COLUMBUS, Ohio – Ohio Senate President Matt Huffman is looking to oil and gas production on public lands, including state parks and state forests, to help replace lost state revenue that would result from income tax cuts that the legislature is eyeing.
Huffman, a Lima Republican, said at the Ohio Oil and Gas Association’s annual conference March 9 that production leases on state lands could be a “great revenue generator,” according to Gongwer News Service, which covers the Statehouse and sent a reporter to the conference.
But it’s unclear how much of a dent new drilling leases would put in the billion-dollar hole that would be left by the most recent tax-cut proposal before state lawmakers.
Republicans who control the legislature have discussed eliminating Ohio’s income taxes, and a bill in the Ohio House would flatten the tax by most drastically cutting rates of wealthy taxpayers and modestly cutting middle-income tax rates. A spokesman for Huffman said Wednesday that the Senate is considering its own tax-cut proposals for the state’s two-year operating budget.
Already, though, the Ohio Department of Natural Resources is accepting lease applications for oil and gas drilling in state-owned oil and gas reserves. The Plain Dealer / cleveland.com has requested from ODNR all the leases that have been submitted.
Oil and gas development on state property is expected to soon begin after over a decade of debate on the issue among Republicans, Democrats, environmentalists and the oil and gas industry. Lawmakers passed a bill in the waning hours of the two-year legislative session last year that paved the way for drilling on public lands.
“If the state can responsibly add to the revenue of the state and we can lower the tax burden, that makes Ohio a much more competitive state,” Huffman told the oilmen on March 9. “And so we should do this in earnest. We should do it responsibly. Kick it into a gear where it actually makes sense and, you know, it can be a great benefit to us.”
But environmental groups have objected to drilling on state property, saying the noise, traffic and air pollution will interfere with the solace Ohioans seek when they camp, hike, kayak and participate in other recreation in state parks and forests.
It’s not realistic to depend on oil and gas as a replacement revenue for reduced income taxes, said Nathan Johnson, the Ohio Environmental Council’s public lands director.
“That’s purely political bluster, there’s no reality behind that,” he said.
The amount of money the state could earn from oil and gas are uncertain, according to the nonpartisan Legislative Service Commission, when weighing the fiscal impacts of an oil-and-gas bill last year. The industry also doesn’t yet have any estimates about how much it will drill in coming years, as leasing is still in the early stages.
Royalties, or the portion that the state would receive from a lease, is one-eighth of the oil and gas produced, Ohio law states. This is a common rate, though some states demand royalties as high as 25%.
What will drilling on state property look like?
Oil and gas companies expect to tap mostly subsurface minerals owned by the state. They set up on private property, then access the state minerals underground through vertical and horizontal drilling, said Mike Chadsey, director of public relations for the Ohio Oil and Gas Association.
State law prohibits companies from using state-owned surface land for oil and gas development “unless the state agency, in its sole discretion, chooses to negotiate and execute a written surface use agreement.”
The companies take around three months to drill and begin hydraulic fracturing operations. They drill a mile or so underground, and use the fracking process to break the state-owned shale formation and release the oil and gas it holds. Production can last decades.
“Whether you and your family are hiking, canoeing or camping there will be no impact to your adventures on state-owned land, as any activity will be taking place on private property or over a mile beneath your feet,” Chadsey said. “There are other public lands today which allow for oil and gas extraction and you would have no idea it is taking place.”
The industry wants access to state subsurface land due to the large swaths of unleased minerals in eastern and southeastern Ohio, he said.
That’s where the Utica Shale formation stretches across a 10-county area and is the most prolific oil and gas production area today, in Columbiana, Carroll, Belmont, Guernsey, Harrison, Monroe, Noble, Jefferson, Morgan and Washington counties.
The ability to extract oil and gas from state property also opens up new private territory that operators have until now avoided, according to the industry. Operators previously have avoided drilling on sections of private land that have pieces of state-owned property nearby because of the prohibition.
That could be a boon for more private land owners, Chadsey said.
“Previously, an operator would avoid land and minerals that are adjacent to state owned land and minerals which would limit, if not outright prohibit, private landowner’s ability to lease and develop their minerals,” he said.
Johnson, of the Ohio Environmental Council, said that even if the surface disturbance is on private land, it could be close to state lands. Ohioans who are retreating into nature will see and hear heavy truck traffic, especially during the drilling stage.
Oil and gas wells and storage tanks can emit air pollutants, such as volatile organic compounds, carbon monoxide, nitrous oxide, methane and ozone.
“We’re talking about carcinogens, we’re talking about endocrine disruptors that’s in the air,” Johnson said. “We know that air pollution does not respect boundaries. It doesn’t care if it’s right beside the park or right in it, it’s going to migrate.”
Even though the operators are generally supposed to stay off the surface of state land, Johnson wonders how long it will remain that way.
