Comparing Marcellus Shale Drilling Tax Plans

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Drilling in the gas-rich Marcellus Shale has grown substantially since 2008, and Pennsylvania lawmakers have been grappling with drilling-related concerns, including local zoning issues, wastewater treatment, groundwater protection, social impacts and taxation. Pennsylvania is the only gas producer of any size without a drilling tax or conservation fee, which is used to pay for local impacts from drilling and to compensate citizens for the removal of this non-renewable resource. An April Quinnipiac poll placed public support for such a measure at 69%-22%.[1]

Several bills have been introduced in the General Assembly to impose a drilling tax or fee. This analysis compares four of the plans: House Bill 33 (Vitali plan), Senate Bill 905 (Yudichak/Erickson plan), House Bill 1604 (Harper plan), and the Impact Fee proposal Senate Bill 1100 (the Scarnati plan).[2] These four bills indicate bipartisan support for some form of natural gas taxation and suggest that action could happen this year, perhaps as part of the 2011-12 budget.

Other drilling tax plans, including House Bill 833 (George), Senate Bill 352 (Dinniman) and Senate Bill 680 (Ferlo), are summarized in an appendix to this report.[3]

Half of All Natural Gas Produced by a Marcellus Shale Well Occurs in First Eight Years

We compare the bills on four key dimensions: the rate structure (tax rate and exemptions), revenue generated in 2011 and 2015, distribution of that revenue, and effective tax rate over the life of the well. The analysis uses the assumptions and projection method used in the Scarnati plan and applies them to all four plans: lifetime production per well of 3.8 billion cubic feet (BCF), a constant price of $4.28 per thousand cubic feet (MCF), and an assumption of 9,480 operating wells by 2015. This allows us to generate an accurate comparison of all four plans.[4]

The Scarnati plan differs from the others in one important way. It imposes the fee on all production in 2010 and 2011, or 24 months of production, which generates more revenue in 2011. The other proposals count only six months of production for 2011.

Key Findings:

  1. The Vitali plan raises the most revenue both on a per-well basis and over the 2011 to 2015 period, providing the largest funding stream for state and local governments and for environmental protection.
  2. After the first year, the Scarnati plan collects the least total revenue of the plans, but collections are quite similar to the Harper plan.
  3. At 5.9%, the effective tax rate of the Vitali plan is nearly twice as high as the other plans, which range between 3% and 3.1%.
  4. Total collections grow substantially, from $50 million to $167 million in 2011 to between $172 million and $552 million by 2015, depending on the plan. This reflects expected rapid growth in both the number of wells and total production.
  5. All plans provide funding for local governments but take very different approaches to funding for the environment and state services. All proposals include a significant share going to local governments in areas that host drilling, and some funding for environmental protection. Two would allocate funding for services that benefit all Pennsylvanians, while two others only offer funding for state-level services that address drilling impacts. The Vitali plan provides the largest share of revenue for state programs.
  6. After 2011, the Vitali and Yudichak plans provide the most revenue to local governments.
  7. The Scarnati plan distributes the largest share to local governments overall, and the most money to local governments in 2011.

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Endnotes

[1] Quinnipiac University Polling Institute, “April 27, 2011 – Big Jump in Disapproval for Pennsylvania Governor, Quinnipiac University Poll Finds, Gov’s Budget Unfair, Voters – Especially Women – Say,” http://www.quinnipiac.edu/x1327.xml?ReleaseID=1593.

[2] Rep. Greg Vitali (D-Delaware), Sen. John Yudichak (D-Luzerne), Sen. Ted Erickson (R-Delaware), Rep. Kate Harper (R-Montgomery), and Sen. Joseph Scarnati (R-Jefferson, Tioga, Warren).

[3] Rep. Camille “Bud” George (D-Clearfield), Sen. Andrew Dinniman (D-Chester), and Sen. Jim Ferlo (D-Allegheny).

[4] An outline of the Scarnati plan was introduced on April 28, 2011, with Senate Bill 1100 being released May 16, 2011. To create a common measure to compare the plans, this analysis uses the known Scarnati plan assumptions regarding well size (3.8 billion cubic feet (BCF) over the life of the well), number of wells drilled from 2006 through 2015, and keeps a constant price for natural gas of $4.28 per MCF. However, this analysis uses a well production curve that creates slightly different results than are reported by Senator Scarnati. The revenue estimate for the Scarnati plan is available here: http://www.pasenategop.com/PDF/2011/marcellus-shale/impact-fee.pdf. Revenues were projected between 2011 and 2015 for the other three plans using the Scarnati methodology. As was done in the Scarnati analysis, all wells drilled in a single year are projected to be in operation the entire year, so the fees and taxes are collected on a whole year of activity.