MD Marcellus Shale Commission’s First Report Issued

Alice in Wonderland

The first of three reports due from the Maryland Marcellus Shale Safe Drilling Initiative Advisory Commission has just been issued. A copy of the 46-page report—about how to tax and sue the drilling industry—is embedded below. It’s interesting reading.

On June 6, 2011, Maryland Gov. Martin O’Malley signed an Executive Order establishing the Marcellus Shale Safe Drilling Initiative, which includes an Advisory Commission with 13 members to assist the Maryland Department of the Environment (MDE) and the Department of Natural Resources (DNR) in a multi-year study of potential Marcellus Shale drilling in the state. “In the state” actually means just two western counties where there is Marcellus Shale: Allegany and Garrett.

The Commission is required to provide reports to the governor and legislature in three installments. This first installment was due Dec. 31, 2011 and to their credit, the commission met the deadline. However, landowners and drilling companies will not be happy with the result. In fact, they may feel like they’ve passed through the looking glass.

Among the priceless gems in the report: Tax gas leases annually (at $10 per acre), and if there’s drilling within X meters from a given location and there’s even a hint of an environmental problem (like elevated methane levels in water), presume, under the law, that the driller is at fault. That is, Maryland will flip the law to presume guilt instead of innocence. Calling Lewis Carroll!

On the revenue-generating front, the study discusses no less than five ways Maryland can tax drillers and landowners, starting with the “pre-drilling” phase of simply having a lease. Never mind that money paid for leases is already taxed: Maryland State income tax and Federal income tax on the landowner. Maryland wants to further tax the drilling company on a per-year basis, by the acre. Who do you think will really pay that tax? The landowner of course. Drilling companies will build such a tax into their cost structure—most likely lowering their lease offers to landowners by the same amount. In the end, it’s the landowners who suffer.

Another tax Maryland is eying: A personal property tax on the equipment used to do the drilling. That’s choice. Want to bring in an extra earth-mover on site? Forget it! It’ll be taxed. Maryland’s justification? “Other states do it too.”

Here’s the list of potential taxes the study mentions as possibilities for lawmakers to go after (in addition to state and federal income taxes already being assessed):

  1. Real property taxes – assessed on the value of the property and its income-generating potential.
  2. Personal property taxes – assessed on the machinery and equipment used to extract natural gas.
  3. Severance tax – assessed on the gas extracted, based on the volume of gas at the wellhead.
  4. Permit fee – assessed when a permit to drill is filed.
  5. Study fee – assessed on leases at a given rate (example they used was $10 per acre per year) to help fund these studies.

This first study also tackles the issue of liability. The most pernicious recommendation is presumption of guilt. The official recommendation: “The General Assembly should enact a law creating a rebuttable presumption that certain damages occurring close in space and time to exploration and production activities are caused by those activities, and an administrative process for requiring the permittee to remediate the damage, pay compensation, or both.”

And a brilliant legal recommendation by the commission: If a homeowner who lives near drilling activity is uncomfortable with talking directly to the driller about a perceived problem (truck noise, road damage, working too late at night, whatever), let’s just force the driller to go right to a mediator to get that issue resolved. Same with entire communities that feel they don’t like what’s happening nearby. The official recommendation: “Community impacts should be addressed through mediation or by use of community benefits agreements.”

The bottom line is this: Even though it affects only two counties (two of the poorest counties in the state), Maryland does not want Marcellus Shale gas drilling, and they’re making it very plain for one and all to see.