Ohio Senate Ways and Means Committee The Honorable Bob Peterson, Chairman

Opponent Testimony on

Severance Tax Provision in As Introduced Version of House Bill 64

Presented By:

Chris Zeigler, Executive Director American Petroleum Institute Ohio

Chairman Peterson, Ranking Member Tavares and members of the Senate Ways and Means Committee, thank you for the opportunity to testify in opposition to the severance tax provisions in the As Introduced version of House Bill 64, the main operating budget of the 131st General Assembly. My name is Chris Zeigler and I serve as the Executive Director of the American Petroleum Institute’s division in Ohio (API Ohio). The API is the only national trade association that represents all aspects of America’s oil and natural gas industry. Our more than 625 members produce, process and distribute most of the nation’s energy. The industry also supports 9.8 million U.S. jobs and since 2000 has invested more than $2 trillion in U.S. capital projects to advance all forms of energy. In Ohio, API members have added billions of dollars in economic value throughout our state and the larger Appalachian region, and represent leaders in the development of the Utica/Point Pleasant shale play. Currently, Ohio’s severance tax is a volume-based tax imposed on oil and natural gas, and their derivatives such as condensate and natural gas liquids, at a rate, including a regulatory fee, of $.20 per barrel and $.03 per MCF, respectively. These rates apply to oil and natural gas produced by both vertical wells and horizontal wells using hydraulic fracturing technology. Under Ohio law, the purpose of the severance tax imposed on the oil and natural gas industry is to support the state’s regulatory program—and according to ODNR budget testimony in the House of Representatives, Ohio’s Division of Oil and Gas Resources “will have more than enough money to conduct its operations.” Because the current severance tax is based on volumes produced, it works well for its intended purpose of funding the regulatory program because increased development equates to increased funds for regulatory efforts. Under today’s system, every producer--from Ohio’s long producing conventional operators to the recent development by unconventional operators--funds Ohio’s robust regulatory program.

As introduced, House Bill 64 maintained the current severance tax rate for oil or natural gas produced by vertical wells. However, in the case of oil, natural gas, condensate, or natural gas liquids produced by horizontal wells, the proposal increased severance tax collected based on the volume of product produced during a calendar quarter multiplied by the average quarterly spot price of the commodity in question. For each product, the “average quarterly spot price” meant, for the quarter that begins six months prior to the existing quarter, the average daily spot price of a specified quantity of product, as publicly available from a source determined by the tax commissioner. Before the first day of each quarter, the tax commissioner would be required to certify and post on the Department’s web site, the average quarterly spot price for each product for the ensuing quarter. The proposed tax increase was to be imposed at the following rates:

For oil, a tax rate of 6.5%;

For natural gas that enters the natural gas distribution system without processing, 6.5%;

For all other natural gas, 4.5%;

For condensate collected at a point other than the wellhead, 6.5%; and

For natural gas liquids collected other than at the wellhead, 4.5%. On the top-end, the severance tax increase included in the As Introduced version of H.B. 64 represents a 2400% increase from the gross receipts tax imposed on every other business through the CAT, which the industry is obligated to pay as well, and a 136% increase over the administration’s severance tax proposal from just a year ago—a time when crude oil was priced significantly higher than its value today. In order to protect the continued development of shale resources and all the benefits it provides to our state, and additional reasons that I will outline, API Ohio is opposed to any increased severance tax provisions being added to H.B. 64. American Energy Renaissance Over forty-one years ago, President Richard Nixon addressed the nation about necessary cutbacks on America’s use of oil and natural gas because of the impending oil embargo. Every President since Nixon has discussed the goal of ending America’s foreign energy dependence. That goal has become reality as U.S. domestic oil and natural gas production is increasing exponentially. In short, the U.S. is an energy superpower. No longer do we debate American energy policy in terms of scarcity and the vulnerability of relying on energy resources from less friendly nations. Now our energy future is discussed in terms of abundance, self-sufficiency and true energy security. This has only been possible because of the combination of two old technologies, horizontal drilling and hydraulic fracturing. Geologists have always known that more oil and natural gas was trapped in shale formations, but without the necessary technology to economically drill and produce, the resources sat dormant.

