Governor Rendell Wants Natural Gas Wellhead Tax for Pennsylvania

By Jon Hurdle

PHILADELPHIA, Jan 14 (Reuters) - Pennsylvania Gov. Ed Rendell said on Thursday he will press for a wellhead tax on natural gas drilling in the state's Marcellus Shale formation to take effect July 1 this year.

Rendell said the industry can afford to pay the "severance" tax, given the higher-than-expected prices that companies agreed to pay this week at an auction to lease state forest lands for gas drilling. [ID:nnN13139717]

He also cited Exxon Mobil's (XOM.N) recent $31 billion bid for gas producer XTO as evidence of the industry's ability to pay for the development of the massive Marcellus field.

"The private sector believes this is going to be extremely profitable," he told a news conference. "There is no reason to think that the industry needs to be nurtured any more."

Rendell scrapped an earlier proposal for a severance tax because he said he wanted to encourage development of the industry at a time when natural gas prices were falling. Details of the proposed tax will be included in state's fiscal 2010-2011 budget on Feb. 9.

He said the industry expects to seek 5,200 Marcellus well permits this year, up from the 1,984 issued in 2009. A total of 958 wells were drilled in the Pennsylvania portion of the Marcellus formation in the past two years, of which 763 were in 2009.

Development of the Marcellus Shale -- which geologists estimate contains enough gas to meet total U.S. demand for at least a decade -- could generate 100,000 jobs in Pennsylvania by the end of the decade, and help reduce U.S. dependence on petroleum from other countries, Rendell said.

"That is something that the state cannot turn its back on and should not turn its back on," Rendell said.

But he said the state also needs to protect its natural environment, particularly drinking water sources, which critics say have been contaminated by chemicals used in the hydraulic fracturing technique used to extract gas from shale.

The Democratic governor said he will hold the first of a series of monthly meetings with industry and state regulators next week to try to reach agreement on the tax proposal and environmental measures, such as the disposal of drilling waste water.

Industry representatives were not immediately available to comment. (Reporting by Jon Hurdle; Editing by Anna Driver and John Picinich)