Mathematics, Gas, and Taxes

Let's have fun with mathematics, starting with some interesting numbers about Susquehanna County.

We have 823 square miles of land area and 9 square miles of water; about 932 sq. miles total.

Pennsylvania has 46,058 square miles of surface. Dividing that into 832 yields 1.81% as The County share of the State's surface area.

Geologists and gas companies claim that 60% of the State's area overlays the Marcellus Shale deposits from which we hope to produce large amounts of natural gas. That works out to about 27,600 square miles. Susquehanna County is completely in that area. So, we overlay about 3% of the Marcellus Shale area in the state. The thickness of the shale layer in Susquehanna County is considered to be about twice the average. So, the shale gas value of our deposits is probably a much higher percentage, say perhaps 6%.

There are several estimates of the value of the Marcellus Shale. All are highly speculative until more drilling and production experience is gained. Governor Rendell uses an estimate of $1Trillion in his budget fact sheet on his proposed severance tax. On that basis, at just 3%, the county would have about $30Billion of shale gas under the surface. At higher % estimates for greater thickness, the value could double to $60Billion.

What do those numbers mean in more human terms - like an acre? At 624 acres per square mile times 830 acres in the county, the county has about 518,000 acres. Dividing that into $30Billion gives a value of about $58,000 per acre. At the higher percentages, that could exceed $100,000/acre. Pretty high for most land here!

Of course, these are "averages" and the real value of any specific parcel can be dramatically different depending on what really lies below and can be extracted. In the last couple of years gas companies have paid 5-year lease prices from $25 per acre to over $2,500 per acre for parcels with roughly comparable gas extraction potentials.

The lease prices vary based on the awareness of the landowners, the degree of company competition, the rising price of natural gas, and expectations of high payoffs from a small portion of the large amounts of land leased. Only some of the payoff may come from actually extracting gas from a parcel. The payoff can also come from flipping leases to other companies or from using the land for pipelines at very low annual payments instead of the high gas royalties hoped for by landowners. Some of the leased land will never be worth exploiting and it may be years before that culling is done.

For these reasons, using the lease price as a fair valuation of the underlying gas is apt to be very misleading. Yet, the county commissioners and township supervisors associations propose to use the lease price as the basis for taxing gas rights (or possible deposits) as property. The resulting tax may require companies and landowners to pay disparate amounts for similar parcels regardless of whether they can get any value from the assumed gas deposits.

How a property tax would be written to protect landowners from additional property taxes when they get no revenue is unclear. A severance tax avoids this issue by only taxing the produced gas. If there is no production, there is neither tax nor royalty income. At least, no one is threatened with foreclosure for failing to pay taxes on non-existent gas deposits, as might happen with a property tax.

Unfortunately, the Governor's proposed severance tax is intended to be used to reduce the state deficit and to pay for projects in the cities and counties that have nothing to do with the production of the gas. The burden of paying for gas-production related services (roads, social and law enforcement, etc.)will fall on the producing counties and towns that may see little of the state severance tax.

Before we jump on the need for any new taxes,it's worth noting that successful gas production yields both corporate income taxes and royalty income taxes to the state. The problem is that the state does not allocate a fair share of those taxes back to the local governments that provide the essential services.

The gas-producing counties and towns deserve a fair share of any gas related taxes whether from royalty income tax, corporate income tax, or severance tax. Getting it depends on the effectiveness of our legislators in writing a fair share allocation into the tax laws. And that brings us to some other numbers.

The US Census Bureau estimates Susquehanna County population at 41,123 in 2007. The comparable 2007 estimate for Pennsylvania was 12,432,792 ( the updated Jan09 estimate is now 12,419,930). New county data will be available in April, but the Susquehanna County population will still be about 0.3% of the state population.

So, 3%-6% of the Marcellus Shale gas value is located on land populated by only 0.3% of the voting public. These numbers do not look good for Susquehanna County getting its fair share of any natural gas tax devised in the political horse trading arena of the State Legislature.

Some other numbers may improve the outlook. As a percentage of the state, our population is only 0.3%; but we are 1.5% of the 67 counties; and we elect 1% of the 203 state representatives and 2% of the 50 state senators. Those numbers look more promising.

If we add representatives and senators from other Marcellus Shale areas, the numbers start to look like a strong minority voting block; if we add the other oil and gas producing areas of the state ( mostly the western half), the numbers have the potential to be a decisive voting block. As a reference point, last year,the DEP issued over 7000 gas well permits, but only 450 were for Marcellus Shale gas (about 15% of these in Susquehanna County).There may be a lot of allies for allocating a fair share of state (income or severance) tax revenues derived from gas production back to the producing towns and counties.

Of course, that's just potential; making it real requires a lot of alliance building around some common interests. And that effort is in the realm of politics not mathematics.