UPDATE 1-Penn. seeks 5 pct-plus tax on shale gas output

Tue Feb 9, 2010 1:58pm EST

* Pennsylvania wants to tax Marcellus Shale gas 5 percent

* "Severance" tax modeled on that use in West Virginia (Adds detail)

By Jon Hurdle

HARRISBURG, Pennsylvania, Feb 9 (Reuters) - Energy companies drilling for natural gas in Pennsylvania's Marcellus Shale would have to pay a wellhead tax of more than 5 percent under a proposal unveiled on Tuesday by Governor Ed Rendell.

Rendell wants to charge drillers 5 percent of the value of gas at the wellhead plus 4.7 cents per 1,000 cubic feet of gas taken from the ground, starting July 1. The plan would raise $160.7 million in the first year and $1.8 billion over five years.

The "severance" tax is modeled on that used in West Virginia, where gas production rose 20 percent from 2002 to 2007, indicating that the tax is no deterrent to development, Rendell said.

The tax proposal must pass the state legislature and could face opposition in the Senate, which is controlled by the Republicans. The Democrats control the lower house.

An official from Chesapeake Energy (CHK.N), one of the biggest operators in the Marcellus, told Reuters last week that the industry would oppose any attempt to replicate the West Virginia tax in Pennsylvania.

Rendell argued that Pennsylvania is the only major fossil-fuel-producing state that doesn't have such a tax, and that the proposal would be less onerous to drilling companies than taxes levied by 28 other states.

"Natural gas companies are accustomed to paying a severance fee," Rendell said in a statement accompanying the fiscal 2011 budget. "Since every other major gas-producing state imposes one, drilling companies accept it as a cost of doing business."

"WE CAN TAX IT"

Sen. Dominic Pileggi, leader of the Republican majority in the state Senate, said his caucus is skeptical that there is sufficient revenue flowing from Marcellus drilling to justify a tax. But he said Republicans would re-examine the governor's severance-tax proposal after rejecting it during negotiations on the current year's budget.

Rendell responded at a later news conference by saying that energy companies had confirmed their ability to pay the tax by recently agreeing to pay twice what was expected for gas leases on state forest land.

"If they believe there's gold in them there shale, we can tax it," Rendell said.

Kathryn Klaber, chief executive of the Marcellus Shale Coalition, an industry group, said in a statement that the tax may undermine development of the field.

"Marcellus Shale development ... remains very much in an early development phase," Klaber said. "Pennsylvania still lacks much of the critical resources and infrastructure needed to develop the Marcellus Shale and compete with other leading natural gas states on a continuing basis."

Revenue from the tax would be paid into a special fund that could not be tapped until July 2011 when it would be used to offset the anticipated loss of $2.3 billion in stimulus funds.

The Democratic governor first proposed the tax in last year's budget but then dropped it, saying he didn't want to derail development of a fledgling industry that promises to generate tens of thousands of jobs and millions of dollars in revenue for the cash-strapped state budget.

Faced with a $450 million revenue shortfall in the coming fiscal year, Rendell has now revived the plan, arguing the industry can afford to pay the levy, given that companies recently bid twice as much as expected to lease state forest land for drilling.

The huge potential of shale gas plays like the Marcellus is shown by an agreement by Exxon Mobil (XOM.N) agreement to buy gas driller XTO Energy XTO.N for $31 billion in stock, Rendell said. The Marcellus, which underlies about two-thirds of Pennsylvania and parts of surrounding states, is estimated to contain enough gas to satisfy total U.S. needs for 20 years. (Reporting by Jon Hurdle; Editing by Daniel Trotta and Marguerita Choy)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.