Pennsylvania drilling tax unlikely in 2011, Scarnati says

HARRISBURG -- It's unlikely lawmakers will tax the extraction of natural gas from the Marcellus shale formation in the 2011 budget, Senate President Pro Tempore Joe Scarnati said Tuesday.

Gov. Ed Rendell is pushing the tax as a way to help close a $1.3 billion deficit expected by June 30. But Scarnati, the lieutenant governor, said although such a tax probably is inevitable, the Legislature isn't prepared to pass it immediately. He cited issues that must be explored, ranging from potential local government regulations and eminent domain to taxation policies on other natural resources such as coal.

"I don't see a path to getting it done," said Scarnati, the Senate's top elected Republican from Jefferson County, who lives about 15 miles from a well operated by a Texas company where a blowout occurred last week when drillers encountered unexpectedly high pressure in the well.

The state House, controlled by Democrats, is poised to consider proposals to tax natural gas extraction. The highest rate proposed is 8 percent of the value at the "wellhead" -- where gas comes out of the ground -- plus 7 cents per 1,000 cubic feet of natural gas extracted. Another proposal suggests 5 percent at the well and 4.7 cents per 1,000 cubic feet of extracted gas.

Scarnati said imposing such a tax won't help balance the coming budget, primarily because drilling under way hasn't produced much gas.

Thursday's blowout at the Clearfield County well prompted some environmentalists to urge a moratorium on drilling on state land. The Department of Environmental Protection on Monday suspended drilling by EOG Resources Inc. until it investigates the accident, which shot contaminated water 75 feet into the air.

Some House Democrats have claimed this is the time to impose a tax and dedicate a portion of the money collected to environmental regulation. But, argued Scarnati: "What's the rush• Let's get it right."

Rendell, in Pittsburgh yesterday, said the state can't afford to ignore the "tremendous economic upside" to the Marcellus shale formation.

"It's a potential economic gold rush for the state, and it's something that we ... shouldn't turn our back on," Rendell said. Along with the economic benefit come environmental and national security benefits, he said. Natural gas burns cleaner than other fuels, and it's produced domestically, lessening dependence on foreign countries.

Other proponents say such a tax could fund key environmental programs. Opponents contend a tax could keep drillers, and jobs, from Pennsylvania.

The Marcellus shale formation stretches about 600 miles, including almost all of West Virginia, eastern Ohio, western and northern Pennsylvania and southern New York. In places, the gas-rich layer runs deeper than 8,000 feet under the surface and can be tapped for gas only with a high-pressure, liquid spray to break apart rocks -- a process known as hydraulic fracturing.

One big problem with gas drilling in Pennsylvania is that state officials allowed it to begin without preparing for the risks, said Myron Arnowitt, state director of Clean Water Action. Rendell said the state is developing emergency response plans for gas well blowouts.

"I think it's typical of how our state has approached the issue. Our approach has been, 'Let's drill now and figure out how to deal with the problems later,' " Arnowitt said. "It's backwards from the way we should be doing things."

State officials shouldn't issue well permits before legislators approve regulations on workers' safety and on safe handling of toxic wastewater, he said.

Taxing gas extraction likely will become an issue in the governor's race. Democratic Allegheny County Executive Dan Onorato has said he favors "competitive" taxation and providing money to areas where drilling occurs and to state environmental and conservation programs. Republican Attorney General Tom Corbett, Onorato's opponent in the November race, has taken a "no-tax pledge" with Americans for Tax Reform that includes not levying a tax on natural gas.

Common Cause of Pennsylvania said in a recent report that drilling companies donated $2.85 million to Pennsylvania political candidates from 2001 through March 2010 and spent $4.2 million on lobbying since reports were required in 2007. Scarnati ranked third on the list of campaign donation recipients with $105,075, Common Cause reported.

Andrew Crompton, Scarnati's staff lawyer, said neither campaign money nor lobbying influenced Scarnati's positions.

"It's an influential business in his district; they're producing jobs in his district," Crompton said -- in some cases, jobs paying $50,000 a year. "We'd be crazy to alienate companies in these areas."

For drilling companies, a proposed severance tax would be a factor in whether to drill in Pennsylvania but certainly not the only factor, said Tom Hoffman, a retired senior vice president of Cecil-based Consol Energy Inc., which has coal and gas operations.

Marcellus shale is a key reserve but it's not the "only gas play in the country," Hoffman said. "If the Marcellus shale gets burdened with a big tax right now, maybe it slides down the road of when it gets developed."

Natural gas products compete with coal; the price for which it can be sold, with profit, becomes critical, Hoffman said.

"For drillers, where's the point in the curve where I can make a decent return on investments• The tax is simply one issue in the overall economic calculation of whether or not you are going to drill," he said.