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.
Saturday, February 28, 2009
Saturday, February 21, 2009
Jessup News Post - February 2008
Township Meeting:
The 4 February 2008 meeting had a significant discussion of zoning,the related NTC Intergovernmental Cooperation Agreement For Multi-Municipal Planning And Implementation, and the proposed NTC SALDO.
After discussion, a unanimous vote was taken to not zone the township.
It was further decided to seek to withdraw from the Intergovernmental Agreement. It requires the township to seek approval of the other 11 municipalities for any land ordinances we want to enact - a condition that is not relevant if we do not zone.
It was decided to investigate other SALDO options including adopting the County SALDO as our own and establishing a planning commission; or establishing a liaison with the County planning commission to improve coordination and input on their decisions. Copies of the County SALDO will be obtained and reviewed.
There was a discussion of obtaining a replacement for the existing backhoe/loader. The decision was to seek bids to do so.
The option of contracting directly with an engineering organization(s)instead of COG for codes and septic enforcement was discussed again with the intent of taking action in the near future to reduce fees to residents.
NTC Meeting:
The 19February2008 NTC meeting was fairly brief. The key items were a discussion of subdivision activity by Bob Templeton and a discussion of zoning and the intergovernmental agreement. Bill Stewart mentioned that Alta Resources may come to the next meeting to discuss their gas leasing and drilling activities. Dave Darrow said that he would be a "Non-Voting" alternate for Franklin Township.
Bill Stewart said there was no report of any township opposed to zoning and he thought all were just talking and no action was taking place. We informed him about the zoning vote in Jessup and Franklin confirmed they had also voted to not zone.
Gene Famolari and Charles Davis, Jessup Rep, raised and discussed the issues about withdrawing from the Intergovernmental Agreement. There was some confusion about whether we wanted to drop from the NTC or just the agreement. Our position was about only the Agreement and this was clarified in the meeting and in a subsequent discussion with Charles Mead.
This NTC meeting had several positives :
Bob Templeton talked about his subdivision summary handout and really endorsed that there is no need for a NTC SALDO based on the number of lots per year for many towns ( e.g. 3/year over 15 years for Jessup.). He said he liked the approach we had discussed about having a Jessup observer attend County planning commission meetings and act as town liaison. He encouraged other towns to consider that.
Bill Stewart tried to defend the NTC's value to one questioner, but could not really point to anything the NTC had done other than getting grants for composting leaf vacuums and improving supervisor relations by regular get-togethers.
I had a long chat with Charles Mead that went from his being angry and convinced I was "misrepresenting" to his understanding my points about what the Intergovernmental Agreement really said, why it needed change and how to do so. We ended up cordial and, perhaps, he will rethink his position.
The key is that the “Agreement” must be updated to do what he and others want to do for the “zoners”. To Change requires a 100% agreement of 12 towns. To Terminate requires only a 75% vote. It is easier to terminate and redo for the willing than to be hard-nosed and force us to withdraw over a year period - during which we are not likely to vote for their needed change.
The issue of changing the intergovernmental agreement is now on the table and should get follow-up in the next meeting. It's important for non-zoners to drop out of it; and that can be done without leaving the NTC. That action gives us freedom from more regulatory efforts by the "joint planning committee" which has a lot of authority ceded it by the towns in the agreement.
On the not so positive side :
Some of the "inner" clique of NTC supervisors are unhappy and may try to find a way to reverse the events or prevent withdrawal. We should be prepared for more discussion on March 19.
Money may be a factor - the budget shows $59.6K tied to SALDO-ZONING. Perhaps they can only keep it if they spend for those items. That could be a terrible incentive to do "wrong" rather than to return the funds. If so, some open discussions and negotiations with DCED could lead to a win-win if approached correctly.
The 4 February 2008 meeting had a significant discussion of zoning,the related NTC Intergovernmental Cooperation Agreement For Multi-Municipal Planning And Implementation, and the proposed NTC SALDO.
After discussion, a unanimous vote was taken to not zone the township.
It was further decided to seek to withdraw from the Intergovernmental Agreement. It requires the township to seek approval of the other 11 municipalities for any land ordinances we want to enact - a condition that is not relevant if we do not zone.
It was decided to investigate other SALDO options including adopting the County SALDO as our own and establishing a planning commission; or establishing a liaison with the County planning commission to improve coordination and input on their decisions. Copies of the County SALDO will be obtained and reviewed.
There was a discussion of obtaining a replacement for the existing backhoe/loader. The decision was to seek bids to do so.
The option of contracting directly with an engineering organization(s)instead of COG for codes and septic enforcement was discussed again with the intent of taking action in the near future to reduce fees to residents.
NTC Meeting:
The 19February2008 NTC meeting was fairly brief. The key items were a discussion of subdivision activity by Bob Templeton and a discussion of zoning and the intergovernmental agreement. Bill Stewart mentioned that Alta Resources may come to the next meeting to discuss their gas leasing and drilling activities. Dave Darrow said that he would be a "Non-Voting" alternate for Franklin Township.
