Yesterday Ohio Governor John Kasich unveiled his proposed budget for fiscal years 2014 and 2015 at an hour-long press conference. The Governor’s proposal, a summary of which can be found here, contained a comprehensive plan to enact new severance taxes for certain categories of new hydraulically fractured horizontal wells in the state. By way of background, during year’s legislative session Gov. Kasich (R) floated a similar concept, but that proposal was scrapped by Republican majorities in both legislative chambers. Revenue from the severance tax increase would help fund the Governor’s parallel proposals to cut state income and sales taxes. The severance tax proposal largely resembles Gov. Kasich’s unsuccessful attempt last year to raise taxes on large, horizontal hydraulic fracturing operations, while eliminating the severance tax for low-volume conventional drillers.
Ohio’s current severance tax rates are $0.20 per barrel of oil and $0.03 per million cubic feet (MCF) for natural gas; there is no separate state severance tax on “gas liquids” or the other hydrocarbons that can be found in Ohio’s Utica shale. The proposed severance tax would apply only to high-volume horizontal wells operating in Ohio’s Utica shale formation – the tax structure for conventional wells would be mostly unchanged, with a new exemption for small-volume gas wells (with average daily production under 10 million MCF) that would exempt almost 45,000 currently taxable conventional gas wells. For horizontal wells, the tax rates would be 1% for natural gas, and 4% for oil, natural gas liquids, and condensate. But a lower tax rate of 1.5% would apply for the first year of a well’s production, in order to allow producers to recover site preparation and drilling costs.
The Governor’s office estimates that its severance tax proposal would produce an estimated $45 million of revenue in fiscal year 2014, $155 million in fiscal year 2015, $305 million in fiscal year 2016, and $415 million in fiscal year 2017. This blog will continue to monitor the progress of Governor Kasich’s severance tax plan as the state legislature considers his overall budget proposal.