Kasich Wants Tougher Regulations, Taxes on Ohio’s Drillers

Ohio Governor John Kasich is proposing changes to how the state taxes and regulates oil and natural-gas drilling with what he calls a goal of “leading the nation with a comprehensive energy strategy.”

The plans, many of which require legislative approval, include a higher tax on drillers to pay for an income-tax cut, updating standards for well construction, disclosing chemicals used in hydraulic fracturing, and new regulations for natural- gas gathering lines, according to information released by Kasich’s office.

Kasich, a 59-year-old Republican, released his proposals today as part of a “Mid-Biennium Review” halfway through Ohio (STOOH1)’s two-year budget with policy proposals in areas including taxes, energy and education. On energy, the governor said he wants a balance between regulations that protect the environment while allowing for new jobs and investment.

Ohio can have regulations in place that really create a model for the rest of country,” Kasich said at a press conference today in Columbus.

States including Ohio (STOOH1), Pennsylvania (STOPA1) and North Dakota (STOND1) are confronting the costs and benefits of hydraulic fracturing, or fracking, which involves injecting water, sand and chemicals underground at high pressure. While the industry says fracking is safe and has allowed increased production, environmental groups say it can lead to contamination.

Showing the Money

Drillers would pay a severance tax as high as 4 percent that would generate as much as $1 billion by 2016 to reduce income taxes paid by individuals and small businesses, according to Kasich’s office. Oil and gas companies would pay an upfront fee of $25,000 per well to local governments to cover impacts from drilling, Kasich’s office said. The companies would get the money back over time, the administration said.

Companies including Exxon Mobil Corp. (XOM), Chesapeake Energy Corp. (CHK) and Devon Energy Corp. (DVN) have begun drilling in Ohio’s Utica Shale, a geological formation that may hold as much as 5.5 billion barrels of oil and 15.7 trillion cubic feet of gas. Ohio drillers also are tapping into the Marcellus Shale, which stretches across Pennsylvania to New York.

Ashes to Ashes

The authority that the administration is seeking for “cradle to grave” disclosure of the volume, concentration and type of chemicals used during the life of a fracking well would be the most extensive of any state, said Fred Shimp, assistant director of the Ohio Department of Natural Resources.

“We’d be in the forefront of disclosure of the chemicals that are used,” Shimp said in an interview.

About half the proposed changes would require legislative approval. The rest may be done through administrative rules, and the agency’s goal is to have all new regulations in place before year-end “so we are prepared for what’s going to happen,” Shimp said.

Besides Kasich’s plan, the Ohio Department of Natural Resources last week proposed rules for the transportation and disposal of wastewater from drilling that it said would be “among the nation’s toughest.” They would include banning drilling into some rock formations and requiring geological reviews before wells are approved, the agency has said.

Quaking State

The recommendations are a response to 12 earthquakes centered within a mile (1.6 kilometers) of an injection well in Youngstown, Ohio. Circumstances “appear to make a compelling argument for the recent Youngstown-area seismic events to have been induced,” including the timing, location and depth of the earthquakes in relation to the well, a state report said.

The governor’s plans have drawn opposition, including from the Ohio Oil and Gas Association, which has said asking one industry to fund tax cuts for others is unfair. Groups including the Fraternal Order of Police of Ohio and Ohio Association of Professional Fire Fighters have said drilling revenue should offset cuts to schools and local governments.

Kasich said he see it as a choice between letting out-of- state companies and their shareholders reap most of the benefits or allowing all Ohioans to share in them.

“We are going to have low taxes, at end of the day, on energy,” Kasich said at the press conference, adding that neighboring states and Texas still would have higher taxes on oil and gas. “The question is, who benefits?”

Small Hindrance

The plan puts a few demands on drillers, while speeding permits, according to a release from the Ohio Environmental Council, which works for clean air, land and water.

“The regulatory improvements are sorely needed,” Trent Dougherty, the organization’s director of legal affairs, said in the release. “Yet, we cannot continue to permit industrial- scale fracking without local government and public input.”

Besides the changes Kasich proposed today, he signed an executive order March 12 giving the state jurisdiction over the construction of natural-gas processing plants. Yesterday, Chesapeake announced a partnership with M3 Midstream LLC and EV Energy Partners LP to build a $900 million processing plant in eastern Ohio. Denver-based MarkWest Energy Partners LP (MWE) announced Jan. 31 that the company and a joint-venture partner plan two natural-gas processing plants and a “fractionator” in eastern Ohio.

The state is watching to see whether it lands the “world- scale” natural-gas processing plant that Royal Dutch Shell Plc (RDSA) said it plans to build in Ohio, Pennsylvania or West Virginia.

In Other Business

Kasich also proposed:

-- An annual tax on banks and other financial institutions of 0.8 percent on the first $500 million of net worth and 0.25 percent on larger amounts to update a tax code “riddled with loopholes,” Kasich said.

Currently, banks pay a corporate-franchise tax of 1.3 percent of net worth. Mortgage brokers, payday lenders and other institutions pay a separate levy that Kasich wants to eliminate so all institutions pay the new Financial Institutions Tax, according to the Ohio Taxation Department.

Kasich, elected with a pledge not to raise taxes, has vowed that all changes would be “revenue neutral.”

-- Spending $1.74 billion for capital improvements, the first such budget in Ohio since fiscal 2009-2010. There would be $1.36 million in bonds backed by the state’s General Revenue Fund, according to the administration.

To contact the reporter on this story: Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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