity at a lower cost. They noted that low natural gas prices will benefit the agricultural sector provided there is adequate transportation pipelines in the rural areas.

The researchers pointed out that “completion of proposed pipeline projects in the Midwest, such as the Rover pipeline, would especially benefit local areas . . . this makes it the most likely means of alleviating constraints on energy in Michigan and Ohio in the near future.”

Further information on the Rover pipeline is available at http://www.roverpipelinefacts.com/. 

Written by Chloe Marie - Research Fellow

11/25/2015

University of Michigan Issues Final Report on Proposed Alternative Policies to Regulate Hydraulic Fracturing in Michigan

Recently, the Graham Sustainability Institute of the University of Michigan released an integrated assessment final report on high volume hydraulic fracturing in Michigan. This report provides an analysis of policy options for responding effectively to the question “[w]hat are the best environmental, economic, social, and technological approaches for managing hydraulic fracturing in the State of Michigan?”

The authors proposed either adaptive or precautionary policy frames for public participation, water resources management, and chemical use disclosure. They observed that “no regret policies” might be the best approach regarding to hydraulic fracturing activities – meaning that such policies will involve net benefits without weighing for future safety, technology trends and price fluctuation.

The authors also considered the precautionary principle as a way to regulate hydraulic fracturing in Michigan.

The final report is available at http://graham.umich.edu/media/files/HF-IA-Final-Report.pdf

Written by Chloe Marie - Research Fellow

09/28/2015

University of Michigan Study Finds Michigan Will Not Have Shale Development in the Near Future

On September 3, 2013, the University of Michigan released a comprehensive study on shale development in Michigan, which concluded that large scale development is not likely to occur in Michigan in the near future.  The study analyzed the technical, economic, geologic, hydrogeologic, environmental, public health, and legal aspects of hydraulic fracturing in the state.  The technical aspect of the study noted that Eastern Michigan's Utica and Collingwood shale formations are very deep and that no commercial development has occurred in either formation. The study concluded that the market price for natural gas would need to approach $6-$8/MCF for operators to be able to profit from high-volume hydraulic fracturing of the deep shale, while the current price of natural gas has peaked around $4/MCF.

The study may be found at: University of Michigan Study

Written by: Thomas Panighetti

September 10, 2013