Energy Company Tax Policy Impacts Attraction of Energy Intensive Industries

States and regions looking to attract energy intensive industries need a multi-pronged approach to tax policy. This tax policy needs to accomplish three complex tasks:

  1. promote energy industry investments in drilling, distribution and processing facilities needed to produce low-cost energy resources
  2. provide for needed infrastructure investments in primarily rural markets that typically are the site of most energy developments
  3. retention and recruitment of heavy manufacturers dependent on the cost of energy more so than other industries

Most debate among policy makers related to energy tax policy centers on how to tax the energy companies themselves. This focus on how energy companies are taxed impacts the attraction of high-wage energy intensive company jobs because without the initial drilling, transmission and processing investment by the oil industry—there is no oil or natural gas or wind or solar power to use.

For the oil and natural gas industry, the rate of the severance tax is the “hot” political topic. Ohio is among many states considering an expansion of their oil and gas severance taxes. Governor John Kasich is pushing for a severance tax expansion. An Ohio General Assembly working group suggested a market-based “trigger” or slow phase-in of a tax increase depending on economic trends with an eye toward maintaining growth in the industry and also recommends uses of any potential revenue gains, such as assisting local governments with infrastructure needs and lowering income taxes. However, the Ohio General Assembly working group failed to recommend a specific severance tax rate increase and Governor Kasich is not satisfied with the result. Focusing on only the severance tax is a common mistake for states looking for energy company investments. Energy companies are also impacted by the overall state business tax system. As an example, while Texas has a relatively high severance tax that is the state’s second largest revenue source, Texas also has no income tax at the local or state level and the Lone Star State does not apply the severance tax until the well is a money maker.

Eight State Comparison of Severance Tax Rates, Bases and Incentives

State Severance Tax Rates & Bases Incentives
Arkansas 5% of the market value of the oil at the point of severance and the owner of a well that produces fewer than ten barrels of oil per day pays a reduced 4% rate on oil from that well with separate levies totaling 2.05¢ per barrel of oil are levied for the benefit of the Arkansas Museum of Natural Resources Deduct costs incurred dehydrating, treating, compressing, and delivering natural gas, an oil or gas well that disposes of salt brine produced in the production of the oil or gas by means of an approved underground saltwater disposal system is allowed a severance tax credit equal to the operator’s costs in maintaining the underground disposal system, up to $370,000
Colorado Basis of gross income attributable to the sale of oil and gas depending upon the producer’s annual gross income and ranges from 2% (annual gross income under $25,000) to 5% (annual gross income of $300,000 and over) plus an additional charge on the market value of oil and gas produced at the wellhead to fund enforcement actions not to exceed 1.7 mills Authorizes a credit against the severance tax equal to 87.5% of ad valorem tax, i.e., property tax, assessed or paid by leasehold and royalty interests
Louisiana Levies a severance tax on oil and condensate equals 12.5% of “gross value” which is the greater of (1) the gross receipts received from the first purchaser, less charges for trucking, barging, and pipeline fees, and (2) the posted field price and a tax on natural gas solids and liquids are levied at a rate of 15.8¢ per Mcf of gas, which results from applying a gas price index adjustment to a base minimum rate of 7¢.56 Production of oil or natural gas from a horizontal well is exempt from the tax for the earlier of the first two years of the well’s production or the date that “payout” of the well is achieved, i.e., the date a sufficient quantity of oil or natural gas, based on market prices, is obtained to recover the producer’s costs of drilling the well and is reduced and eventually eliminated if the price of oil or natural gas increases to certain thresholds
North Dakota Levies a gross production tax on oil which equals 5% of the gross value of the oil at the wellhead and an oil extraction tax which is currently 6.5% of the gross value of oil at the wellhead. Beginning in 2016, the oil extraction tax rate becomes 5% of the gross value of oil, unless the price of oil exceeds $90 per barrel plus an inflation factor, in which case the rate will increase to 6% If the price of oil dips below a trigger price, currently $52.59 per barrel, a 4% reduced rate applies, and, until July 1, 2015, if the oil price exceeded the trigger price, the first 75,000 barrels or first $4.5 million of gross value of oil from a horizontal well was subject to a reduced 2% rate


