Hancock Gas Lease

The State may now be a step further away from issuing drilling permits. Industry analysts are saying that the political difficulties that Gov. Paterson is experiencing mean that he doesn’t have the political capital right now to bring this thing to a close. Bloomberg news is reporting (via the Buffalo News):

“Up until recently, [Governor Paterson] was in a position to push Marcellus drilling in New York State,” said [industry consultant] Palmerton, who is based in Syracuse. “Given the political pressures right now, I’m very concerned the DEC may be pressed to hold this up until after the election, or delay it for some indefinite period of time.”

The article goes on to mention the Governor’s plans for a tax on extracted gas, but notes that the State Senate has proposed removing that from the budget.

So at the moment, the prospects for gas drilling in the Southern Tier is very cloudy.

Last month we reported that Governor Paterson has proposed a 3% tax on royalties from gas. Now we learn what he plans to do with that money. He’s planning to add 35 jobs to the State payrolls, apparently to ensure the safety of our health and environment from drilling operations. As reported in The Press & Sun Bulletin:

New York is budgeting for 35 new positions in the next fiscal year to help oversee production of the Marcellus Shale, if and when it gets there.

While political and regulatory uncertainty clouds the fate of Marcellus production north of Pennsylvania, the staffing proposals are a sign that Gov. David Paterson’s office is preparing.

“If drilling moves forward, we have the infrastructure in place to do it in a safe and responsible way,” said Morgan Hook, a spokesman for the governor.

The staffing initiative would add 29 workers to the Department of Environmental Conservation, four to the Department of Health, and two to the Public Service Commission.

Governor Paterson has unveiled his budget proposal for the year beginning April 1. With nearly $1 billion of new taxes and fees, one can only assume it’s an April Fools joke. Some of this is targeted specifically at gas leases. As reported by ABC News:

A 3 percent tax on natural gas extraction from the Marcellus Shale formation in the Southern Tier and in central New York using horizontal wells, raising $1 million starting in 2011-2012.

This isn’t a lot of information, but it does imply a few things.

• Since it says “gas extraction”, I take it to mean taxes on actual gas coming out of wells, as opposed to just leases themselves. Note that some lease contracts make the landowner responsible for these taxes. If you’ve signed a lease you should check on this; if you’re considering it, make sure you understand what the deal will be.
• If they expect to derive tax income from gas drilling, it strongly suggests that they do intend to have wells drilled in 2010, and actively producing gas.
• If they expect $1 million dollars in revenue from a 3% tax, the math says that they expect $33.3 million dollars of gas to be pumped in fiscal 2010.

It seems that when unfortunate homeowners in Broome County face foreclosure due to tax debts, the government is taking the owners’ mineral rights. PressConnects presents a somewhat confusing story:

Sarah Vroman … owns about 22 acres in the Town of Sanford and lost her property for back taxes. After she worked out an agreement to pay them earlier this year, the county returned the property, minus the mineral rights. … Broome County legislators unanimously passed a resolution in August to return her property, but it made no mention that mineral rights were being withheld. That decision was made by Kevin Keough, the county’s director of real property, who said he was following procedure in the interest of taxpayers.

The county could end up reversing an administration decision it made to keep mineral rights on foreclosed property of more than five acres.

While it’s unfair to other taxpayers if someone gets away without paying taxes, if the issue is resolved, we can’t imagine any moral justification for keeping their property. Broome County’s policy fleshes out more of the picture that we don’t really own our land, we just rent it from the government.

The area is already richer to the tune of $100 Million, as reported by the Press & Sun-Bulletin.

So far, the deal has made about 500 residents in eastern Broome and western Delaware counties richer by roughly $110 million. Although drilling isn’t likely to start until after a public environmental review by state officials is completed next year, lump-sum checks have already begun arriving.

The article goes on to point out, however, that the management of these newfound funds can be difficult, and that residents need to remember about its income tax impact come next year.

Where stakeholders previously had problems with property taxes — now it’s income taxes.

“Your whole mindset is different,” said Decker, who is $2.77 million richer — minus 42 percent taxes.

…

There is no question the rush for natural gas in the region carries the potential for a monumental economic transformation. But how sustainable it is depends on how well people handle their newfound wealth, said Jim Thorne, an investment officer at M&T Bank.

“If a person goes out and buys a helicopter and a fast car and suddenly finds out taxes are due, it will be short-lived,” he said.

…even without taxes. In Vandergrift Borough, PA, a small town of about 5,500 people, gas well leases have really helped out the town and its schools. The Pittsburgh Tribune-Review reports:

There are well-founded concerns about gas wells — especially those located near homes.

But there can be substantial benefits to taxpayers. In Vandergrift, the borough will see royalties of about $40,000 a year. And taxpayers in at least a half-dozen other municipalities and school districts in the Valley are reaping gas-well revenues ranging from $4,000 to $25,000 a year. …

If each of the three wells bring in $1,000 in royalties each month, the borough will get about $36,000 a year in revenue. …

Vandergrift gets about $4,000 to $5,000 worth a year in free gas — for its maintenance garage that houses eight or nine vehicles.

“Whenever you can get a new source of revenue — and it helps us hold down taxes — that’s good,” DelleDonne said.

