State has proven it can go without shale tax for now
A severance tax on the Marcellus Shale gas-drilling industry has been one of Gov. Tom Wolf’s major priorities since he became Pennsylvania’s chief executive in 2015.
If he’s re-elected in November, it’s likely that that so far elusive goal will remain one of his agenda items, going forward.
State residents interested in legislative goings-on in Harrisburg understand why the Democratic governor has failed in that tax plan, even though other Marcellus states have such a levy in place: The Republican-controlled General Assembly has remained fearful that implementing the tax would lead to a driller exodus, or at least dampen prospects for expanded drilling.
Opponents of the tax argue that Pennsylvania already imposes an impact fee on drillers — a fee that they liken to a severance levy.
Still, analysts have contended that the effective rates of natural gas severance taxes in states such as West Virginia and Texas outperform the Keystone State’s fee. And, those analysts contend that future production increases will only widen the gap between revenue generated in those states from the industry and what Pennsylvania will take in by way of its fee.
Amid that debate in this election year and during this time of ongoing 2018-19 budget preparation are pronouncements by Wolf and lawmakers that Pennsylvania’s fiscal picture has improved, with incoming revenue remaining strong.
It’s safe to say that Wolf’s latest severance-tax proposal, included with his 2018-19 spending plan delivered to the Legislature in February, is dead, and that it won’t be given consideration in future years either — whether he’s re-elected or not — as long as the state’s financial condition continues to improve.
But news on the shale-drilling front merits watching — developments related to both the rise in oil prices and from decisions in the industry now proving to have been unwise.
On the industry’s positive side, shale drillers are reported to be ramping up production in places other than the West Texas oil field that became the country’s drilling center after oil prices began to tumble in 2014.
That price tumble made fracking and horizontal drilling less economical and resulted in companies curtailing investments.
Only now is the industry said to be recovering, thanks to $70-a-barrel crude prices.
However, many shale companies continue to struggle, according to a May 18 Wall Street Journal article, which reported that of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in this year’s first quarter.
The article reports that the top 20 companies by market capitalization collectively spent almost $2 billion more during the quarter than they took in from operations, largely due to bad bets hedging crude prices.
“Seeking stability after years of wild fluctuations in crude prices, many operators entered into derivatives contracts in late 2017 that effectively ensured they could sell some of their 2018 output for $50 to $55 a barrel,” the article says. “Now that prices have risen to more than $70 a barrel, many are failing to capture the value of the rally.”
Pennsylvania lawmakers’ severance-tax caution is playing out to be good judgment for now. There’s enough evidence for Wolf to concur.
The proposed severance tax might make sense sometime in the future to bolster the state’s finances, but it’s not a necessity now.