Gas Tax Revenue Falls

Production up, price dropping

Morgantown Dominion Post
31 July 2011
By David Beard

While looking at the natural gas severance tax collections and distributions for the past few years, one might ask, “What Marcellus boom?” The state’s regular severance tax collections have been steadily declining since Fiscal Year (FY) 2008 — from slightly more than $80 million then to slightly more than $50 million for FY 2011. The distributions to cities and counties have dipped accordingly.

The reason: Production has risen, but the price of gas has fallen, Deputy Revenue Secretary Mark Muchow said. The severance tax is 5 percent of gross receipts, so lower prices mean less tax income.

According to the U.S. Energy Information Administration, the price peaked in July 2008 at $10.79 per thousand cubic feet (Mcf). A steady decline ensued, bottoming out at $2.98 per mcf in September 2009. Since then, it’s held steady at about $4, and stood at $3.98 per mcf as of April this year.

Several factors influence price, including supply and demand, Muchow said. With Marcellus wells mushrooming across West Virginia and Pennsylvania, the supply is up while the demand is down.

To see how the Marcellus boom is really doing, we studied how seven oil-andgas-producing counties in north-central West Virginia are faring in severance tax distributions directly related to production within their borders.

Wetzel and Marshall counties have been at the heart of the extraction boom. Wetzel’s revenues have almost doubled, while Marshall’s have shot up almost 10 times. Marion County is seeing a rebound after a decline in 2009.
   

Severance tax basics

There are two severance taxes on oil and natural gas. One pays off the old worker’s compensation fund and is 4.7 cents per Mcf extracted at the wellhead. That tax doesn’t figure into this report.

The other is the regular 5 percent gross receipts tax. From that, 90 percent goes into the General Fund; 10 percent is returned to the cities and counties.

From the portion distributed to cities and counties, 25 percent goes to all the cities and counties, based on population, and 75 percent returns to oil and gas producing counties, based on production.
   

Who gets how much?

According to a report by Muchow presented to the Legislature’s Marcellus Select Committee, severance revenues climbed steadily from FY 2006 through FY 2008, when they topped $80 million.

Distribution figures from the state treasurer’s office show that distributions climbed accordingly — from $6.7 million in June 2007 (from FY 2006 collections) to $8.36 million in June 2009. They dipped sharply in June 2010 to $5.97 million, with a slight bump last June to $6.09 million.

But look at what happened in Marshall and Wetzel counties.

Marshall County’s share based on population was about $19,000 in June 2007, rose to $22,000 in 2008, then fell twice, hitting about $14,500 in 2011.

But its share based on oil and gas production soared: about $6,000 in 2008; $10,700 in 2009; $37,700 in 2010; $56,600 in 2011.

Wetzel’s situation is similar. Its share based on population fell every year, from $8,600 in June 2008 to $6,900 in 2011.

With the Marcellus activity across the county, its production-based share climbed from $98,000 in 2008 to nearly $195,000 in 2011.

Marion County saw its production share climb from $102,000 in 2008 to $120,000 in 2009, then plunge to $58,000 in 2010. With more permits under way, the 2011 distribution climbed to $72,000.

In Preston County, production proceeds fell from $12,600 in 2008 to almost $11,000 in 2010, then jumped in 2011 to more than $17,000.

While Marcellus activity is under way in Harrison County, its production share has fallen steadily since 2008 — from a high of $369,000 to $281,000 this year. Taylor County has seen a similar steady decline — from $41,600 to $22,000.

Monongalia County also hasn’t seen the production boom. Its share climbed from $57,600 in 2008 to $87,500 in 2009; then fell the next two years, to just under $43,000 this year.

When the boom booms

Muchow’s report shows in FY 2011 there was a little more than $50 million in natural gas severance collections.

With production steadily increasing, assuming prices hold steady, collections should rebound to more than $60 million in FY 2012 then go past their 2008 peak in 2013 — reaching almost $90 million. By FY 2016, collections may be about $120 million.

Projected total severance collections for coal, oil and gas will also climb, but not as sharply — from about $460 million for FY 2011 to $500 million for FY 2014, and about $510 million or $520 million in 2016.

One more budget boost

Separate from the severance tax, gas companies also pay property tax based on the value of the gas they extract, Muchow said. In the past few years, local governments have been seeing higher property tax revenue from gas extraction.

Marcellus gas is making up a larger share of the total, he said.

In 2006, according to his legislative report, natural gas property taxes amounted to $35 million. They climbed steadily through 2010 to $110 million.

Because conventional gas extraction is tapering off as Marcellus picks up, the total dropped to about $80 million in 2011.

But Marcellus is making up a larger share. From 2006-’09, it doesn’t factor in the bar graphs. In 2010, it was less than 2 percent of the total. In 2011, it jumped to 8 percent.

Looking ahead, Muchow said Marcellus “will be the predominant force in natural gas production.”
   

Local property taxes

In Monongalia County, it’s too soon for the few Marcellus projects — 13 new permits — to impact oil and gas property tax income, said Shirley Zackery of the assessor’s office. There are 1,220 active oil and gas wells in Mon County.

Zackery explained that 2011 revenues are based on 2009 extraction, which is reported in 2010 — there’s always a two-year lag built in.

This year’s total assessed value for oil and gas properties is $38,429,833, Zackery said.

Mon County’s total 2011 oil and gas property tax revenue is $795,497.53 distributed three ways: Board of education, $605,346.72; county $186,307.83; state, $3,842.98.

Zackery didn’t have 2010 figures at hand, but said the 2011 income represents a decline. Well production drops over the years, producing less tax income. The first five years of a well are the biggest for taxpayers.

Preston County was able to provide appraised oil and gas values for three years. For tax year 2011, it’s $12,763,859. The assessed value, at 60 percent of the appraised value, would be about $7,658,315.

For 2010, appraised was $7,165,458; assessed would be about $4,229,275. For 2009 it was $10,703,428; assessed would be about $6,422,057.

The Dominion Post also contacted Wetzel and Marion counties, but they were unable to provide figures for this report.