Friday, January 24, 2014

Local Officials Seek Share Of Fracking Tax Proposal

Local governments in Ohio's shale drilling region asked the House Ways & Means Committee Wednesday to give them a cut of the revenue from a plan to overhaul the oil and gas severance tax.  Meanwhile, an industry group that supports the bill (HB 375) sought to allay concerns about how the proposed severance tax was structured and doubts about revenue estimates.  Sponsored by Rep. Matt Huffman, the measure would create a new severance tax on horizontal wells. The administration has said the net proceeds tax structure, along with a state income tax credit and Commercial Activities Tax exemption make it difficult to estimate how much revenue it would generate.

Greg DiDonato, executive director of the Ohio Mid-Eastern Governments Association, detailed a variety of extensive local infrastructure needs in the 10-county development district that includes much of the Utica Shale play.  "We are fortunate to have these natural resources in our area, but the development of these resources is placing a burden on our local governments," he said, citing truck traffic, strains on the water supply and wastewater facilities, and other infrastructure needs.  Mr. DiDonato, a former state lawmaker, encouraged members to recognize the cost of building out the infrastructure necessary for the region to serve the new oil and gas development.  "In order for the region to be supportive of HB375 moving forward, an equitable portion of funds generated by any severance tax needs to be returned for investment in the areas most directly impacted by the shale development," he said.

Misty Casto, executive director of the Buckeye Hills-Hocking Valley Regional Development District, recommended several changes to the bill, saying the original version "significantly undervalues a non-renewable natural resource of our region."  She urged members to earmark a portion of the revenue to help Appalachian oil-and-gas producing communities to "establish a sustainable glide-path in transitioning away from the industry's boom phase, rather than repeating the devastating effects on communities of abrupt boom-to-bust cycles of the past."  Ms. Casto also asked the committee to raise the proposed rate and base the tax on gross value instead of net proceeds.  "The language in HB375 defines 'net proceeds' in terms of allowing for the exclusion of 'any' post-production costs. This permits excessive deductions in a way that 'gross value' does not," she said. "I encourage Ohio to keep the tax rate simple and equitable by employing a gross calculation."

Aaron Dodds, regional planning and economic development director for Carroll County, said his area, at the heart of the fracking boom, was already experiencing both positive and negative effects.  "If House Bill 375 is to be enacted this money needs to come back to the counties that it came from because we are the ones feeling the burden," he said.

Cambridge Mayor Tom Orr underscored his city's need to develop infrastructure before the fracking boom subsides.  "In order for the greatest and most diverse economic growth to be realized, we will need to improve and maintain our regional infrastructure," he said.

At least one major fracking operator, Gulfport Energy Corporation, has responded to the local governments' pleas.  Gulfport President and CFO Michael Moore acknowledged that southeastern Ohio has experienced boom and bust cycles over the past two centuries because of its reliance on natural resources like lumber, coal, oil and natural gas.  "This is why Gulfport is joining with a number of our local partners in support of returning a portion of the new HB 375 revenues to southeast Ohio. Regarding the severance tax rate, we are hopeful that an earmark for SE Ohio can be secured under HB375 as introduced," he said in written testimony.  "That said, Gulfport Energy wants to insure that the rate is appropriate to provide for the local earmark. We also believe our local partners should have access to resources, now and long-term, for infrastructure improvements and conservation efforts," Mr. Moore said.

John Molinaro, CEO of the Appalachian Partnership for Economic Growth in southeast Ohio where much of the shale plays are located, said the group supports the tax plan "so long as a significant portion of the revenues derived are dedicated to mitigating short and long term impacts of the extraction and to building a better economic future for the region."  The funds are necessary because of "economic displacement," which he said has occurred in every area that's experienced an extraction-related boom.  "This happens when the companies that come in to do the extraction bid up the cost of labor, land, facilities and services," Mr. Molinaro said in testimony.   "This bidding-up process squeezes out local activities that are the underpinnings of the economy. Firms that cannot raise their prices enough to pay these increased costs close or move. When the extraction ends, the local economy finds itself with fewer jobs to support its people and less tax revenue to support critical government services."

Harrison County Commissioner Don Bethel said in testimony that he thinks counties should benefit from the severance tax, but some more than others - especially those counties that have been and will be impacted most by oil booms, such as his county.

Rich Milleson, Chief Financial Officer of Milleson Insurance, Agency LLC in Harrison County, said he "supports the current regulatory scheme that is in place where a severance tax supports the Oil and Gas and Geological Survey divisions within DNR."  He suggested that if a surplus occurs, the money should be given to the region where it was generated.

In regards to revenue estimates, Ohio Oil & Gas Association President Dave Hill defended the organization's estimates that the bill would generate $2.07 billion over 10 years. The projection is based on the assumption of 1,000 wells being drilled on average each year over the next decade, which is consistent with other significant shale plays around the country, he said.  "Clearly the evidence shows that the assumptions of future well activity and pricing are conservative. We believe the revenue model is the best available to provide a reasonable projection of future well growth and thus severance receipts looking forward ten years," he said.  The witness also dismissed concerns about the proposal to create a new horizontal severance tax based on net proceeds, saying it would impose a gross receipts tax on the total gross value, while recognizing producers' costs to add value to the product through processing.  "HB375 does not allow a producer to deduct costs for drilling or equipping a well or for costs in the production of a well. Also, oil and gas produced from a well is the first point of production, nothing else precedes it," he said.

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