Governor Wolf has proposed a 5% extraction tax on Marcellus Shale gas. The new tax is projected to raise an additional $1 billion in revenue each year. Will this work in Pennsylvania?
First, some background on U.S. natural gas sources and markets. Most of our country’s gas is consumed in the major population centers of the northeast, the so-called Washington-to-Boston corridor. It’s cold here in the winter and a number of homes use gas as a primary heat source. Gas is also used year-round to heat water, cook and dry clothes. Business and industry use gas to heat & cool buildings and it’s increasingly used for power generation.
Starting around World War II and prior to the shale gas boom of the past 8 years, most of the natural gas used in Pennsylvania came out of the ground in Oklahoma, Texas and under the Gulf of Mexico – yes, there are pipelines on the sea floor. (Fuel coming from outside Pennsylvania is referred to below as imported gas.)
There is already major infrastructure in place to bring imported gas here. Large, interstate pipelines, or gas transmission lines, have been operating for decades. Some move gas through Arkansas, Tennessee, Kentucky and Ohio. Others bring it across the Gulf States and then north through the Carolinas.
Lines are typically 30 to 42 inches in diameter and operate at pressures between 750 and 2,000 psi. Every 75 miles along the length of the line, a compressor station keeps the gas moving. One station may have several compressors, each driven by a very large electric motor or turbine engine – some as high as 30,000 horsepower.
Several of these interstate pipelines travel west-to-east across Pennsylvania.
Some major companies like Dominion, Tennessee Gas, Texas Eastern and Transco all have transmission lines flowing through Pennsylvania. Pipelines traveling across Pennsylvania’s northern tier have made it very easy for shale drillers to deliver gas to nearby and faraway markets.
As you may have guessed, it costs much more to bring natural gas from the Gulf States than it does to run a short line from a shale well to an existing pipeline. This has been a windfall for the shale drillers and the gas companies.
Shale drillers claim they’ll leave Pennsylvania if a tax is enacted. Frankly, I’m not sure where they’d go because every other gas-producing state levies an extraction tax (in Texas, it’s currently 7.5%). Besides, Pennsylvania is much closer to market than gas-producing states in the south, and transportation costs make up a significant portion of an end-user’s gas bill.
The anti-tax crowd also claims the increased cost of taxed natural gas will just be passed along to Pennsylvania gas consumers. This is incorrect for two reasons. First, the shale drillers can’t raise their price above that of imported gas or consumers will buy the imported fuel instead. Natural gas, after all, is a commodity and consumers will usually buy from the lowest-priced supplier.
Secondly, the shale gas boom has made Pennsylvania a natural gas exporter, meaning more gas is extracted in the state than is consumed. In 2013, PA extracted 2.92 trillion cubic feet but only used 1.09 trillion cubic feet. The remaining gas was sent to mid-Atlantic and New England states. Even if the sales price of gas did increase somewhat, PA gas consumers would only pay for one third of the state’s new revenue source. The remaining revenue would come from out of state. Governor Wolf is simply making a good business decision – he’s externalizing our costs.
Our governor’s proposal is projected to raise an additional $1 billion annually and will rely on residents outside Pennsylvania to pay for two thirds of these new funds. In my opinion, the sooner we can get the governor’s proposal implemented, the better.
Gary Kendall, a retired engineer, worked in the energy sector for 31 years. He’s a member of Susquehanna Valley Progressives.