Natural Gas Shale Play with Tax and Regulations

HARRISBURG, Pa. (AP) - The natural gas industry in one of the nation's hottest exploration spots is bracing for a political tussle over whether and how Pennsylvania will tax methane from the potentially lucrative Marcellus Shale formation.
An industry trade association, the Marcellus Shale Coalition, said Thursday it wants any discussion of a tax to involve the high cost to drill a shale well and cumbersome state laws that make it costly to operate.
A tax enacted without addressing issues that hamper exploration companies could encourage some to move resources to shale formations in other states, said coalition president Kathryn Klaber.
"What is important is to look at the broad issues, not just a tax, as to how we make this climate best for growth," Klaber said. "There are a lot of modernization policies that need to be put in place to develop this massive natural resource."
On Tuesday, Gov. Ed Rendell issued his annual spending plan for the state and renewed his call to enact a tax identical to West Virginia's: 5 percent on the value of sale, plus 4.7 cents per thousand cubic feet produced.
Rendell projects the tax would produce $180 million in the fiscal year beginning July 1 and increase to nearly $530 million after five years, including 10 percent set aside for local governments.
Rendell wants money to shore up a state treasury that faces a projected $5.6 billion gap in 2011 and 2012 resulting from spiraling public pension costs and the expiration of federal stimulus budget aid.
Pennsylvania is the biggest natural gas producer that does not impose some type of tax on it.
However, the coalition wants to steer talk of a tax to reflect those imposed by shale states, such as Texas, Arkansas and Louisiana. In those states, the tax is discounted initially to allow the exploration companies to recoup a multimillion-dollar investment in each well.
For instance, Texas imposes a 7.5 percent tax but discounts it for 10 years or until the operator recovers 50 percent of the drilling and completion costs. In Arkansas, the state imposes a 5 percent tax on natural gas production but discounts it to 1.5 percent for at least three years.

Last year, Rendell called for the same tax rate on gas. After months of Republican-led opposition, he relented, saying he did not want to hurt an industry in its infancy.

In recent weeks, Rendell has said he believes the industry can afford to pay a tax, and pointed to the heavy influx of cash into Marcellus Shale exploration ventures.