Raising severance taxes on natural gas


The following editorial appeared in The Exponent (West Virginia) Telegram on Oct. 4:

The West Virginia Center on Budget and Policy has released a study suggesting that raising the state’s severance tax on natural gas liquids could increase revenue and help West Virginia profit from the use of the “wet gas” in-state.

According to the study, a plan to increase the gas severance tax from 5 percent to 10 or 15 percent could increase state revenue by about $168 million over the next five years. The plan would offer tax incentives that would reduce the effective severance tax rate for the gas and liquids that are used in ethane cracker plants or other downstream industries in West Virginia.

Sean O’Leary, a policy analyst with the Center on Budget and Policy, told the Charleston Gazette-Mail that the plan isn’t focused on incentivizing the production of more natural gas, but rather making sure that the natural gas produced in the state is creating more jobs here.

“It’s not that we aren’t producing it,” O’Leary said. “We are producing a ton of it, but we are shipping it all out of state.”

Over the past several years, state officials have attempted to lure ethane cracker plants to the state, but to no avail. Several companies, including PTT Global Chemical, have chosen to build the secondary industries in other states like Ohio.

Companies are investing billions of dollars in pipelines to move natural gas and its byproducts out of the Marcellus Shale region to the Gulf Coast and other areas for processing.

Columbia Pipeline Group recently announced plans to spend $1.75 billion to build and improve pipelines in Ohio and West Virginia in order to connect gas wells there to pipelines transporting natural gas and natural gas liquids to the Gulf Coast, with the potential to move 1.5 million cubic feet of gas per day.

The shipping of natural gas and natural gas liquids out of West Virginia is costing jobs and investment, according to state officials.

In response to a decision by Chesapeake Energy to sign a long-term contract to transport 75,000 barrels of ethane per day from the Marcellus Shale region to Texas, West Virginia Commerce Secretary Keith Burdette remarked, “Every barrel of ethane shipped out of West Virginia means less and less investment.”

At current prices, 75,000 barrels means West Virginia is losing roughly $1.875 million in potential investment each day from that Chesapeake Energy contract alone. Just think about what this could do for West Virginia’s economy if we were able to retain just a fraction of that in state.

Since West Virginia’s severance tax has been shown to have very little, if any, negative impact on natural gas production in the state, as evidenced by the rapid and ongoing increase in production, the state could feasibly raise the severance tax on just natural gas liquids, with little or no negative impact on production.

For example, West Virginia could raise its severance tax on natural gas liquids from its current rate of 5 percent to a base rate of 10 or 15 percent. That isn’t out-of-line with what the top 10 energy states are imposing.

Since nearly all the natural gas liquids produced in West Virginia are exported, the higher tax would largely fall on out-of-state producers and consumers; the tax would likely have little impact on production in the Mountain State, particularly since the tax on dry natural gas would stay the same.

In fiscal year 2015, the 5 percent severance tax on natural gas liquids generated an estimated $20.3 million in revenue; that is projected to increase to about $37 million by fiscal year 2020. Increasing the severance tax on natural gas liquids from 5 percent to 10 percent could generate an additional $37 million in severance tax revenue for West Virginia by fiscal year 2020, while a 15 percent rate would generate an additional $73 million.

The state could then offer a tax credit if the natural gas liquids are sold to an in-state cracker plant or other chemical manufacturing facility. At 2014 prices, a $1.25- to $2.50-per-barrel credit would offset the tax increase. This would make it cheaper for companies to use West Virginia-produced gas liquids in manufacturing industries here, rather than shipping the liquids to facilities out of state.

The Exponent Telegram encourages state lawmakers to consider modifying the gas severance tax so West Virginia can create an incentive to keep natural gas liquids here, while offering a credit for in-state use, thus creating jobs and economic growth in chemical manufacturing and other manufacturing industries.

The tax change would also generate much-needed additional revenue, ensuring West Virginia enjoys some of the benefits from its natural resources, even when these are shipped out of state.

Online:

http://www.theet.com/

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