Pennsylvania, Ohio governors elected on push to tax gas production

Unconventional energy operations and taxes could be effected by election results in governors' races in Pennsylvania, Ohio, Colorado and Illinois In a potential political game-changer for oil and gas companies in two of the nation's key shale gas plays, Democrat Tom Wolf in Pennsylvania and Republican John Kasich in Ohio both cruised to victory in their gubernatorial races on Tuesday November 4th by wide margins after promising voters they would push to cash in on fast-rising gas production from the Marcellus and Utica shale plays by enacting higher severance taxes.

But whether they will be able to act on those promises became a larger question following Tuesday's elections, as Republican lawmakers who have been reluctant to raise taxes on booming production also gained strong majorities in both houses of the legislatures in both states.

More broadly across the nation, the oil and gas industry held its own in political battles over hydraulic fracturing as voters defeated four of the eight efforts to ban fracking in communities in Ohio, California and Texas.

Support for oil and gas development also may have played a role in the narrow re-election of incumbent Democratic Gov. John Hickenlooper in Colorado, while some industry insiders pointed to repeated delays in permitting fracking operations in southern Illinois as contributing to the apparent defeat of Democratic Gov. Pat Quinn.

And although they will push for higher taxes on oil and gas production, both Kasich and Wolf support continuing development of their states' shale resources. Both have said their proposed tax plans would be competitive with those of other producing states while raising much-needed funds to plug budget gaps-in the case of Pennsylvania-and to give tax breaks to the citizens of Ohio.

Wolf beat Republican Gov. Tom Corbett by a solid 55-45 percent margin after a campaign in which Wolf repeatedly touted his support for a 5 percent gas severance tax as a way to raise money for under-funded schools and to pay for stronger environmental oversight of hydraulic fracturing and drilling waste disposal.

In Ohio, Kasich stormed to re-election with a 64-33 percent drubbing of Democratic challenger Ed FitzGerald. In the final days of the campaign, Kasich called the state's current 20 cents-a-barrel severance tax "a total and complete rip-off to the people of this state," and promised to push again for about a 4 percent severance tax, either in the state legislature's coming lame- duck session or during negotiations over the state budget in 2015.

He may have an uphill climb, though. In his first term, Kasich twice pushed the GOP-controlled Ohio Legislature to pass the 4 percent gas severance tax, but his efforts failed to win support. And on Tuesday, Ohio Republicans won 65 House seats, their largest majority since 1967 and enough to give the GOP supermajorities in both the Ohio House and Senate.

In May, the Ohio House passed a bill calling for a 2.5 percent severance tax, but that bill also contained various exemptions that would have significantly reduced the money it raised. At the time, Kasich called the tax "puny," and the GOP-controlled Senate did not take up the issue.

Wolf faces a similarly difficult task in Pennsylvania, where Republicans picked up eight seats in the House and three in the Senate, adding to their majorities that so far have not heeded calls to enact a severance tax. The state has an 'impact fee' on drillers, but the state's Independent Fiscal Office has reported that Pennsylvania's effective tax rate on gas production is by far the lowest among gas-producing states.

Wolf also promised during the campaign to beef up oversight of drilling and to prevent new drilling in state parks and forests, but he made clear he sees continued production as a key to the state's economic growth.

A similar moderate position of supporting oil and gas development under strict regulations appears also to have benefited Hickenlooper, who narrowly defeated Republican challenger Bob Beauprez by a 48-47 percent margin.

In a state fractured by the controversy over fracking, Hickenlooper appeared to have fared better in producing districts than did fellow Democrat Sen. Mark Udall, who lost his re-election bid to the pro-industry GOP candidate, Rep. Cory Gardner.

And in Illinois, Quinn appears to have lost to Republican Bruce Rauner by about a 5 percent margin. Rauner presented himself as the pro-business and pro-growth candidate, and long delays under Quinn in developing regulations covering hydraulic fracturing-thus idling drillers in the southern part of the state--may have helped him portray Quinn as opposing economic development.

Several communities around the country also voted last Tuesday on initiatives to place moratoria or bans on fracking, with mixed results that did not show any strong momentum for such initiatives either way.

Probably the most closely watched initiative came in the north Texas town of Denton, which voted Tuesday to ban fracking on a 59-41 percent vote. Denton, which sits atop the Barnett Shale where the fracking revolution was born, becomes the first community in resource-rich Texas to ban fracking.

The Denton ban drew immediate lawsuits from state's General Land Office and the Texas Oil and Gas Association, which say it violates state laws giving oversight of drilling to state authorities.

In California, voters in San Benito and Mendocino counties, which sit atop portions of the Monterey Shale but which have seen little drilling to date, voted in favor of banning fracking and other well stimulation practices. Voters rejected a similar ban in Santa Barbara County-which has more than 1,000 working wells-by about a 2-1 margin. California media have reported that the oil industry spent about $5.7 million to defeat the Santa Barbara initiative and more than $1.8 million in San Benito County, although no fracking has taken place there.

The California Senate rejected legislation earlier this year that would have placed a state-wide indefinite moratorium on fracking, but two other local governments-the city of Los Angeles and Santa Cruz County-have adopted bans.

And in Ohio, voters in Youngstown, Kent and Gates Mills rejected initiatives to ban fracking while the town of Athens adopted a ban.

Overall, several oil and gas insiders said the industry fared fairly well in the elections as voters generally favored candidates who support energy development, although they expect local challenges to fracking to continue in the coming years.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.