Yesterday, the Ohio Department of Natural Resources released 2011 production data on the first nine wells to produce oil and gas using new horizontal fracturing (“fracking”) in Ohio’s Utica shale.
Oil & Gas Production
Of the nine wells for which data was collected, five are in the production phase, in which gas and oil is captured, sold and taxed by the state. These wells are located in Carroll and Harrison Counties, and are operated by Chesapeake Energy, the most active of Ohio’s shale drillers. In total, the five wells produced over 43,000 barrels of oil and 2.5 billion cubic feet of natural gas.
Significantly, these figures represent the first opportunity to validate estimates made by the oil and gas industry—and used by the Kasich administration—to forecast potential economic benefit from Ohio’s shale.
The Ohio Chamber of Commerce’s February 2012 Shale Coalition report projects that an average Utica well will produce 90,000 barrels of oil and 105,000 mcf of natural gas in its first year. By comparison, these five Ohio wells produced, on average, just 22,463 barrels of oil and a whopping 1.2 million mcf of gas. In other words, at least for these first five wells, Ohio’s shale is producing significantly less oil than expected, and significantly more gas.
This is meaningful to policymakers as Governor Kasich’s proposal to “modernize” Ohio’s severance tax rates actually lowers the tax on natural gas, while increasing it on oil. Given that our first batch of wells are cranking out gas far ahead of schedule, with oil lagging, this plan may represent a gift to the industry; one that could result in considerable lost revenue for the state of Ohio.
Revenue and Taxation
At the Governor’s proposed tax rate of just 1.5% in the first year for oil and 1% for gas, they would pay approximately $150,000 in taxes, or an effective tax rate of 1.2%. If, however, Ohio applied the same rates of taxation as Texas—4.6% for oil and 7.5% for gas—Ohio’s take would be six times greater, at just over $817,000, an effective rate of 6.4%.
If the 100 wells that were permitted in 2011 all begin producing in 2012 at the same rate as these five, Innovation Ohio estimates that the state could generate $7.5 million from Kasich’s plan compared to $40.1 million under the Texas rates. Under current law, Ohio would collect just $4.1 million.
If, however, the industry continues to bring on new wells at the current pace (37 in the month of March alone), 444 new wells could come online in 12 months, generating $33 million under the Kasich plan compared to $178 million under the Texas rates.
The same production levels, under Ohio’s current tax rates—preferred by the oil & gas industry and the GOP House members that stripped the Kasich plan from HB487—would net just $18 million for the state on what Innovation Ohio estimates would be $2.7 billion in revenue for the industry. This equates to nearly $160 million in lost revenue potential, and an embarrassingly effective low tax on the industry of just 0.7%. This is the status quo unless lawmakers act.