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Oil and Gas Severance Tax Bill Fails to Reach House Floor

Pennsylvania House Bill No. 1401, which would create a severance tax and significantly change oil and gas royalty payments, recently failed to pass an important legislative hurdle.

The bill imposes a 3.2% severance tax, or drilling tax, on unconventional natural gas extraction. This tax would be in addition to the Act 13 impact fees already levied upon natural gas producers. According to drafters of the bill, the severance tax and the impact fees would equal approximately 5% of the value of natural gas sold in Pennsylvania. Additionally, the bill would alter the required minimum royalty payment under and oil and gas leases so that the lessor would not receive less than 12.5% of the gross proceeds received by the lessee on production under the lease. Under the terms of the bill, a deduction or allocation of costs, expenses or other adjustments could not be deducted from the gross proceeds before calculating the amount of royalty due to the lessor. This provision would severely limit, and at times eliminate, an operator’s ability to deduct pro-rata post-production costs from royalty payments.

Late Tuesday night, supporters of House Bill No. 1401 failed to acquire the necessary votes to push the bill to the House floor so that debate on the legislation could resume. The motion, which required 101 votes to succeed, instead received 100 votes in favor. The bill has been subject to numerous amendments which has stalled its progress.

Although this represents a setback for the bill, it is possible that further legislative action may be taken to pass it. At this point, however, it now appears that passage will be more difficult.