First, some background on U.S. natural gas sources and markets. Most of our country’s gas is consumed in the major population centers of the northeast, the so-called Washington-to-Boston corridor. It’s cold here in the winter and a number of homes use gas as a primary heat source. Gas is also used year-round to heat water, cook and dry clothes. Business and industry use gas to heat and cool buildings and it’s increasingly used for power generation.
Starting around World War II and prior to the shale gas boom of the past eight years, most of the natural gas used in Pennsylvania came out of the ground in Oklahoma, Texas and under the Gulf of Mexico — yes, there are pipelines on the sea floor. (Fuel coming from outside Pennsylvania is referred to below as imported gas.)
There is already major infrastructure in place to bring imported gas here. Large, interstate pipelines, or gas transmission lines, have been operating for decades. Some move gas through Arkansas, Tennessee, Kentucky and Ohio. Others bring it across the Gulf States and then north through the Carolinas.
Lines are typically 30 to 42 inches in diameter and operate at pressures between 750 and 2,000 psi. Every 75 miles along the length of the line, a compressor station keeps the gas moving. One station may have several compressors, each driven by a very large electric motor or turbine engine — some as high as 30,000 horsepower.
Several of these interstate pipelines travel west-to-east across Pennsylvania.
Some major companies like Dominion, Tennessee Gas, Texas Eastern and Transco all have transmission lines flowing through Pennsylvania. Pipelines traveling across Pennsylvania’s northern tier have made it very easy for shale drillers to deliver gas to nearby and faraway markets.
As you may have guessed, it costs much more to bring natural gas from the Gulf states than it does to run a short line from a shale well to an existing pipeline. This has been a windfall for the shale drillers and the gas companies.
Shale drillers claim they’ll leave Pennsylvania if a tax is enacted. Frankly, I’m not sure where they’d go because every other gas-producing state levies an extraction tax (in Texas, it’s currently 7.5 percent). Besides, Pennsylvania is much closer to market than gas-producing states in the south, and transportation costs make up a significant portion of an end-user’s gas bill.
The anti-tax crowd also claims the increased cost of taxed natural gas will just be passed along to Pennsylvania gas consumers. This is incorrect for two reasons. First, the shale drillers can’t raise their price above that of imported gas or consumers will buy the imported fuel instead. Natural gas, after all, is a commodity and consumers will usually buy from the lowest-priced supplier.
Second, the shale gas boom has made Pennsylvania a natural gas exporter, meaning more gas is extracted in the state than is consumed. In 2013, Pennsylvania extracted 2.92 trillion cubic feet but only used 1.09 trillion cubic feet. The remaining gas was sent to mid-Atlantic and New England states. Even if the sales price of gas did increase somewhat, Pennsylvania gas consumers would only pay for one-third of the state’s new revenue source. The remaining revenue would come from out of state. Governor Wolf is simply making a good business decision — he’s externalizing our costs.
Our governor’s proposal is projected to raise an additional $1 billion annually and will rely on residents outside Pennsylvania to pay for two thirds of these new funds. In my opinion, the sooner we can get the governor’s proposal implemented, the better.
Plantagenet on Fri, 3rd Apr 2015 8:18 pm
Its smart to tax fossil fuel extraction and other processes. Its even smarter to save a good portion of the tax revenue in a sovereign wealth fund rather then blowing it all on increased welfare spending, because when the oil and NG are gone all the FF tax revenue will be gone as well.
Nony on Fri, 3rd Apr 2015 10:32 pm
It’s a wealth transfer from the landowners to the state as a whole. One step down the pathway to nationalizing mineral rights like the rest of the world.
Makati1 on Sat, 4th Apr 2015 12:54 am
More of the Socialist world coming to the UFSA. Tax and spend, not save. The government does not know how to save or even to spend wisely. They are all so deep in debt the sun doesn’t shine.
Perk Earl on Sat, 4th Apr 2015 3:46 am
Segue from the extraction tax for a moment – ck. out the link below, which claims the US economy is reaching stall speed, i.e. AtlantaFedGDPnow suggest early April US GDP is 0%.
https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm
rockman on Sat, 4th Apr 2015 7:08 am
“Shale drillers claim they’ll leave Pennsylvania if a tax is enacted.” To save typing I’m going to float another silly acronym: MUB…More Utter Bullsh*t. These days there seems to be a lot of MUB tossed out daily. In this case I’m not sure who to assign this MUB to. The companies drilling in PA who would never walk away from the trend. OTOH I’ve not seen any printed documentation of any company putting forward MUB on this issue. Would have been nice if the writer had given some links. So it might be the writer trying to spice up his piece with MUB.
