By Karl Henkel
Local brine-injection well operators are questioning Ohio Gov. John Kasich’s latest proposal to quintuple taxes on out-of-state fracking wastewater.
Kasich’s proposal, included in Senate Bill 315, calls for a 10-cents-per-barrel tax on all injected fracking wastewater that originates from Ohio and a $1-per-barrel tax on injected wastewater from out of state — the latter a fivefold increase from current rates.
“No business can thrive when its tax burden is increased this dramatically, but this proposal will have an especially negative impact on Ohio-based operators,” said Nicholas C. Paparodis, senior executive vice president of Youngstown-based D&L Energy Inc. “Energy producers need injection wells in order to operate. If Gov. Kasich taxes locally-owned Ohio disposal wells out of existence, it will have a negative effect on the state’s oil and gas industry as a whole.”
Current rates are 5 cents per barrel on all injected brine that originates from Ohio and 20 cents per barrel on injected brine from out of state.
D&L’s Youngstown well, for example, processed about 2,000 barrels per day. Depending on specific contracts, a gas or oil driller could pay an injection-well operator about $4 a barrel to dispose the liquid.
The injection well operator would make $8,000 from the 2,000 barrels.
Under the current tax system, the state would levy a $400 tax on the operator. Under the proposed tax system, the operator would pay $2,000 in taxes.
Rob Nichols, spokesman for Kasich, said Friday the increased fees will make up for the fact that out-of-state brine haulers do not pay permitting fees or severance taxes in Ohio. Though the injection well operator is the taxed party, the trickle-down effect of the tax increase will be felt by the brine’s originating source.
Bob Kleese of Kleese Development Associates in Warren, which has injection wells in the Mahoning Valley and deals primarily with out-of-state brine, said any tax hike would be passed on to extraction well operators.
“It’s going to have some type of effect,” said Kleese, who was unfamiliar with the nuances of the proposal.
Ohio’s 177 injection wells disposed about 12 million barrels of wastewater in 2011 and brought $1.5 million in brine taxes to the state.
Had the 2011 totals been taxed at Kasich’s proposed rate, the tax revenue would have reached nearly $7 million.
That taxed money, according to SB 165, goes to the Oil and Gas Well Fund and is used for the Division of Oil & Gas Resources Management, which receives no state general-revenue funding and operates solely on fees and severance taxes.
The new tax rate could disproportionately affect some well operators more than others.
For instance, nearly 94 percent of the 550,000 barrels of wastewater disposed at D&L’s now shuttered Youngstown well site originated from someplace other than Ohio.
The state taxed D&L the current maximum of $100,000 at that well in 2011, but using the proposed figures, that total would have surpassed the newly proposed $500,000 annual maximum.
Wells will be taxed first on the wastewater received from out of state, then taxed on in-state brine.
Ninety percent of the revenue generated from the taxation will still go toward the Oil and Gas Well fund, which Nichols said would help pay for creation of a brine-disposal electronic permitting system, a brine-disposal database, a brine-hauler transponder system, a chemical disclosure reporting system and for the addition of 10 staffers to ODNR’s injection-well program.
The remaining 10 percent will go into a statewide geological mapping fund that aims to discover any unknown fault lines that could spur earthquakes.
The state concluded that the Youngstown well triggered 13 earthquakes in less than a year.