Thanks to American ingenuity, shale regions across the U.S. accounted for 95% of domestic oil production growth and for all domestic natural gas production growth from 2011-13.1 In October 2013, for the first time in nearly two decades, the U.S. produced more crude oil than it imported.2 Petroleum production grew to more than 11.6 million barrels per day of crude oil and natural gas liquids in 2014.3 Taken as a whole, North American energy supplies could produce more than 100% of our liquid fuel needs by 2024.4 The U.S. is no longer constrained by the amount of oil and natural gas resources technically extractable in the ground; but rather the economics of extracting the resources and the policies that allow these opportunities to be pursued. The Benefits of Ohio Shale Development Nationally, the oil and natural gas industry has contributed more than a trillion dollars of value to the U.S. economy in wages, capital investment, and labor income in recent years, representing 8% of the overall economy. The U.S. oil and natural gas industry also pays the federal government substantial rents, royalties and lease production access—totaling more than $119 billion since 2000.5 In fact, U.S. oil and natural gas companies pay more than $84 million dollars to the federal government in both income taxes and production fees every single day,6 with an effective tax rate of 44.5%, much higher than other industries and the federal statutory rate of 35%.7 Closer to home, Ohioans have been reaping the benefits from the development of our emerging shale resources over the last several years. Development that is having a tremendous positive impact on our economy and tax revenue--all under Ohio's current severance tax structure:

EXPANDING INDUSTRY: According to the latest Ohio Department of Jobs and Family Services Quarterly Shale Report, employment in core and ancillary shale-related industries account for over 197,000 Ohio jobs. With over 13,700 shale-related business establishments spread

1 U.S. Energy Information Administration, Drilling Productivity Report, February 9, 2015.

http://www.eia.gov/petroleum/drilling/ 2 U.S. Energy Information Administration, International Energy Statistics,

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=55&aid=1&cid=RS,US,&syid=2009&eyid=2013&unit=TBPD 3 U.S. Energy Information Administration, International Energy Statistics,

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=55&aid=1&cid=RS,US,&syid=2009&eyid=2013&unit=TBPD 4 API, State of American Energy, 2013. http://www.api.org/~/media/Files/Policy/SOAE-2013/SOAE-Report-2013.pdf

5 Energizing America: Facts for Addressing Energy Policy, API, February 2015, page 16,

http://www.api.org/~/media/files/policy/jobs/energizing-america/energizing-america-february-2015-high-res.pdf

6 Energizing America: Facts for Addressing Energy Policy, API, February 2015, page 16,

http://www.api.org/~/media/files/policy/jobs/energizing-america/energizing-america-february-2015-high-res.pdf

7 Energizing America: Facts for Addressing Energy Policy, API, February 2015, page 17,

http://www.api.org/~/media/files/policy/jobs/energizing-america/energizing-america-february-2015-high-res.pdf

across the state, the development of shale resources has not only revitalized Ohio's most economically distressed regions but also the entire state.8

NEW INVESTMENT AND ECONOMIC GROWTH: Billions have already been invested in Ohio, with shale development having contributed value-added economic activity of $4.1 billion in Ohio in 2012 alone.9 Currently, oil and gas related infrastructure investment in Ohio has been reported to be nearing $28 billion.10

NEW JOBS: From 2011 Q2 to 2014 Q3, employment in core shale industries, such as pipeline construction and well drilling, increased by 110.6%. By comparison, all other Ohio industry employment increased by 4.1% during the same time period.11

HIGH PAYING JOBS: Core shale-related industry jobs paid over $26,000 more annually than jobs in other Ohio industries. Ohioans in jobs that support the oil and natural gas industry earn over $16,000 more than individuals in other Ohio industry jobs. The average individual salary in core shale industries was $71,594. The average salary in ancillary shale-related industries was $61,625.12

