Tax on gas wells goes unchecked

by Chris Cotelesse


Originally published in the Akron Beacon Journal Feb. 6, 2012


As Ohio prepares to usher in a multibillion-dollar gas drilling industry, it is relying on an honor system with well owners for the purpose of collecting taxes and fees, and the numbers don’t add up.

Well owners are required to report the amount of natural gas they “sever” from the Earth and file severance tax returns each quarter.

But an examination of production numbers by the NewsOutlet, a collaboration of journalism programs at Youngstown State, Kent State and the University of Akron, raises questions about their reliability, and no one has an explanation for the disparities.

From 2000 through 2009, the Ohio Oil and Gas Association, which represents the industry, reported more natural gas production than did the Ohio Department of Natural Resources, the agency responsible for regulating wells.

The variations were wide, with ODNR’s annual production numbers 3 percent to 15 percent below those of the association.

In 2010, it was the opposite: ODNR reported more production than did the association.

And an analysis of severance taxes collected by a third source — the Ohio Department of Taxation — suggests a third set of gas production numbers, which means that two government agencies have different gas production numbers.

Tom Stewart, executive vice president of the oil and gas association, said he estimates production by examining “first purchaser” figures, which represent the amount of natural gas bought at each well site.

“We try to zero in on what the best number is to report what the production is. I think we get it pretty close,” Stewart said.

State officials said they don’t have the authority to go to the wells and check the meters against the reports, and there is no explanation for the different numbers.

“We just process the tax returns and allocate the money to ODNR’s oil and gas program. … We can audit the returns, but we don’t have the authority to go to the well sites and check the meters,” said Gary Gudmundson, spokesman for the tax department.

No verification

ODNR said much the same.

“We don’t really evaluate them from the viewpoint of whether they’re true or false,” said Mike McCormac, oil and gas permitting manager for ODNR.

He said ODNR’s mandate is to collect the data and force well operators to comply, but the agency has only recently been given the authority to pursue action against delinquent production reports. Staffing and an overload of public information requests are proving difficult for the newly established oil and gas division.

At the moment, the dollar amount represented by the discrepancies — perhaps $1.5 million over 10 years — is relatively small in comparison to the state budget. In 2010, the last full year for which information is available, the state collected $2.07 million from the gas severance tax, compared with a state budget of more than $50 billion.

Twenty years ago, when gas production was about twice the recent rate, the state was receiving an inflation-adjusted $5.9 million a year.

But the oil and gas industry said it expects to drill nearly 4,000 wells in Ohio in the next four years.

Projections for 2013

Projections by the Ohio Oil and Gas Energy Education Program suggest that production in 2013 could be double that of 2010, and output will rise exponentially the following two years.

Using the Ohio Oil and Gas Energy Education Program estimates, the state could collect nearly $40 million in taxes and well fees in 2014, if gas production is accurately reported and tax rates remain the same.

Ohio Policy Matters, a research and advocacy group in Cleveland, concluded in a study published in December that Ohio could generate significant new revenue if it raised its tax rate to that of other gas-producing states.

The organization said that while Ohio ranks 19th in the nation for natural gas production, it is 25th among the 35 states that had severance taxes in 2010.

The organization said that if Ohio raises its rate to match some other neighboring states, it could generate as much as $538 million in additional dollars through 2015.

The organization encouraged the increase to improve oversight, to handle environmental issues that may occur and to support the state’s general fund.

Oil and gas well fund

Ninety percent of the severance tax goes into the oil and gas well fund for regulation of the mining and drilling industry, capping of abandoned wells and site cleanup if operators fail to do their job. Another 10 percent goes into the state geological mapping fund for mapping state resources.

Only when there is leftover money does it go to the state general fund for other purposes.

In 2010, the state added a 0.5 cent fee to the 2.5-cent tax on every thousand cubic feet produced — and similar fees to other types of extraction, including mining and oil production.

At that time, the Ohio Legislative Services Commission said the new fees would help with staffing. The Division of Mineral Resources Management said it had the equivalent of 35 full-time employees and planned to add about 33 for oversight.

ODNR admits that oversight already is a problem.

“Some days we can spend almost the whole day just on the phone or responding to emails. It’s a total balancing process to be responsive to the public and yet try to get statutory work done,” McCormac said.

The is a collaboration between the Youngstown State University journalism program, Kent State University, the University of Akron and professional media, including WYSU-FM Radio and the Vindicator (Youngstown), the Beacon Journal and Rubber City Radio (Akron).

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