Through the summer and leading up to the adoption of Ohio's biennial budget, changes to Ohio's severance tax were discussed in the General Assembly and in the media. Severance tax provisions were cut from discussions fairly early in the budget process, and the budget became law without any change to the severance tax. Still, those in favor of and opposed to changes in the Ohio severance tax continue to advocate for their respective positions in the media.
Ohio currently levies a severance tax of ten cents on every barrel of oil, and two and a half cents for every thousand cubic feet ("MCF") of natural gas. Ohio also imposes a conservation fee, and for many producers that fee is one half of one cent for every MCF, and ten cents per barrel of oil. In addition, natural gas and oil production companies pay real property tax based on the value of the oil and natural gas reserves on the property subject to tax. Condensate and NGLs are not directly addressed in Ohio's tax regime.
Ohio's neighbors with the most territory in the Marcellus and Utica shale formations – West Virginia, Pennsylvania, and New York – vary in the degree of taxation for natural gas activities. West Virginia imposes a 5% flat tax on gross production of oil or natural gas, with exemptions for low producing oil and gas wells. Pennsylvania does not impose a severance tax, but in 2012 enacted legislation allowing certain localities to impose an "unconventional gas well fee" on extraction activities. The Pennsylvania unconventional gas well fee varies from year to year based on the price of natural gas and the Consumer Price Index ("CPI"), but in 2012 horizontal wells paid $45,000 each. New York imposes no severance tax, but imposes a property tax on the economic value of oil and natural gas interests.
One proposal before the Ohio General Assembly is a new tax on the severance of gas, oil, condensate and natural gas liquids ("NGLs") from horizontal wells. This proposal, House Bill 212 ("HB 212"), was introduced on June 18, 2013, and referred to the Agriculture & Natural Resources Committee on June 25, 2013. The HB 212 proposal, as introduced, would levy a severance tax on oil, condensate and natural gas from horizontal wells. The tax on oil and condensate would be 7.5% multiplied by the metered quarterly volume and by the average spot prices as calculated by the Tax Commissioner. If the British Thermal Unit ("BTU") measurement of the gas severed from the well is equal to or less than 1,050/cubic foot, then the tax on natural gas would also be 7.5% multiplied by the metered quarterly volume and by the average spot price as calculated by the Tax Commissioner. For horizontal wells with higher BTU measurements, the rate of tax would be set by the Tax Commissioner according to a formula set forth in the bill.
It is important to keep these taxes in perspective – both nationally and globally. U.S. states with large, established oil and natural gas production – such as Texas and Oklahoma – have relatively high taxes on extraction activities. Texas imposes a 7.5% production tax on the market value of gas, and a 4.6% production tax on the market value of condensate. Oklahoma imposes production severance taxes on natural gas and oil at 7%, 4% or 1%, depending on the market price of the resource in question.
Internationally, there also have been some changes for the taxation of natural gas in recent years. Last summer, it was reported that the United Kingdom proposed to cut income taxes from shale oil and gas production to a maximum of 30% – compared to the 62% maximum generally applicable to oil and gas extraction. Russia, on the other hand, took a different direction. Media outlets reported that Russia significantly increased its natural gas taxes in 2012 then, last spring, announced plans to shift from a flat tax to a formula that takes into account energy prices and extraction costs.
Only time will tell what may become of taxes in each of the states with significant Marcellus and Utica shale development opportunities, but BakerHostetler's shale team will keep you apprised of new developments in this area as they occur.
For a comparison of state taxes on oil and natural gas production activities, see the National Conference of State Legislatures summary here.
For further coverage of the Pennsylvania unconventional gas well fee, see NPR State Impact reporting here.
For additional coverage on Russia's tax formula, see Reuters' coverage here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.