I clearly recall how shocked I was to learn that PA had never had a severance tax on oil/NG production. Texas and La have collected $BILLIONS over the decades. MUB to think that severance taxes have done anything to inhibit drilling in those states. Just these two states have the highest concentration of wells on the planet.
For several years I’ve been advising those folks (typically in the Letters to the Editor in local papers) that they were being played the fool by the industry. Operators in Texas and La don’t lose sleep over state severance and country taxes. We aren’t particularly thrilled with the 12.5% of ever bbl of oil produced in La being taken from us. Yes: for every $100 million in oil produced the state gets a check for $12.5 million. But in hundreds of wells over 40 years I’ve not seen a single instance of an operator rejecting a project due to severance taxes.
The oil patch does put a lot of wear and tear on the public infrastructure with our activity. Thus there’s nothing unfair about the public being compensated for those damages. I can assure you the grass roots in the patch don’t have a problem with severance taxes since we are also part of the population that receives this financial benefit.
It’s just the cost of doing business. A business that has been very good for the last 5+ years.
Nony on Sat, 4th Apr 2015 8:00 am
I’m sure there are projects that are economical with no severance tax, but not with 12.5%. That you can’t identify them doesn’t mean they don’t exist. After all there are projects at all different price points and to the producer a tax is just like lowering the price of sale.
Nony on Sat, 4th Apr 2015 8:01 am
The main tradeoff is not between the industry and the state but between leaseholders and the state.
ghung on Sat, 4th Apr 2015 8:28 am
Nony: “I’m sure there are projects that are economical with no severance tax, but not with 12.5%.”
Life’s tough all over, eh? When I was building houses, if I couldn’t make a profit while paying all the costs, including local permits and fees, I didn’t do the project. It never occurred to me that I was special somehow, or that the costs were unfair because I (or the client) couldn’t afford them. Whatever costs were incurred to the community-at-large from my doing business there were my responsibility. Pay up or go home.
Davy on Sat, 4th Apr 2015 9:20 am
Fossil Fuels will soon be treated differently as depletion gains speed and supply insecurity becomes widespread. Society will start the collapse process economically very soon after supply disruptions and rationing start. I have seen studies that show a 10% reduction in liquid fuel supply equates to 50% reduction in discretionary driving. Emergency and vital services cannot be reduced much without social fabric damage. Imagine the economies of scale with a significant reduction in economic activity from discretionary driving reductions at that percentage.
Our complex interconnected system is driven by brittle efficiency of JIT distribution and manufacturing. This is driven by economies of scale. We will see a systematic collapse process begin with fossil fuel supply reductions reduces the efficiency and economies of scale of our complex BAU. Taxing and regulating a free market FF complex will accelerate that process. Eventually this will likely lead to governmental control of a greatly reduced fossil fuel sector as the whole free market oil complex deteriorates. The sector is vital so it cannot be let go in a natural market process of collapse.
I mention greatly reduced oil complex because we know governmental control cannot match free market capitalism at work in a proper market environment. This is not a value statement of good or bad. It is likely a reduction in fossil fuel production and distribution in a controlled environment will be better at eliminating poor attitudes and lifestyles we see now. No fuel for Nascar BS but fuel to a dying production AG sector.
This talk of tax in this article will be short lived and just the typical political posturing to scrape the remaining crumbs of wealth to support an overly large governmental sector that will implode eventually probably into martial law with greatly reduced services and regulations.
rockman on Sat, 4th Apr 2015 10:06 am
Davy – “…to scrape the remaining crumbs of wealth to support an overly large governmental sector”. Not that I entirely disagree with your view. But consider Texas with regards to benefit of the severance tax: our Rainy Day Fund:
“Normally, most of the state’s oil and gas production taxes go to the Rainy Day Fund. Before 2007, the fund’s balance had never topped $1 billion. Because of a recent surge in drilling activity in South and West Texas, the fund’s balance has quickly taken in billions of dollars. The comptroller’s office has projected the fund’s balance will be $8 billion in 2015.
