* Pennsylvania wants to tax Marcellus Shale gas 5 percent
* "Severance" tax modeled on that use in West Virginia
By Jon Hurdle
HARRISBURG, Pennsylvania, Feb 9 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
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,
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
"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
(Reporting by Jon Hurdle; Editing by Daniel Trotta and