Bill Stewart said there was no report of any township opposed to zoning and he thought all were just talking and no action was taking place. We informed him about the zoning vote in Jessup and Franklin confirmed they had also voted to not zone.
Gene Famolari and Charles Davis, Jessup Rep, raised and discussed the issues about withdrawing from the Intergovernmental Agreement. There was some confusion about whether we wanted to drop from the NTC or just the agreement. Our position was about only the Agreement and this was clarified in the meeting and in a subsequent discussion with Charles Mead.
This NTC meeting had several positives :
Bob Templeton talked about his subdivision summary handout and really endorsed that there is no need for a NTC SALDO based on the number of lots per year for many towns ( e.g. 3/year over 15 years for Jessup.). He said he liked the approach we had discussed about having a Jessup observer attend County planning commission meetings and act as town liaison. He encouraged other towns to consider that.
Bill Stewart tried to defend the NTC's value to one questioner, but could not really point to anything the NTC had done other than getting grants for composting leaf vacuums and improving supervisor relations by regular get-togethers.
I had a long chat with Charles Mead that went from his being angry and convinced I was "misrepresenting" to his understanding my points about what the Intergovernmental Agreement really said, why it needed change and how to do so. We ended up cordial and, perhaps, he will rethink his position.
The key is that the “Agreement” must be updated to do what he and others want to do for the “zoners”. To Change requires a 100% agreement of 12 towns. To Terminate requires only a 75% vote. It is easier to terminate and redo for the willing than to be hard-nosed and force us to withdraw over a year period - during which we are not likely to vote for their needed change.
The issue of changing the intergovernmental agreement is now on the table and should get follow-up in the next meeting. It's important for non-zoners to drop out of it; and that can be done without leaving the NTC. That action gives us freedom from more regulatory efforts by the "joint planning committee" which has a lot of authority ceded it by the towns in the agreement.
On the not so positive side :
Some of the "inner" clique of NTC supervisors are unhappy and may try to find a way to reverse the events or prevent withdrawal. We should be prepared for more discussion on March 19.
Money may be a factor - the budget shows $59.6K tied to SALDO-ZONING. Perhaps they can only keep it if they spend for those items. That could be a terrible incentive to do "wrong" rather than to return the funds. If so, some open discussions and negotiations with DCED could lead to a win-win if approached correctly.
Wednesday, February 11, 2009
More on Taxes and Gas Extraction
With the release of the Governor's budget, the issues discussed in my last post become more immediate and focused. The Governor proposes a severance tax of 5% plus 4.7 cents per thousand cubic feet (mcf) of gas at the wellhead ( Marcellus Budget ). At the current market price of about $4.60/mcf, that is effectively a 6% tax. This severance tax will be the political ground zero for all legislative negotiations on taxing natural gas.
I have argued against the property tax assessment of gas deposits and rights based on lease value, as advocated by both the CCAP ( County Commissioners Association of Pennsylvania and the PSATS ( Pennsylvania State Association of Township Supervisors) in their 2009 priorities lists. I believe those taxes are neither fair nor practical to administer. With the Governor's proposal on the table, they are a distraction to a political strategy of gaining a local government allocation of any severance tax revenues.
I still believe that the gas extraction business will more than pay its way based on the additional corporate taxes and royalty income taxes that it generates. And it will grow our economy. A substantial portion of those new revenue streams from existing taxes should be allocated to the local counties and towns that are producing the gas and bearing the burdens of servicing the industry's needs.
That should happen in any event; but it may not be practical to get it now. If a severance tax is in our future, we should be sure to get a substantial revenue stream devoted to the producing counties and towns. We also need to be sure we do not overtax and become less competitive than other gas-producing states. A 6% severance tax may seem small compared to Texas's 7% tax; but Texas has no income taxes and that makes them more attractive than us to gas producers.
We need a balanced tax policy that keeps us competitive and fairly recompenses the gas-producing towns, counties, and land owners. That should result in property tax reductions in those towns and counties. From a practical politics standpoint, the best strategy is to abandon the PSATS and CCAP positions on property tax assessment of gas rights and focus on getting a substantial allocation of the severance tax to the producing counties and towns to reduce property taxes and to fund the local services that are essential to efficient gas production. This funds allocation could be administered as easily as the liquid fuel tax for road maintenance.
By the way, the Governor's Marcellus Budget, above, estimates severance tax revenues of $1,819.3 Million over the next 5 years. Susquehanna County overlays about 3% of the Marcellus Shale deposits in Pennsylvania. However, based on shale thickness and drilling activity, our share of the state's gas production is likely to be considerably higher ( maybe 6-10%) over the next 5 years. With a 6% share, Susquehanna county would generate $109 Million of that 5- year revenue stream. A substantial portion of that would pay a lot of local bills.
For the record, I'm attaching a copy of a letter to the local newspapers on this topic; hopefully it will be published in the 18 February editions. The letter :
Fair Taxes from Gas Extraction
Under current state law, towns and counties cannot assess property taxes on gas deposits or rights. Hence, they get no additional revenue from natural gas extraction, but must keep the roads and bridges open under heavy truck traffic and provide social and law enforcement services.
