Energy companies drilling for natural gas in Pennsylvania's Marcellus Shale are ready to fight a proposed state wellhead tax, arguing it would slow development of America's biggest gas formation.
Gov. Ed Rendell, faced with a projected $450 million revenue shortfall for fiscal 2010-11, wants to raise at least $100 million a year from the so-called severance tax on the drilling boom in the Marcellus Shale, a gas-bearing formation that underlies about two-thirds of the state.
Specifics of the tax plan are expected today, when Rendell is due to give a budget address.
The Democratic governor says the industry can afford a tax, noting that companies paid twice as much as expected at a recent auction of state forest lands for drilling and that Exxon Mobil agreed to pay some $30 billion in stock for gas driller XTO Energy.
But industry executives said such a tax would slow development of the gas field that promises to generate tens of thousands of jobs and millions of dollars in revenue for the cash-strapped state budget.
"We have not put a line in the sand but we feel we are building a foundation, and this may not be the right time," said David Spigelmyer, vice president of government relations for Chesapeake Energy Corp, the second-largest U.S. producer of natural gas, which has growing operations in Pennsylvania.
(That's what they said last time around too. This industry is so predictable... same old, same old.)
Spigelmyer said industry officials had been scheduled to meet with Rendell in mid-January to argue against the tax but the meeting was canceled when the governor took a humanitarian trip to Haiti.
Spigelmyer said the industry will resist any attempt to impose the tax if it is based on the "blanket tax" charged in West Virginia, a model Rendell had in mind when he first proposed the tax in the run-up to the current year's budget.
"If it's built around the West Virginia model, we would certainly oppose that approach," Spigelmyer said.
However, a tax modeled on one in Arkansas, which offers reductions based on capital investment, may be more acceptable, Spigelmyer said.
Kathryn Klaber, president of the Marcellus Shale Coalition, an industry group, said a tax was likely to erode the economic benefits that will flow from development of the giant gas field.
"In principle, any tax on economic activity will have a detrimental impact on that activity," she said.
Rendell first proposed the tax about a year ago but withdrew it, saying the levy would stunt the growth of a fledgling industry at a time of low natural gas prices. Rendell has now revived the idea.
Republican state lawmakers are skeptical about the latest proposal, said Erik Arnesen, a spokesman for the GOP-controlled state Senate.
"We opposed the tax last year, a position which Gov. Rendell eventually came to agree with," Arnesen wrote in an e-mail. "This year, we are not convinced that the time is right to impose any new taxes, but we are open to having a conversation about the pros and cons of a severance tax."Editorial comments by Splashdown in red.