Vol. 6, No. 7

Topics discussed in this week’s Report include:

  • Ohio: Governor proposed increased tax on oil and natural gas development.
  • Texas: Appellate court reversed $3 million judgment in Barnett Shale nuisance case.
  • Analysts raised concerns that trade war with Mexico could reduce natural gas prices.
  • Consol Energy announced plans to exit coal mining in favor of natural gas.

States

Ohio: Governor proposes increased tax on oil and natural gas development. Gov. Kasich’s (R) proposed budget calls for increased taxes for oil and gas development as part of a broader plan that would also simplify and reduce the state’s income taxes. Gov. Kasich’s proposal would impose a 6.5 percent tax on the value of oil and natural gas when sold at the wellhead, with a 4.5 percent tax on natural gas and natural gas liquids when transferred at a further stage of distribution. The taxes would replace existing taxes of $0.20 per barrel for oil and $0.03 per thousand cubic feet for gas. If approved, the new taxes would apply to development in the Utica Shale.

Texas: Appellate court reverses $3 million judgment in Barnett Shale nuisance case. The Fifth Court of Appeals in Dallas has reversed a $3 million jury verdict against Aruba Petroleum Inc. for alleged nuisance related to air contamination, light pollution and offensive noises and odors. The court held that Aruba did not take intend to cause substantial interference with the plaintiffs’ use of their homestead near Fort Worth, Texas, as a result of Aruba’s natural gas development in the Barnett Shale. In contrast to some other states, Texas requires a plaintiff to show a specific intent to cause interference with the property of another to prevail in a private nuisance action. As a result, the case may have limited precedential value outside of Texas.

Markets

Analysts raise concerns that trade war with Mexico could reduce natural gas prices. Responding to the Trump administration’s call for a 20 percent tax on imports from Mexico, analysts from Tudor Pickering Holt & Co. and Again Capital LLC warned that a trade war with Mexico could reduce natural gas prices to $2 per mmBtu. Mexico is the largest importer of natural gas and liquefied natural gas from the U.S., with exports to Mexico exceeding four billion cubic feet per day in the second half of 2016. Exports are projected to increase by another billion cubic feet over the next year. If a trade war with Mexico results in the elimination of or substantial reduction in natural gas exports, the analysts warned that there would be a significant oversupply of natural gas in the U.S. that would cause a significant drop in prices and, as a consequence, a significant drop in domestic production. The analysts projected a 40 percent chance that such a trade war would occur.

Consol Energy announces plans to exit coal mining in favor of natural gas production. Consol Energy Inc. has announced plans to sell its remaining coal mines and focus instead on growing its natural gas production business. Consol has been operating coal mines since 1860 and, as recently as 2011, was the nation’s fifth-largest coal producer. However, in the face of declining demand for coal, Consol has increased its natural gas production in the Marcellus and Utica Shale formations, where production in the fourth quarter of 2016 had year-over-year increases of 14 and seven percent, respectively. Consol will look to sell its remaining three coal mines or spin them off to shareholders.