Debating Severance Tax on Oil and Gas

Industry leaders believe changing the way Ohio collects severance taxes for oil and natural gas production will promote more fracking in the state’s vast Utica Shale field.

According to supporters of the measure introduced in the Ohio House this month, it could also lead to a break for those paying income tax in the Buckeye State by raising up to $1.7 billion over 10 years.

“We believe this will provide some much needed clarity for those who have invested in our state,” Penny Seipel, vice president of public affairs for the Ohio Oil and Gas Association. “Some people are hesitant to invest because they are not sure about the tax rates.”

House Speaker Pro Tempore Matt Huffman, R-Lima, and Speaker William G. Batchelder, R-Medina, introduced the legislation, known as H.B. 375.

Rep. Jack Cera, D-Bellaire, said he has been appointed to serve on the House Ways and Means Committee to engage in debate on the severance tax.

“There was no one from the shale area on the Ways and Means Committee, so I asked if I could serve on it regarding this bill,” he said. “My big concern is that the money is not coming back to our area. We are the ones who are having our way of life affected by it.”

According to Seipel, frackers in Ohio now pay severance taxes at a rate of 20 cents for each barrel of oil and 3 cents for every 1,000 cubic foot unit of natural gas produced. This is the case regardless of whether the driller is: an international corporation such as Exxon Mobil, Chevron, Royal Dutch Shell or BP; a company that works primarily in the U.S., such as Chesapeake Energy, Gulfport Energy, Rice Energy or Antero Resources; or a small local driller such as Buckeye Oil Producing Co.

The tax rates are also the same no matter if the wells are $7 million to $8 million horizontal wells that go thousands of feet into the earth – nearly all major companies are drilling horizontal wells into the Utica and Marcellus shale formations – or if they are conventional vertical wells that are much more economical.

“We always want to consider how something impacts our whole industry,” Seipel said.

She said H.B. 375 calls for replacing the current severance taxes with a new system that does not differentiate between oil production and natural gas production when it comes to horizontal wells.

For these, the new tax would be 1 percent of the net proceeds for whatever comes out of the well for its first five years of production, with the rate increasing to 2 percent after that.

For those drilling conventional vertical wells, the tax would be cut in half, as it would be 10 cents for a barrel of oil and 1.5 cents for every 1,000 foot cubic unit of natural gas.

All these rates are lower than those in West Virginia, which charges a 5 percent severance tax on all oil and natural gas production.

Cera said he expects the bill will pass in the Republican House some time next year. He just hopes those in the majority will consider the residents of eastern Ohio when considering the legislation.

“Some seem to think that if the severance tax is too high, the industry will go back to Pennsylvania,” Cera said. “They have too much investment here now to go back to Pennsylvania.”