Why Natural Gas Companies Love Pennsylvania

I've mentioned in a previous post (PA Is All Fracked Up - Feb. 2, 2013) and in tons of social media comments my disdain for Pennsylvania's lack of a severance tax for natural gas companies based on the volume of gas that they extract and ship to market in PA.  PA's convoluted surrogate for a severance tax is nothing more than corporate welfare to gas companies doing business in PA.

Well extracting natural gas near residences in Washington County, PA.
 (photo credit: State Rep. Jesse White - supportjesse.com)

PA and Alaska are the only two (out of 32) gas-producing states in the country that do not charge gas companies a severance tax based directly on the value of the gas they produce (although Alaska does have a very unique and effective tax system for oil and gas produced in their state).  Instead, we in PA have what Gov. Corbett has decided to call an "impact fee" charged to gas drillers per well rather than based on the volume and market value of the gas produced.  It's a deliberately complicated program that was designed by the governor and his cronies to NOT look or sound like a severance tax in any way, because Corbett took Grover Norquist's Anti-Tax pledge when he ran for office in 2010.  So because of our governor's pledge to a Washington lobbyist, as PA's natural gas production increases, the impact fees paid by the gas companies effectively remain relatively flat.  The Pennsylvania Budget and Policy Center has put out one of the better analyses that I have seen on PA's impact fee.  The PA Budget and Policy Center is a project of the non-profit Keystone Research Center.

If gas companies operating in PA are getting what amounts to a tax break by having avoided a severance tax, you might think that their lower costs of doing business in PA would mean that PA's landowners who have leased their land to drill natural gas wells would be seeing handsome royalty checks. Unfortunately, that is not the case.  A news story I read yesterday from Pittsburgh's Tribune-Review described marketing and transportation fees that gas companies are deducting from the royalty checks sent to landowners.  While these deductions can only be evaluated on a case by case basis to determine whether they are contractually legitimate, the larger question is whether it is legal for these deductions to take the net royalty payments below the state-minimum 12.5%.  These deductions seem like a duplicitous means of paying less than the legal minimum percentage of royalties to landowners who lease their land to gas companies.  If so, it would mean that the gas companies are getting both a break on the severance tax from the state and a break in royalty payments by passing on some of their costs of doing business to landowners.  What Gov. Corbett has created in PA is not a business-friendly climate but rather a climate in which the deck is stacked in favor of businesses with PA residents getting fleeced.

Before I finish, I want to make one more point about the counter-effectiveness of PA's current impact fee system.  By keeping impact fees much cheaper than severance taxes in other states, the price of PA's natural gas is made artificially low.  This artificially cheap natural gas becomes an attractive commodity to export overseas.  That's great news for the U.S. trade deficit, but the net effect is that every cubic foot of PA's natural gas that is shipped overseas is one less cubic foot of gas available domestically to bring us closer to energy independence as a nation. And even though I enjoy paying less for my natural gas right now, we need to critically evaluate claims by Gov. Corbett and the natural gas industry that development of PA's Marcellus Shale gas fields will bring the U.S. closer to energy independence as they have promised.

Opening up the overseas market significantly will increase demand significantly and will drive up the cost of natural gas for U.S. consumers, according to a recent article in Bloomberg Businessweek.  Gas producers are seeking to market U.S. natural gas to overseas markets, because natural gas prices in some countries are three times what U.S. consumers are currently paying.  If the domestic supply of natural gas has to equilibrate with global demand and global prices, the U.S. will remain dependent on our current mix of domestic and foreign oil.  The U.S. crossover to natural gas for vehicles and industry that is currently touted by many will lose it's economic incentive to materialize. We all need to let our state representatives know that PA's current natural gas impact fee system is a sham that needs to be overhauled.