Taxing it & taking it: Shale gas/oil follies

Taxing it & taking it: Shale gas/oil follies

Let’s see, there’s glut of shale natural gas. That has led to depressed prices, now at historic lows. In turn, that has led to a major retrenchment in the industry.

Yet, there’s still talk of slapping a tax on top of a tax – adding an extraction tax on top of the impact fee. But it’s hardly a sure thing, especially with the shale gas industry in such a slump.

So, what have the economic mavens in Harrisburg proposed? Why, a 150 percent increase in the fee that the state charges operators to drill each Marcellus and Utica shale well.

Under a rule change approved by the Pennsylvania Environmental Quality Board, the fee will go from $5,000 per well to $12,500 per well.

As the Post-Gazette notes, that’s the highest such permitting fee in the United States.

Brilliant!

Regulators rationalize that the $12,500 fee represents only 0.16 percent of the $8 million it costs to drill a new well. But as more than a few observers have noted, the more you tax something, the less you get of it.

In an industry consolidating and scaling back and struggling with plummeting earnings, such a dramatic increase in the cost to do business easily could lead to even fewer wells being drilled and for a longer period of time.

Some DEP officials have made no bones about the fact, in word and in deed, that they don’t care much for the shale gas industry. So, this latest attempt, on top of prior attempts, to tax the industry out of existence, should surprise no one.

The massive permit fee increase still must be reviewed by state House and Senate environmental committees and the state’s Independent Regulatory Review Commission.

One can only wonder if any of the reviewers will see the fee hike for what it is.

The Pennsylvania Supreme Court has preserved the century-old legal principle of “right of capture,” ruling that it applies to natural resources secured by fracking.

That is, because of the nature of shale oil and natural gas – even they migrate underground even in shale formations, supposedly – a procurer whose drilling ends up tapping such product from under an adjacent property for which rights have not been secured not only cannot be charged with trespassing but has no legal requirement to compensate the landowner.

The law has generally held that the first to drill for such a resource has the right to it, even if that resource migrates from another property.

There is, however, an important caveat (but one most difficult to enforce). As one attorney supporting royalty owners put it to the Post-Gazette:

“The court left the door wide open that if the plaintiff can prove there was an actual, physical intrusion as part of the (fracking) then the rule of capture will not insulate the driller.”

Which borders on being able to count the number of angels on the head of a pin.

As argued previously herein, the rule of capture may have a long lineage of court affirmation but that’s no excuse for what, at its base, is unlawful taking.

In this day and age of grand technological advancements, it should be  the onus of the procurer to show whether or not it captured unlicensed product through natural flow or by the act of fracking that extended into property for which no rights had been secured.

Placing that onus on the adjacent property owner is, pure and simple, a blow to property rights – property rights, by the way, that are far older and sacrosanct than the “rule of capture.”

Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).