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The Worcester Gas Tax Ho ax
Fracking apologists, including a lawyer representing Norse Energy and one of the New York land owners groups, have touted an apocryphal estimate of what a hypothetical shale gas well would pay in ad valorem property taxes in the Town of Worcester in Otsego, County. This mythological well is also used in the rather misleading argument against a severance tax in New York – implying that since there is an ad valorem local property tax on gas wells in New York, there does not need to be a state production (severance) tax at the wellhead. Let’s examine these arguments. No Gas No Tax – The ad valorem property tax is based on the amount of gas produced; if there is no production, there is no tax. The property tax valuation is similar to the “income method” on commercial property – such as a shopping center – which values the asset based on its productive value. The method used in New York is not dissimilar from that used in every other state that has a property tax on oil and gas wells – meaning every state with oil and gas production except Pennsylvania – which has no property tax on gas wells. New York’s method of valuing production is not suited to horizontal shale gas wells, since the value of such wells is gone in literally a matter of months – approximately 80% of the value is gone in the first two years. 1 Once the initial surge of gas is gone, the value of the well on the tax rolls would drop precipitously. If there is no gas production, there is no tax. Dry Holes - Tests of the Marcellus and Utica shale gas formations have not been successful near Worcester, as illustrated in the map below provided by Karen Edelstein using FracTracker. These so-called “double play” test wells were drilled in what was touted as the “fairway” of the Utica and Marcellus, that area where the shale was thought to be most productive. None of them were successful, and one of the test wells, the Pullis 1, has already been plugged. The location for the Ross 1 well was picked by Gastem USA, which traded at $3 a share prior to drilling the test well, and 8.5 cents soon afterwards. Based on the isopachs and total organic content of the Marcellus, results on a well in Worcester should be similar to the Ross 1. The ad valorem property tax on such a well would be zero.
Utica / Marcellus Test Wells Near Worcester, Otsego Co. NY
Looking For Gas In All The Wrong Places. At All The Wrong Prices The problem with these test wells, and with the ad valorem prospects for the Town of Worcester, is that they were drilled in the wrong place at the wrong time. Meaning the geology in this area is not a conducive to productive gas wells – as that further south on the Pennsylvania border 2 – or at current and projected http://www.scribd.com/doc/72140110/VoodooFrackonomics
prices for methane. 3 Here’s a simple test – if the well is driled by a company from Texas or Oklahoma when gas prices are above $5 mcf – it might have potential. If it is drilled by a company from Quebec – where fracking is banned, or Norway, where onshore shale gas exploration is illegal – it’s more likely to be a dry hole. If below $4 mcf, precious few of these horizontal dry gas shale wells make any economic sense anywhere. End of geology and economics lesson. Ad Valorem and Severance Taxes An ad valorem local property tax on an oil or gas well is not incompatible with a state production or severance tax at the wellhead. In fact, they always go together – except in New York – which has no state tax on gas – and the woebegone Pennsylvania – which has neither a state or local tax on gas. (Pennsylvania is a veritable tax haven for frackers - who have managed to buy off both the legislature and the governor. ) The lack of a severance tax is pronounced in New York – leaving the state bereft of a revenue source for regulating the industry or repairing the road damage caused by shale gas industrialization. 4 Since most New Yorkers are not familiar with the taxation of oil and gas wells, it is easy for fracking shils to hoodwink them into thinking that they have to make a choice – between an ad valorem property tax and a state production tax. When the answer everywhere else is both. Absent a state tax at the wellhead, New York will simply be exploited by out of state producers. 5
James “Chip” Northrup Cooperstown & Texas http://www.scribd.com/northrup49
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