DECREASING UNEMPLOYMENT NUMBERS: In counties where drilling activity has been taking place, unemployment dropped significantly since 2011.13

o Belmont County: 8.6% in 2011 down to 5.1% in December 2014 o Carroll County: 9.8% in 2011 down to 4.9% in December 2014 o Harrison County: 10.2% in 2011 down to 5.0% in December 2014 o Columbiana County: 9.8% in 2011 down to 5.1% in December 2014 o Jefferson County: 11.1% in 2011 down to 6.6% in December 2014 o Guernsey County: 10.1% in 2011 down to 5.7% in December 2014 o Noble County: 12.6% in 2011 down to 6.0% in December 2014

8 Ohio Department of Jobs and Family Services Quarterly Shale Report, 2014 Q3.

http://ohiolmi.com/OhioShale/Ohio%20Shale%20Report_3Q_2014.pdf 9 America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, IHS Inc., December 2012.

http://www.api.org/~/media/Files/Policy/SOAE-2013/Americas_New_Energy_Future_State_Highlights_Dec2012.pdf 10

Shale Economic Development Overview (Spring 2015), Bricker and Eckler, LLP. http://www.bricker.com/documents/misc/shale_economic_development_chart.pdf 11

Ohio Department of Jobs and Family Services Quarterly Shale Report, 2014 Q3. http://ohiolmi.com/OhioShale/Ohio%20Shale%20Report_3Q_2014.pdf 12

Ohio Department of Jobs and Family Services Quarterly Shale Report, 2014 Q3. http://ohiolmi.com/OhioShale/Ohio%20Shale%20Report_3Q_2014.pdf 13

Ohio Unemployment Rates by County, Annual Average 2011, http://ohiolmi.com/laus/CLFE/AnnualAverages/2011Ranking.pdf Ohio Department of Jobs and Family Services Quarterly Shale Report, 2014 Q3. http://ohiolmi.com/OhioShale/Ohio%20Shale%20Report_3Q_2014.pdf

SALES TAX REVENUES ARE UP: Sales tax revenues increased significantly from 2009 to 2013 in the eight most active shale drilling counties in Ohio.14

o Harrison County- Sales Tax Revenue Increase of 315% o Carroll County- Sales Tax Revenue Increase of 100% o Noble County- Sales Tax Revenue Increase of 91% o Monroe County- Sales Tax Revenue Increase of 50% o Belmont County- Sales Tax Revenue Increase of 38% o Guernsey County- Sales Tax Revenue Increase of 38% o Columbiana County- Sales Tax Revenue Increase of 34% o Jefferson County- Sales Tax Revenue Increase of 21%

LOWER UTILITY RATES FOR OHIO FAMILIES: Because of Utica shale production, Ohioans have paid below the national average for natural gas. In 2013, Ohioans paid more than $213 million less for their natural gas than other states. U.S. shale production has saved Ohio businesses more than $162 million, and in 2013 lower natural gas prices saved schools $60 million (enough to employ 700 teachers) and state and local governments over $10 million.15

"PAYING OUR FAIR SHARE": In addition to the severance tax, Ohio's upstream oil and gas industry pays every tax that other Ohio manufacturers pay. These include income tax, sales tax, commercial activity tax (CAT), ad-valorem tax, fuel use tax and employment related taxes. In 2012, unconventional development in Ohio generated nearly $1.5 billion in federal and state revenue. This includes more than $910 million in state and local taxes or the equivalent of about 3.6% of the state's $25 billion in 2011 revenues.16

Today’s reality Historically, it has been stated that there is never a good time to be the recipient of increased taxes, but for the oil and natural gas industry, there couldn’t be a worse time than now. Since November of last year, countless articles have been written about the plunging value of crude oil; unfortunately, less has been written about the fact that Appalachian Basin shale gas has been priced below the national benchmark, Henry Hub spot price, over the last several years. Record domestic oil and natural gas production combined with reported geopolitical decisions by foreign producers to maintain their levels of production are having significant impacts on the operations of domestic oil and natural gas producers, oil field service companies, and supply industries across the U.S. and here in Ohio.