During a special session in 2013, lawmakers passed a measure asking voters to approve sending half of the oil and gas production taxes that would normally go to the Rainy Day Fund to the State Highway Fund instead. The Texas Department of Transportation has said it has a $5 billion annual budget shortfall. Last month, 80 percent of Texas voters approved the measure, called Proposition 1.”
And in addition tens of $millions of the fund are now dedicated to mitigating the effects of the recent drought we experienced. Anyway you slice it the production taxes collected have been a huge benefit to our citizens. If some other state’s gov’t pisses away any production tax revenue that’s would be a sin on them but doesn’t invalidate the severance tax model IMHO.
rockman on Sat, 4th Apr 2015 10:16 am
And I’ll repeat: of the 100+ drilling projects in La. I’ve reviewed over the last 40 years I’ve not seen one rejected because of the high severance tax La. charges. And for a simple reason: the potential revenue of a successful project is typically so high the effect of the severance tax amounts to much less than 1% of the projected rate of return. IOW if a well cost $5 million and will produce $20 million in future revenue the difference between the Texas and La. oil severance tax would be about $1.2 million. IOW if a $5 million investment is good with a $20 million return it’s still good with an $18.8 million return.
Severance taxes are not a personal with the oil patch…it’s just business. LOL.
Davy on Sat, 4th Apr 2015 12:07 pm
Rock, the rainy day fund is a great example of financial prudence on your states part. The investments are likely to be worthless in a few years when the market crashes. The spending of money on highways is a dubious investment considering the auto age is drawing to a close. At least the state showed some financial restraint by saving instead of places like KSA where they are buying votes from a spoiled population.
rockman on Sat, 4th Apr 2015 7:00 pm
Davy – I’m not a big proponent of the expansion of the Texas highway system…at least long term. But many roads are in bad shape. And we’ll still be driving a lot much longer than “a few years”. And understand those other “investments” are badly needed…such as the effort to mitigate one of the potential problems caused by AGW…droughts:
Texans overwhelmingly passed a constitutional amendment to jump-start financing for water projects in the state. The plan will take $2 billion in surplus state money (from the Rainy Day Fund) to start a low-interest loan program for water projects in Texas. It passed with over 73 percent of the vote. The $2 billion approved this week will act like a down-payment on a mortgage that will allow the state to borrow billions more for hundreds of water projects outlined in its official Water Plan. Those projects aim to provide enough water to meet the state’s needs over the next fifty years.
There’s also a move to use some of the money to shore up the state’s underfunded Medicare program. And a there is another move to ship more towards public education. Texas has a VERY long history of using its oil/NG riches to serve public education:
The Permanent University Fund was established by the 1876 Constitution of the State of Texas. Initially, its assets included one-tenth of University of Texas lands bordering the railroads (UT Austin was granted 1 million acres in West Texas as compensation) as well as 1 million acres additional. In 1883, Texas and Pacific Railroad returned 1 million acres, deemed too worthless to survey, to the State Government, which turned the land over to the PUF.
{Today much of those “worthless” acres are better known as the Permian Basin. And why did those lands belong to the state like much of the west belonging to the federal govt. See below}
The terms of the annexation of the Republic of Texas in 1845 meant that Texas kept its public lands. The 1894 discovery of oil in Corsicana, Texas and the 1901 discovery of oil at Spindletop in Beaumont, Texas, began a subsequent oil boom in Texas and the western U.S. In 1901, the Texas Legislature authorized UT Austin to “sell, lease and otherwise control” oil and mineral rights for PUF land. In late 1916, after a report was submitted to the Land Commission of the UT Board of Regents, the Board forbade the sale of any University lands, including those of the PUF.
If interested the rest of the history of the PUF is quite a take: http://en.wikipedia.org/wiki/Permanent_University_Fund
And how beneficial for the students is the fund? When I attended geology grad school at Texas A&M in 1973 I was only a teaching fellowship that granted me the in-state student rate. Which was less than $300 PER SEMESTER…not per hour.
Texas politicians do have their faults like all of them. But they do have a history of passing on the advantages of our great good luck when it comes to natural resources.
Davy on Sat, 4th Apr 2015 7:21 pm
Rock, water projects are dear to my heart if they are not the idiot complex and energy intensive kinds.