Severance tax could slam brakes on drilling industry in Ohio

Severance tax could slam brakes on drilling industry in Ohio

The April 1 headline in USA Today spelled it out all too clearly: “Falling Oil Prices Cost 100K Jobs.” The timing of Gov. John Kasich’s proposed severance-tax increase on oil and gas, while maybe well-intentioned from a political and humanistic standpoint, couldn’t be worse. In all likelihood, a severance tax on oil and natural gas production will hurt energy investment in Ohio and cost Ohio jobs.

The governor’s two-year budget plan unveiled in March calls for a 6.5-percent tax on all crude oil and natural gas produced in the state. He says that now is the right time to impose the tax because Ohio’s shale industry has recovered its initial investment costs. While this may have been true when oil was more than $100 a barrel and natural gas was selling for nearly $4 an Mcf, it certainly isn’t true today.

Truth is, drilling companies are in trouble. The Ohio rig count is in freefall. According to the Ohio Department of Natural Resources, there are only 27 rigs left exploring for oil and natural gas in the state. That number dropped by 10 in just the course of one week, while only three permits were issued for new wells. Exploration budgets have been slashed on average by nearly 40 percent for the year ahead. Drilling in Ohio is in danger of coming to a screeching halt.

Drilling activity in Pennsylvania and West Virginia is significantly outpacing that in Ohio. Why infer that it is now when activity is largely drying up? The last thing Ohio needs is to add a tax to the cost of producing oil and gas. Instead we need to encourage energy investment in the state, not push it away .

The shale industry has invested more than $22.5 billion in Ohio. In Ohio’s counties where shale development has been greatest, the unemployment rate fell to just 4.5 percent in January of this year from 16.1 percent in 2010. This decline in joblessness has come about thanks to private investment that has involved significant risk-taking from the energy industry.

It would be unwise to clamp additional taxes on oil companies now that may end up driving them away. Southeastern Ohio needs the investment and the well-paying jobs that come with shale development.

Gov. Kasich is a smart person and a shrewd politician. I believe that he will come to realize that his proposed severance tax on energy development could boomerang. Taxing companies that are energizing the state’s economy and providing thousands of well-paying jobs is just not wise at this time.

ROBERT W. CHASE, Marietta

Chase is chairman and Benedum Professor in the Department of Petroleum Engineering & Geology at Marietta College.