The Ohio Oil and Gas Association (OOGA) issued a press release on Monday taking Ohio Gov. John Kasich to task for his proposal to slap a severance tax increase on the nascent Utica Shale drilling industry and use the proceeds to give taxpayers an income tax reduction. The new tax increase on drillers has been tentatively removed from budget discussions, but OOGA believes Kasich won’t let it rest and will likely try to resurrect it.
From the OOGA press release:
Ohio’s crude oil and natural gas producers, represented by the Ohio Oil and Gas Association (OOGA), are taking a stand against the severance-tax increase proposed by the Kasich administration as part of its Mid-Biennium Budget Review. Though the tax-increase provision is currently removed from the bill, the oil and gas industry remains adamant that a tax increase of any kind at this critical juncture in the exploration of the Utica shale formation will diminish Ohio’s business-friendly climate and the economic future of all Ohioans.
“The specter of a tax increase has induced a sense of uncertainty among oil and gas companies which have to rethink their original business plans for drilling in Ohio,” said Tom Stewart, executive vice president of OOGA. “Ohioans deserve prosperity through growth and this tax proposal has placed that opportunity at risk.”
With only seven wells producing in two counties, the industry says it is too soon to know the real value and viability of the Utica. The infancy of Utica shale development is one of several points of contention that oil and gas producers have with the administration’s proposal. In addition to concerns about taxing an emerging industry, it takes offense to claims that the severance tax is outdated and far less than other states; that out-of-state companies are taking Ohio’s resources; and that natural-gas liquids are not currently taxed.
Ohio’s severance tax was reformed two years ago and is competitive with neighboring states
The administration claims that Ohio’s severance tax is 40 years old and needs to be “modernized.” The truth is that the severance tax, like other oil and gas taxes, was reformed only two years prior with the bi-partisan passage of SB 165.
The severance-tax rate doesn’t tell the whole story. While the rate is comparable to or less than those in neighboring states, it’s important to note that crude oil and natural gas producers in Ohio also pay four other taxes: income, sales, commercial activity and ad valorem — a property tax based on the value of unproduced minerals remaining in the ground.
“Comparing Ohio to other shale-producing states is difficult because of the variations in the tax structure and the incentives and abatements offered,” said Jerry James, president of OOGA and Artex Oil Company in Marietta. “For example, Pennsylvania has no severance or ad valorem tax while West Virginia has a 5 percent severance tax.”
James notes that oil and gas drilling has declined in West Virginia in the past five years, while drilling activity has increased 600 percent in Pennsylvania during the same time period. However, some companies have curtailed activity in the state since an impact fee was imposed.
Ohio is home to hundreds of local crude oil and natural gas producers
The administration has portrayed oil and gas companies as “foreigners” who are coming to Ohio to take its natural resources, which is simply untrue. Ohio has a 150-year-old heritage of oil and gas production and is home to hundreds of local producers, as well as many out-of-state companies, which plan to invest billions of dollars in Ohio and its workforce.
Because Ohio is a large consumer of natural gas, much of the gas being produced will remain in the state as reserves to be used by residents and businesses, particularly those in the manufacturing and chemical industries. Furthermore, Ohio’s crude oil and natural gas resources belong to Ohioans, especially the land and royalty owners who could benefit greatly from shale development, not the government.
Natural-gas liquids are taxed under the current structure
The administration has claimed that there is currently no separate tax on natural-gas liquids — the “wet gases” such as ethane and butane that are highly valued among the chemical industry. While the tax might not be on the books, according to James the industry has been paying taxes, most often at the more costly crude-oil rate.
“Every molecule severed and sold from a well is taxed under the current tax structure,” said James. “If it’s sold in the gas phase, it pays the natural-gas severance rate. If it’s sold as a liquid, it pays the crude oil severance rate.”*
MDN’s view: Looks like the otherwise conservative Republican Gov. Kasich and his “spread the wealth” socialist idea aren’t sitting well with drillers in Ohio. Let’s hope the governor’s bad idea “dies on the vine.”
*Ohio Oil and Gas Association (Mar 26, 2012) – Ohio’s Crude Oil and Natural Gas Producers Stand Against Tax-Increase Proposal (PDF)