Industry, Lawmakers Debate Gas Tax

WHEELING – State Sen. Orphy Klempa is prepared to push for a higher natural gas severance tax if drilling companies do not prove to him that they plan to hire more West Virginia workers.

Klempa, D-Ohio, is affiliated with organized labor as co-chairman of Project BEST. He is a member of the Legislature’s Joint Select Committee on Marcellus Shale, which passed a bill for the full Legislature’s consideration that, among many changes, would increase the permit fee to drill a Marcellus well in West Virginia substantially.

Now, the fee is $650, but would increase to $10,000 for the first well and $5,000 for each additional well on the drilling pad, if the legislation is ultimately signed into law by Gov. Earl Ray Tomblin.

Industry leaders and officials at the Marshall University Center for Business and Economic Research believe the Mountain State is already charging gas companies taxes that are too high – and believe surrounding states such as Ohio and Pennsylvania may ultimately see more drilling because of their lower tax rates.

West Virginia’s severance tax on natural gas currently is 5 percent. In addition, the state charges companies 4.7 cents per 1,000 cubic feet of gas produced.

“Right off the bat, West Virginia wells are worth 5 percent less than Pennsylvania wells,” said R. Dennis Xander, vice president of the Independent Oil and Gas Association of West Virginia. “There is definitely a competitive advantage to not being in West Virginia.”

According to Marshall’s tax study, Ohio only charges severance rates of 2.5 cents per 1,000 cubic foot-unit (known in the industry as an Mcf) of gas produced. Pennsylvania presently applies no severance tax, although state officials are considering adopting a system of “impact fees” that would start at $40,000 for each well for the first year.

“We do have a hard time competing with other states because of the severance tax,” said Corky DeMarco, executive director of the West Virginia Oil and Natural Gas Association. “Just on the 5 percent, over the life of a Marcellus (Shale) well, we are making an educated guess that we will pay about $1.2 million in severance taxes. And that’s not even including the 4.7 cents per Mcf, plus all the other taxes.

“These companies are public companies that are responsible to their shareholders. When they see that severance tax, they are going to think they should go to other states.”

According to the Marshall study, “West Virginia appears to have one of the highest tax burdens on natural gas compared to the five surrounding states.”

Klempa doesn’t buy the industry’s claims that higher taxes will shift gas production elsewhere. Though industry leaders held a job fair last week in Moundsville attended by more than 1,200 residents, he said drillers need to step up their efforts to hire more workers from the West Virginia, Ohio and Pennsylvania area.

“The proof is in the pudding. If we don’t start getting some pudding from the gas companies, we need to take steps to get some pudding,” Klempa said. “I was not elected by the gas companies. I was elected by the people of the Northern Panhandle, and they want to know where the jobs are.”

Klempa said the idea that the Mountain State’s taxes on gas drillers are too high now is off base because of lower costs on workers compensation and unemployment compensation. Citing ever-increasing activity by numerous drilling companies throughout northern West Virginia, Klempa said he is “not worried about them not wanting to do business with us.”

“If West Virginia gets nothing out of this deal but scarred land, busted up roads and environmental problems, this legislator is ready to vote to raise their taxes,” said Klempa, noting he is willing to raise not only the severance tax, but other taxes the companies pay. These could include personal property taxes, corporate taxes and drilling permit fees.

Though Klempa insists West Virginia needs to get more from the gas drillers, specifically jobs, Xander said the industry is making positive steps by holding job fairs like the one in Moundsville last week. Xander also is not pushing for a reduction in the severance tax from its current level.

“I am a greedy capitalist just like the next guy, but I also want to pay my bills,” he said. “The notion that these drilling companies are coming in here from Oklahoma and Texas just to rape and plunder – I don’t see that.”

Xander also said talk of raising taxes and name-calling directed at gas drillers is not a good way to make West Virginia an attractive site for the ethane cracker. The Mountain State joins Ohio and Pennsylvania in competing for a cracker that would create hundreds of permanent jobs paying in the $60,000 per year range. Royal Dutch Shell plans to announce which of the states will receive the large chemical plant in early 2012.

“All of this talk about employees and labor being upset may discourage the cracker development here,” Xander added.

Some drilling companies insist they would hire more West Virginia workers if those employees had the proper training. Klempa, again, dismisses such a concept.

“I am so tired of hearing these multi-million or billion dollar companies saying that we – the state of West Virginia – need to pay to train people to work for them,” he said. “I will be watching closely to see just how many people they end up hiring from that job fair.”

One legislator who appears ready to support the permit fee increase is Senate President Jeff Kessler, D-Marshall, whose home county is one of the most-heavily impacted from drilling action in the state.

“I know the amount of investment these companies make in these wells,” he said of the multi-million dollar drilling operations. “A permit fee of $10,000 on such a large investment is not excessive.”

Kessler also said he still wants to use part of the severance tax collections to establish the “West Virginia Future Fund,” which would be similar in nature to a system used in Alaska to provide funding for state residents.

“Once all of the gas is depleted, we need to have something to show for it,” he said.

Kessler also is concerned about some gas companies shipping their products – specifically ethane – to Canada and the Gulf Coast for use, so he would like to establish a system of tax incentives for the drillers to use their fuels to create jobs in West Virginia.

“We have a lot of supply – we don’t want to just give it away,” he added.