By Pittsburgh Business Times

Gov. Ed Rendell and the Pennsylvania Legislature agreed that the state needs a severance tax on drilling in the Marcellus Shale, but few details have been ironed out.

Although the 2010-11 budget does not include it, the plan is to enact such a tax by Oct. 1, so it will go into effect Jan. 1.

But how large the tax on natural gas production will end up being and what the industry will get in return remains to be seen. The Marcellus Shale Coalition is cautiously optimistic that the tax, which only two weeks ago president Kathryn Klaber said was ⿿enormous⿝ and ⿿would only drive away jobs,⿝ will win industry favor when the legislature debates how it should be structured.

Drillers in the Marcellus seem resigned to some kind of severance tax. Other states, including neighboring West Virginia, have had such taxes in place for some time; West Virginiaâ¿¿s was enacted in 2006.

What has been proposed thus far in Pennsylvania is a 5 percent tax on the price of gas at the wellhead and an additional 4.7 cents for every thousand cubic feet produced.

Thatâ¿¿s modeled after West Virginiaâ¿¿s severance tax structure, but the industry would like to see something more akin to Louisiana or Arkansas.

In Louisiana, where the Haynesville Shale competes with the Marcellus for investment, the tax is suspended for the first two years or until the operator has broken even on the cost of completing the well. In Alabama, the grace period is three years at a diminished tax rate of 1.5 percent.

⿿It allows you to capture the high up front capital that these wells require so you can recover those costs,⿝ said Matt Pitzarella, a spokesman for Range Resources, one of the most active drillers in the Marcellus.

During the time it takes a company to recoup those costs, which hover around $3.5 million per well, the rate of production falls dramatically. According to data released by Range Resources last year, the production rate of 24 of its Marcellus wells, which began at 5 billion cubic feet per day, decreased by 85 percent after the first two years to about 800 million cubic feet. By year three, the wells lost another 25 percent of their flow.

Another unknown is where the revenue generated by the tax will go.

⿿Our position was that a severance tax made sense and that we wanted to see a very significant portion of the severance tax funds go toward environmental protection programs,⿝ said Myron Arnowitt, state director for Clean Water Action, an environmental advocacy group.

On the other hand, Susan Oliver, a spokeswoman for Williams Companies Inc., an Oklahoma-based Marcellus driller and midstream company, released a statement that said the company agrees ⿿with the Coalition that if there⿿s a severance tax, we would like to see the local communities in which we are operating benefit the most.⿝

How much will go to municipalities affected by the drilling has yet to be ironed out, according to Gary Tuma, a spokesman for the governorâ¿¿s office.

Copyright 2010 American City Business Journals

Copyright 2010