14

Ohio preparing for first Utica bust as oil prices tank, Columbus Business First, January 16, 2015. http://www.bizjournals.com/columbus/print-edition/2015/01/16/ohio-preparing-for-first-utica-bust-as-oil-prices.html?page=all 15

The Unconventional Energy Revolution: Estimated Energy Savings for Public School Districts and State and Local

Governments, HIS Global, Inc. June 5, 2014. http://www.api.org/~/media/files/policy/hydraulic_fracturing/ihs-govt-and-school-

savings-june2014.pdf

16 America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, IHS Inc., December 2012.

http://www.api.org/~/media/Files/Policy/SOAE-2013/Americas_New_Energy_Future_State_Highlights_Dec2012.pdf

Not only has the downturn in commodity prices decreased the value of proved domestic reserves, it’s also had a direct impact on the cost and access to capital that all producers need just to maintain lease holdings. Because of five-year “hold-by-production” leases that require companies to drill at least one well within its leasing period, shale production will continue only because companies need to drill in order to maintain their access to acreage. However, individual oil and natural gas companies have been making the necessary decisions to weather the storm, with rippling effects felt throughout the supply-chain. Spending reductions, asset liquidations and layoffs are the reality for today’s oil and gas companies as well as supporting industries. In Ohio, recent press reports have included unwelcome announcements such as:

U.S. Steel announced an “idle” of its Lorain facility, which provides pipes and tubes for oil drilling and fracturing, laying off more than 600 employees.17

Vallourec Star shut down its $1 billion steel mill in Youngstown for three weeks in mid-February, citing “the declining oil and gas market.”18

GoFrac, which provides products and services to support hydraulic fracturing, closing its office in Cambridge.19

Blue Racer Midstream has put its plans to build a $70 million wet gas processing plant on hold in Mahoning County.20

For shale-developing companies operating in Ohio, recent reports have been equally sobering, with announced reductions in 2015 capital expenditure budgets compared to investments from just a year ago.21 Although increases in production continued during the first quarter of this year, many companies have posted losses in revenue, citing lower commodity prices.22 There should be no doubt that development of Ohio’s shale resources in 2015 will look markedly different from just last year. The impending economic impact on supporting small businesses and local governments is yet to be determined. Unfortunately, proponents of these tax increases are using terms like “certainty” as a potential benefit for the increased cost of operating in Ohio. For developers of shale resources now operating in our state, the only certainty is higher capital costs and lower realized profits. The cost to drill an oil and shale-gas well in Ohio is nearly 20% higher than in Texas and more than 34% higher compared to North Dakota. Much of the Utica’s natural gas sells at a significant discount to

17

http://www.clevescene.com/scene-and-heard/archives/2015/01/07/us-steel-idles-lorain-plant-announces-more-than-600-local-layoffs 18

http://www.vindy.com/news/2015/feb/04/vallourec-star-will-shut-down-three-weeks/ 19

http://www.bizjournals.com/columbus/news/2015/02/06/texas-fracking-company-reportedly-exiting-utica.html 20

http://marcellusdrilling.com/2015/02/blue-racer-shelves-plans-for-mahoning-oh-wet-gas-plant/ 21

http://www.bizjournals.com/columbus/blog/ohio-energy-inc/2015/02/energy-roundup-natural-gas-production-keeps.html 22 http://www.cantonrep.com/article/20150506/NEWS/150509450/1377/FRONTPAGE

