Click to Enlarge

Ohio Governor John Kasich announced today that he plans to “change Ohio’s severance tax for oil and gas production” in his Midterm Budget Review Bill and use the additional revenue to fund an across-the-board income tax cut.

The current severance tax is 20 cents on a $107 barrel of oil and 3 cents per $2.62 MCF of natural gas.  These figures are based on the February 29, 2012 closing prices for crude oil and natural gas on the NYMEX futures exchange.

The Governor’s proposed changes to Ohio’s tax system for oil and gas production are intended to complement upcoming revisions to Ohio’s environmental, health and safety regulations that are designed to keep pace with new technologies for high-volume horizontal oil and gas wells in Ohio’s shale formations.  The Governor added that updates to Ohio’s severance tax policies will keep rates competitive with other oil and gas-producing states while generating new revenue that will go directly to Ohio taxpayers, in the form of an income tax cut.

Specifically, small natural gas wells producing less than 10 MCF per day would no longer pay any severance taxes on natural gas production.  This eliminates taxes for approximately 90% (44,500) of Ohio’s conventional natural gas wells.  For conventional natural gas wells producing above this level, the new 1 percent rate would apply, with a cap of 3 cents per MCF.

High volume horizontal wells would be subject to a low initial severance tax rate of 1.5 percent or both natural gas liquids and crude oil.  This rate would apply for the first year to allow producers to recoup their drilling costs, which can range from $6 to $12 million per well, and can be extended for one additional year if drilling costs haven’t yet been recovered in the first year.  After the initial cost-recovery period expires, the standard rate of 4% would go into effect for both natural gas liquids and crude oil.

Severance tax rates for natural gas produced by high-volume horizontal wells would be changed from the current 3 cents per MCF to 1% (price x production volume).  At the current natural gas price (approximately $2.60 per MCF), this represents a tax cut for producers.

Severance tax rates for crude oil from conventional wells would remain unchanged at the current 20 cents per barrel rate.

Ohio currently does not apply a separate severance tax on natural gas liquids produced by conventional wells.  That would not change.  No separate tax would be applied to natural gas liquids produced by conventional wells.

Up-front fees of $25,000 per well would be paid by oil and gas companies to local governments to offset impacts on local governments.  The fee will be returned over time; this represents an acceleration of these impact fees.

This blog will provide additional details when the Governor’s proposed statutory language is made public.