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The Associated Press September 13, 2010, 10:34AM ET

Marcellus Shale tax is front and center in Pa.

For the first time since talk of taxing the methane beneath Pennsylvania bubbled up two years ago, the Republican-led Senate appears ready to join Gov. Ed Rendell and the House's Democratic majority in ending the state's status as the largest natural-gas producing state without such a tax.

Still, there will still be room for wide disagreement in a debate that is set to intensify when the House and Senate return to Harrisburg this month.

Lawmakers may also sort through a number of issues surrounding the modern-day gas rush to tap the Marcellus Shale formation beneath the commonwealth. But the tax is unquestionably the centerpiece of the debate, particularly with the cash-strapped state looking for help.

The Democratic governor set the table in February 2009 when he first proposed a tax equivalent to West Virginia's - 5 percent on the sale value, plus 4.7 cents per thousand cubic feet of gas. At that rate, Pennsylvania would land somewhere in the middle of the various tax rates imposed by natural gas-producing states, although industry representatives say it would be the highest among the states with gas-yielding shale formations.

Such a tax is projected to raise $280 million in 2011, the Rendell administration said.

But the companies drilling into the Marcellus Shale - which include homegrown businesses and some of the world's largest exploration companies - view that rate as too high. They warn that adopting West Virginia's tax structure could prompt some to send rigs, jobs and money for compressor stations and pipelines to shale formations in other states.

Senate Republican leaders seem to agree, and have been studying the tax structure in Arkansas, which allows a 1.5 percent tax for up to four years before the rate rises to 5 percent on gas extracted from shale.

Rendell rejected that argument.

"Some of the things the industry is talking about are outrageous," Rendell said at a Capitol news conference Thursday.

One company, he said, had stated in a filing with the U.S. Securities and Exchange Commission that it expected to earn a 64 percent rate of return on its Marcellus Shale wells.

"And they want a lower tax bill?" Rendell continued. "They want a lower tax bill that will allow them to extract 50 percent of the natural gas that's in the shale in the first five years and only get taxed at 1.5 percent? That's outrageous."

The Marcellus Shale is one of a number of shale formations that, thanks to technological advances, are being hailed as a major new source of natural gas and a prominent topic in discussions of the country's energy future.

The industry's pursuit of Marcellus Shale gas is fast changing large swaths of Pennsylvania. It also is buoying a panoply of businesses during a difficult economic period, helping makers of steel pipe, haulers, railroads and quarries, as well as engineering, environmental and law firms. None will want to see that change.

"This industry is investing billions of dollars in Pennsylvania right now to develop the infrastructure for the long-term sustainability" of the gas field, said Dave Spigelmyer, vice chairman of the Marcellus Shale Coalition, an industry group.

A tax could also reduce the monthly checks that distribute the royalties to landowners in the gas fields, depending on how the law or a landowner's lease is written.

The cost of a tax also could trickle down to the home and business owners in Pennsylvania who use natural gas for heat or other purposes, although competitive market pressure for the lowest-cost gas could force the supply chain to absorb it.

But tax or no tax, analysts say the Marcellus Shale will remain a focal point of the industry. Its proximity to major East Coast cities, among other things, make it one of the lowest-cost gas reserves - if not the lowest - on the continent.

"The quality of the shale is very good," said Manuj Nikhanj, vice president of the Calgary-based investment research firm Ross Smith Energy Group. "The amount of reserves, the amount of production and results you get for every dollar invested is among the best out of any other (gas reserve) in North America."

As a result, a West Virginia-style severance tax should make very little difference to the industry's decisions on where to invest, Nikhanj said.

Still, the industry has a case to make for avoiding costs right now: Natural gas is so cheap that few in the industry are making much money, he said. Production from the Marcellus Shale only aggravates that, flushing pipelines with more gas supply that suppresses prices.

"The industry," Nikhanj said, "is basically hurting themselves right now."


Marc Levy covers Pennsylvania government for The Associated Press in Harrisburg.

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