the nationally quoted NYMEX Henry Hub Price, with similar discounts for Ohio shale oil compared to WTI Crude Prices. The fact is that Ohio drillers are already at a competitive disadvantage to other oil and natural gas producing states before an increased severance tax is levied. Again, there is never a good time to be the recipient of increased taxes, but for the oil and natural gas industry and supporting businesses the results could be devastating. So it certainly was not a surprise to read a statement concerned about increasing taxes on Ohio job creators by a leading tax reform association, “Increasing taxes on Ohio’s energy producers and small businesses could lead to more layoffs and set Ohio back in its economic recovery.”23 For those who directly benefit from Ohio oil and natural gas development, like the Plumbers & Pipefitters Local 396, the points are more direct and reflected in a letter sent to Speaker Rosenberger earlier this year. “[Shale energy development] is more than an opportunity for Eastern Ohio, it is making a real impact on our livelihood. People are getting back to work with skilled jobs that have the potential to be around for the foreseeable future. Unnecessarily high taxes, coupled with low oil prices, threaten these opportunities and could put our region back for years.” [Exhibit A] Long-term considerations Since 2011, severance tax increase proposals have not been presented in the context of an overall energy policy or taken into account other factors directly impacting the industry. The proposed tax increases are merely a means to an end objective that doesn’t promote the industry’s continued existence. Statements such as "If you don't drill, then you don't pay,"24 certainly don’t convey an interest in ensuring that overall policies are in place to encourage the continued development of shale resources in the state. Nor is there an accounting of the benefits from industry development or an appreciation of the potential negative impacts from increased taxes. Ohio’s oil and natural gas producers are not only concerned about proposed increased state taxes, but also federal tax increases. President Obama’s Administration has proposed over $90 billion in additional taxes and fees on the industry over a 10-year period.25 Studies have shown that in the long run, the negative economic consequences of higher taxes more than offset any short-term tax revenue gains. According to an economic analysis by Wood Mackenzie, an additional $5 billion in new, annual taxes—similar to what’s been proposed by the Obama Administration—could actually decrease cumulative government revenue by $29 billion by 2020. In addition, higher federal taxes could result in the loss of tens of thousands of jobs between now and 2020.26

23

http://www.atr.org/americans-tax-reform-responds-ohio-gov-kasich%E2%80%99s-income-tax-plan 24

http://www.cleveland.com/open/index.ssf/2015/02/gov_john_kasich_touts_tax_plan.html 25

Energy and Taxes, Economic Growth and Tax Fairness, API, January 2015. http://www.api.org/~/media/files/policy/taxes/energy-and-taxes/energy-and-taxes-primer-lowres.pdf 26

Wood Mackenzie, “Energy Policy at a Crossroads: An Assessment of the Impacts of Increased Access versus Higher Taxes on

U.S. Oil and Natural Gas Production, Government Revenue, and Employment,” January 2011.

http://www.api.org/~/media/Files/News/2011/SOAE_Wood_Mackenzie_Access_vs_Taxes.pdf

It seems prudent that before considering increasing taxes on a nascent industry in the state, which is currently making the necessary decisions just to maintain acreage interests, a full accounting of the benefits and consequences of that policy should be the guide for any additional tax considerations. The long-term and broad-based economic opportunities that have the real potential to positively advance both the state’s economy and growth of the industry are at stake. API Ohio certainly appreciates the foresight provided by the Ohio House of Representatives’ 2020 Tax Policy Study Commission included in their version of H.B. 64. The House believed this commission provides a proper forum for consideration of comprehensive tax policy. We agree. The full spectrum of Ohio’s oil and natural gas industry has been and hopefully will continue to be an essential component of Ohio’s economy for years to come. As such, API Ohio is fully committed to engaging in any policy discussions that support the continued growth of the oil and natural gas industry to the real benefit of all Ohioans. However, for the reasons I have detailed today, the severance tax proposal within the As Introduced version of H.B. 64 presents our industry with serious short- and long-term concerns in light of economic conditions. Ohio’s oil and natural gas industry has proven its potential for increased economic growth and job creation in our state and now more than ever, during this downturn in the industry, we need a thoughtful, long-term approach to allow this opportunity to be fully realized by the state and its citizens. Thank you.