Both county (CCAP) and township (PSATS) associations propose the State allow property taxes on gas rights based on lease values. This proposal is neither fair nor practical.
How do we assess fairly the "value" of underground gas rights separately from surface rights? Gas companies pay different lease prices for comparable land at different times. If gas can't be extracted or the property is not leased, is the value zero? It's hard to make fair assessments and to administer this tax.
Governor Rendell proposes a new severance tax on gas at the wellhead of effectively 6% at current prices in addition to existing income taxes on royalties and corporate earnings. Too much taxation can drive gas producers to other states. We need a balance that keeps us competitive and fairly recompenses the gas-producing towns, counties, and landowners.
If gas is extracted, State tax revenue is increased by the new profits and royalties. By allocating a significant part of gas-based royalty and corporate income taxes and, if passed, severance taxes to the counties and towns from which those tax revenues were generated, the gas-rights owners pay a tax not paid by surface-only owners. The new revenue can pay for the new services and reduce local property taxes. Any severance tax should be kept low to encourage production here and should flow mostly to the gas-producing local governments.
This approach treats both types of property owners fairly, pays for the added community services,and can be administered as easily as the gasoline/fuel tax allocation for road maintenance. For more information, go to www.jessupjottings.blogspot.com.
I have argued against the property tax assessment of gas deposits and rights based on lease value, as advocated by both the CCAP ( County Commissioners Association of Pennsylvania and the PSATS ( Pennsylvania State Association of Township Supervisors) in their 2009 priorities lists. I believe those taxes are neither fair nor practical to administer. With the Governor's proposal on the table, they are a distraction to a political strategy of gaining a local government allocation of any severance tax revenues.
I still believe that the gas extraction business will more than pay its way based on the additional corporate taxes and royalty income taxes that it generates. And it will grow our economy. A substantial portion of those new revenue streams from existing taxes should be allocated to the local counties and towns that are producing the gas and bearing the burdens of servicing the industry's needs.
That should happen in any event; but it may not be practical to get it now. If a severance tax is in our future, we should be sure to get a substantial revenue stream devoted to the producing counties and towns. We also need to be sure we do not overtax and become less competitive than other gas-producing states. A 6% severance tax may seem small compared to Texas's 7% tax; but Texas has no income taxes and that makes them more attractive than us to gas producers.
We need a balanced tax policy that keeps us competitive and fairly recompenses the gas-producing towns, counties, and land owners. That should result in property tax reductions in those towns and counties. From a practical politics standpoint, the best strategy is to abandon the PSATS and CCAP positions on property tax assessment of gas rights and focus on getting a substantial allocation of the severance tax to the producing counties and towns to reduce property taxes and to fund the local services that are essential to efficient gas production. This funds allocation could be administered as easily as the liquid fuel tax for road maintenance.
By the way, the Governor's Marcellus Budget, above, estimates severance tax revenues of $1,819.3 Million over the next 5 years. Susquehanna County overlays about 3% of the Marcellus Shale deposits in Pennsylvania. However, based on shale thickness and drilling activity, our share of the state's gas production is likely to be considerably higher ( maybe 6-10%) over the next 5 years. With a 6% share, Susquehanna county would generate $109 Million of that 5- year revenue stream. A substantial portion of that would pay a lot of local bills.
For the record, I'm attaching a copy of a letter to the local newspapers on this topic; hopefully it will be published in the 18 February editions. The letter :
Fair Taxes from Gas Extraction
Under current state law, towns and counties cannot assess property taxes on gas deposits or rights. Hence, they get no additional revenue from natural gas extraction, but must keep the roads and bridges open under heavy truck traffic and provide social and law enforcement services.
Both county (CCAP) and township (PSATS) associations propose the State allow property taxes on gas rights based on lease values. This proposal is neither fair nor practical.
How do we assess fairly the "value" of underground gas rights separately from surface rights? Gas companies pay different lease prices for comparable land at different times. If gas can't be extracted or the property is not leased, is the value zero? It's hard to make fair assessments and to administer this tax.
Governor Rendell proposes a new severance tax on gas at the wellhead of effectively 6% at current prices in addition to existing income taxes on royalties and corporate earnings. Too much taxation can drive gas producers to other states. We need a balance that keeps us competitive and fairly recompenses the gas-producing towns, counties, and landowners.
If gas is extracted, State tax revenue is increased by the new profits and royalties. By allocating a significant part of gas-based royalty and corporate income taxes and, if passed, severance taxes to the counties and towns from which those tax revenues were generated, the gas-rights owners pay a tax not paid by surface-only owners. The new revenue can pay for the new services and reduce local property taxes. Any severance tax should be kept low to encourage production here and should flow mostly to the gas-producing local governments.
This approach treats both types of property owners fairly, pays for the added community services,and can be administered as easily as the gasoline/fuel tax allocation for road maintenance. For more information, go to www.jessupjottings.blogspot.com.
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