“We shouldn’t take for granted that these operations won’t be located on the surface on some state public lands,” he said. “There’s a default in the law, the lease basically has a default provision saying no surface occupancy. But that’s not hard and fast.”
Why lease now?
Lawmakers amended a poultry bill in December to define natural gas as green energy and to require state agencies to lease land in good faith while rules and a lease form go through the state’s official rulemaking process.
This requirement – saying agencies “shall” lease, instead of “may” lease – is more stringent than a 2011 law that permitted state agencies to lease minerals. The 2011 law also required the governor appoint members to a state board that would oversee oil and gas leases.
Then-Gov. John Kasich didn’t name anyone to the board by the time the law went into effect. There was no oil and gas development on state land for well over a decade, as people on both sides of the issue debated, until the December bill that required agencies to accept leases.
Gov. Mike DeWine signed the bill, which goes into effect April 7. The final part of the rule-making process occurs April 10, although the state has likely already received lease applications.
Will environmental groups or others sue to challenge leases in state lands or the state land parts of the poultry bill?
“I think it’s a fair to stay tuned on that question,” said Johnson of the Ohio Environmental Council.
Huffman, when he talked to the Ohio Oil and Gas Association earlier this month, acknowledged how controversial drilling on public reserves is, but said the state needs to march ahead.
“I think the state has to get somewhat businesslike in how they’re doing this,” he said. “This can’t be, ‘Gee, we feel bad because people are yelling at us, sort of do it because we have to, but not do very much because maybe they won’t be as mad.’”
How much revenue does the state need to raise if it decreases income taxes?
For the House bill that flattens the income tax, House Bill 1, the fiscal estimate states that the state’s General Revenue Fund would lose $2.5 billion in the first fiscal year after the change. It would lose $1.8 billion in the following year. There would also be losses to the local government and public library funds.
The legislature won’t be able to pay for the tax cuts unless it raises revenue elsewhere, slashes government employees and programs, or a combination of both.
“Obviously, Alaska is oil rich,” said John Fortney, Huffman’s spokesman, on Wednesday. “They don’t have an income tax.”
In addition to Alaska, states such as Texas and Wyoming earn enough from natural resources to forgo state income taxes. However, those states’ finances are managed differently than Ohio’s, with each having sovereign wealth funds created with the income earned from oil and gas.
The funds in Wyoming and Texas supplement government operations and education when oil and gas prices tank. The Alaska Permanent Fund famously pays out a dividend to residents each year.
Those states produce more crude and have more crude reserves than Ohio.
Ohio is competitive, however, to other states with natural gas, having the fifth most-proved reserves in the country, according to the U.S. Energy Information Administration.
And the sector is important to the state’s economy, said Chadsey, the spokesman at the Ohio Oil and Gas Association. Over 208,000 Ohioans are employed in the oil and gas industry.
Local governments receive ad valorem taxes, a type of property tax based on the value of the oil and gas. They enter road usage maintenance agreements in which the industry pays for upgrades and maintenance of county, city, village and township roads, Chadsey said.
“The state would also see additional severance taxes paid into state coffers to help fund and run an effective Ohio Department of Natural Resources, thus reinvesting monies back into the state park system,” he said. “Local governments also have the option of leasing public lands if they so choose. We have seen some public entities lease lands in Ohio with great success.”
What about the climate?
Each year between 1971 to 2000, Ohio has experienced on average 17 days over 90 degrees, according to data and modeling by the Union of Concerned Scientists. With no action on climate change, that could increase to 60 days a year by midcentury, 2036 to 2050, and to 93 days by late century.
High heat is deadly for older Ohioans and people who work outside. Additionally, temperature shifts result in more storms, which hurt people and property and are costly.
Creating more fossil fuels that produce carbon will not combat climate change, notes Johnson of the Ohio Environmental Council. Yet, Ohio lacks a climate strategy.
Republicans who have controlled the Ohio legislature and statewide government offices for years haven’t prioritized addressing climate change.
In 2019, House Bill 6 repealed the state’s renewable energy standards. That bill was at the center of former Ohio House Speaker Larry Householder’s conviction in federal court this month over accepting bribes to pass the legislation. Lawmakers repealed part of it after Householder’s arrest, but there has been no action by the legislature or calls from Gov. Mike DeWine to reinstitute the renewable standards.
“Climate change is an existential threat,” Johnson said. “I mean, the science is clear, the potential repercussions that we’re facing if we don’t face down meaningfully our greenhouse gas emissions are dire. There’s no way around it. In fact, the state is proceeding so gung ho to open up our state public lands of all places – these are the most pristine, the most beloved places in the entire state – is all happening in the backdrop of climate change.”
Laura Hancock covers state government and politics for The Plain Dealer and cleveland.com.