Natural Gas Price Plummets, But Fracking Tax Still a Wolf Priority

Without a tax, officials say, "we're leaving all the money on the table."

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States that depend on energy resources to power their economies and budgets are tightening their belts as the prices of oil and natural gas fall, but that won’t — and maybe shouldn’t — stand in the way of a new fracking tax in Pennsylvania, officials say.

Governor-elect Tom Wolf, who takes office in two weeks, won election in part on a promise to impose a 5 percent severance tax on natural gas production in Pennsylvania and use the revenues — he estimated as much as $1 billion — to restore funding to the state’s K-12 public schools. But a “glut” of natural gas production is driving prices lower, and Wall Street is casting a dubious eye on companies making big drilling investments in the Marcellus Shale.

Which raises the question: Did Pennsylvania — the only gas-producing state without an extraction tax — miss its moment to tax the fracking industry for the best benefit of its citizens?

Michael Wood, research director for the Pennsylvania Budget and Policy Center, says no: There’s still plenty of gas production — and tax dollars — to go around.

“Even if the price is falling, there’s a tremendous amount of value there — even if we don’t drill another well,” Wood said.

Natural gas is trading this week at around $2.70 per million BTUs, a two-year low in the industry — driven by a combination of factors, including mild weather, overproduction across the industry, and the fact that a pipeline network to deliver the gas hasn’t caught up with the recent surge in production: Nobody wants to buy gas that can’t be delivered.

But Wood countered that Pennsylvania produced $8 billion worth of natural gas in the first six months of 2014, and that drilling permits for the year were up over 2013. Even if prices remain low, he said, Wolf’s proposed tax would still raise “hundreds of millions of dollars.” And production remains robust: The Marcellus is expected to increase its output nearly 20 percent this year.

In any case, he suggested, a fracking tax during low-production periods still would raise more money for Pennsylvania government than no tax at all. “”It’s certainly true Pennsylvania loses revenue every day we don’t have the tax,” he said.

But the state’s natural gas producers — who are opposed to a tax — say the low price of natural gas means the tax couldn’t possibly create the $1 billion amount of revenue expected. And producers say the tax would discourage additional production. “If you put a (severance) tax in play, you’re going to see a lot less investment,” David Spigelmyer, president of the Marcellus Shale Coalition, said in a December news conference opposing Wolf’s plan.

Wolf, however, plans to proceed. A spokesman for the governor-elect said Tuesday the tax, even at low prices, would still raise more money than the current “impact fee” charged. (The fee varies from year to year, but in 2013 it amounted to a one-time charge of $50,000 for each new well drilled, generating $224 million for the state. Even with natural gas trading at historic lows, PBPC estimates the fracking tax could bring in nearly three times that amount.)

“An extraction tax remains one of Governor-elect Wolf’s priorities,” said spokesman Jeffrey Sheridan on Tuesday. Without a tax, he said, “we’re leaving all the money on the table, while our schools are suffering from the drastic cuts of the outgoing administration.”

Wood did acknowledge there are dangers to becoming reliant on energy production for revenue. He said the state should build safeguards into the structure of any tax it imposes.

“If you do have a tax like this, you’re going to see collections increase and decrease,” he said.

The good news? For every bust, there’s a boom. A fracking tax might produce low returns “if the gas prices stayed low forever,” Wood said, “but that never happens.”

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