Drop in oil, gas prices fuels debate over severance taxes

To hear representatives of the oil and gas industry in Ohio tell it, the huge decline in oil and natural gas prices because of oversupply globally makes it absolutely the wrong time to increase the severance tax — as proposed by Gov. John Kasich in his biennium budget sent to the Legislature.

But as far as Kasich is concerned, the industry has had a free ride for several years and it’s time for drillers to pay for the right to tap into Ohio’s natural resources.

The governor, who won re-election in November by a landslide and talked about the severance tax on the campaign trail, has dismissed the industry’s claim that the current decline in prices justifies a reassessment of the 6.5 percent tax that would generate an estimated $180 million.

“It’s never a good time” as far as the industry is concerned, the governor has replied when asked to comment about the statewide campaign launched by the Oil and Gas Association to build political, community and media support for its opposition to the severance-tax proposal.

We have long supported such a tax because this region’s Utica Shale play lured major oil and gas producers from around the country in the early days for exploration. The process used to fracture the shale — fracking — to get at the deposits resulted in major environmental problems that had to be addressed urgently.

The need arose to legislatively deal with what was taking place because state government was ill prepared to deal with the earthquakes and other challenges associated with fracking.

The Ohio Department of Natural Resources was given exclusive responsibility for the new shale-based oil and gas exploration and has access to the proceeds of a tax rate that amounts to 20 cents on a barrel of oil and 3 cents on a thousand cubic feet of natural gas to cover its additional expenses.

Thus, while we share Gov. Kasich’s belief that the industry has made enough money over the past four years to cover any current shortfalls, we do wonder if there’s a case to be made for holding off on the 6.5 percent severance tax.

Fallout

Although Mahoning and Trumbull counties aren’t major participants in the oil and gas boom in Ohio, the fallout from the global glut and the subsequent decline in prices have affected the operation of one of the Valley’s key players in the industry, Vallourec Star.

The company’s parent, Vallourec, which is headquartered in France, spent more than $1 billion on a state-of-the-art steel pipe manufacturing complex along U.S. Route 422 in Youngstown to meet the demands of oil and gas exploration.

But as a result of the industry cutting back on drilling new wells and idling many others that have been in operation, Vallourec Star has been forced to slow production and, thus, reduce its payroll. There have been layoffs, and there’s no telling how long the downturn will last.

It’s clear that both the governor and the oil and gas industry have persuasive arguments to make, which prompts this question: Is compromise a realistic goal?

We would hope so.