The article cites many more examples of revenue from gas leasing producing income for towns and schools, and saving substantial money for taxpayers. So even those people not leasing their own lands will benefit to some degree.

New York State is leasing mineral rights to the gas companies for below-market prices. The Press & Sun-Bulletin tells us:

Under long-standing policy, New York’s share of royalties from natural gas wells on state-owned land is fixed at 12.5 percent — the minimum allowable by law. By contrast, royalties are seen as a vital part of the deal-making process for private landowners, who have been negotiating rates up to 18 percent.

…

The state should be setting an example by aggressively pursuing leases that benefit taxpayers and boost the market, [Lindsay Wickham, a field specialist with the New York State Farm Bureau] said. Landowners look to the state to learn,” he said. “And what do they see? How not to do it. The state bids out tens of thousands of acres without a competitive process for royalties. It makes no sense. Period. We’ve been after the DEC for more than five years to change this.”

…

The state comptroller’s audit of the 2005 mineral rights leases by the DEC did just that.It determined the agency’s Division of Mineral Resources should do more to ensure the state is getting the most out of lease deals with energy companies. In particular, it noted, the DEC should “analyze the potential benefits of certain leasing practices, such as progressive royalty rates, that could result in increased revenue.”

In other words, the state should consider driving a harder bargain for a greater share of royalties from producing wells.

Moreover, the audit found “certain weaknesses in the department’s administrative oversight and record-keeping practices,” including missing records and documentation. It also noted the agency may not be collecting all of the royalty revenue owed because it lacks a system to check whether gas companies accurately calculate and report production.

So the gas companies are getting what appear to be sweetheart deals, keeping State revenue down at the expense of taxpayers. And what do we get in return? We get underbid in the market for leases, so the State is competing against landowners, and “dumping” land rights onto the market, again costing us money.

Plenty of people say that the government is in bed with industry. When policies like this are business-as-usual rather than a scandal, it’s hard to argue against that position.

Some people are calling for gas drilling as a reason for more taxation. From iStockAnalyst:

Unlike the majority of states, New York lacks a natural resource depletion or severance tax. Thus, soaring gas prices and dramatically expanded recoverable reserves will do little to replenish shrinking public budgets. If New York were to impose a tax similar to that of other top natural gas producing states, public services could receive nearly $500 million in additional annual revenue. This revenue could prove critical in maintaining a high level of public services in a time of rising unemployment, soaring food and energy prices and a massive housing crisis.

Many states distribute depletion tax revenue directly to local governments experiencing the associated environmental and economic costs of drilling. As more wells are drilled, increases in reports of incidents involving gas wells will follow. Last year, an accident at a nearby natural gas drilling site left dozens of homeowners in Brookfield without drinking water for days, some for months. Many houses had to be fitted with water purification systems that are costly to maintain.

I’ve got to say that a spiraling cost of living is not a reason for increasing taxes. We’re not around to ensure that the government can survive. If it’s harder to make ends meet, that’s a reason to lower taxes, not raise them. Indeed, if the government fancies that it can manage our economy to make things work well, then a poor economy must be a sign that they’re not doing their jobs; don’t reward this by throwing more money at a bad plan. If they’re failing us, don’t give them more money!

That said, there’s something to the idea that gas drilling will create unusual expenses. Some — but not all — in the community will be lucky enough to benefit from the situation. So it’s not fair for the entire community to pay for those expenses. If water trucks damage roads, the cost of repairs shouldn’t be borne by the towns (and, more to the point, the residents of the towns).

Clearly, damage caused by water trucks ought to be paid for by the operators of the water trucks, eventually to be borne by the gas company, and depending on the lease terms, possibly in part by the landowner.

This actually seems to be working itself out already. Gas companies aren’t just taking water from public supplies or aquifers; as we’ve reported, they’re buying it from the towns. And the towns can see that they’re going to need a way to deal with road problems, and are petitioning Albany for the power to protect against this expense, as noted in this article.

That sounds fair, but that’s not a tax. That’s a direct reimbursement for damages. What’s being advocated is nothing but a greedy grab for riches. The article continues

If New York does decide to embrace this principle, it should learn from the mistakes of others and design an effective policy. Consider the case of Ohio, also home to part of the Marcellus Shale region. Ohio has a depletion tax, but one so poorly designed that the state will see only minimal gains in its revenue despite soaring gas prices. The reason?

Ohio’s depletion tax is on the volume of natural gas the state produces, rather than its market value. Thus Ohio’s tax will generate only $10 million in annual revenue. This is minuscule compared to the half a billion dollars of annual revenue Ohio would receive if its tax were similar to other states such as Montana or Oklahoma that tax a percentage of the market value.

This proposal has nothing to do with recovering the unusual expenses that gas drilling might cause. It’s all about a way for the government to tap into any source of income that the people can find, and to grab the greatest portion of it possible. According to this article, a tax that affects citizens the least is, by definition, poorly designed. The philosophy appears to say that soaring gas prices is not a reason to cut taxpayers some slack: it’s a reason to soak them more, to get more income for the government.

Recovering expenses from the gas companies and maybe landowners is good and fair: those not benefiting shouldn’t have to shoulder the cost. But using this as a pretext to fill the state coffers to waste on their pet projects is a very bad thing.