Oklahoma Levies a gross production tax on oil and gas for wells producing on or after July 1, 2015 of 2% on the gross value of severed oil and gas for the first three years of a well’s production, with a 7% rate applying thereafter, and, if the sale price of the oil or gas does not reflect the prevailing price for similar gas or oil, the Oklahoma Tax Commission may require the producer to pay the tax on the basis of the prevailing price of oil or gas from the same field and if the sale is between related entities and not done at arm’s length, then gross value equals the prevailing price of oil and gas produced in the county, as calculated by the Commission. A petroleum excise tax equal to 0.095% of the gross value of severed natural gas and oil is charged with rate decrease of 0.085% scheduled for July 1, 2016 Oklahoma allows gas producers to deduct their marketing costs associated with moving the gas from a well to market from the gross production tax base, and, for wells producing on or after July 1, 2015, Oklahoma imposes a 2% rate on the gross value of severed oil and gas for the first three years of a well’s production
Ohio A general severance tax is imposed at 10¢ per barrel of oil and 2.5¢ per 1,000 cubic feet (Mcf) of natural gas, and the cost recovery assessment is imposed at 10¢ per barrel of oil and 0.5¢ per Mcf of natural gas
Texas Levies a severance tax on oil and condensate (“oil production tax”) equal to the greater of 4.6% of the market value of oil or condensate or 4.6¢ for each barrel of oil or condensate produced, imposes a regulatory oilfield clean-up fee of 0.675¢ per barrel of oil produced. a severance tax on gas and all liquid hydrocarbons that are not condensate (“gas production tax”) equals 7.5% of the market value of gas or liquids produced..72, and an oilfield clean-up fee of 1/15 of 1¢ per Mcf of gas produced The market value of gas is reduced by costs incurred by the producer to compress, dehydrate, sweeten, or deliver the gas, for the gas production tax, Texas offers a temporary rate reduction for wells extracting gas designated by the Texas Railroad Commission or the Federal Energy Regulatory Commission as a high-cost gas, which currently includes gas produced from shale formations, the reduction is calculated by subtracting from the 7.5% rate the product of that rate times the ratio of drilling and completion costs incurred for the well to twice the median drilling and completion costs for high-cost wells completed during the preceding fiscal year, but the rate may not be reduced below zero, the reduced rate applies for the lesser of ten years beginning on the first day of production, or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs incurred for the well.
West Virginia Levies a severance tax on oil and natural gas at a rate of 5% of the gross value of the natural gas or oil with the gross value of natural gas and oil equals the product’s local market value, with deduction for processing costs necessary to obtain commercially marketable or usable oil or gas and an additional tax on natural gas in the amount of 47¢ per Mcf for the purpose of reducing the state’s Workers’ Compensation debt. Provides an annual credit of $500 for each severance taxpayer and exempts natural gas and oil extracted from low-producing wells.

Again, these taxes in energy rich states are not the only tax energy companies pay but they illustrates approaches multiple states have taken in this area.

2015 Venture Capital Investments on Track for Highly Productive Year with Energy Investments Booming

Venture capital firms in the U.S. have invested more than $47.2 billion in the first three quarters of 2015. These investments total more than seventeen of the past twenty years’ year-end totals, according to data recently provided by the National Venture Capital Association and PricewaterhouseCoopers. The information is available in The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association and is based on data collected by Thomson Reuters. 2015’s investment activity has a very strong likelihood of reaching the highest annual level since 2000.

Through third quarter 2015:

  • Regions – The Midwest is sixth out of 18 regions, preceded by Silicon Valley in first, New England second, NY Metro third, LA/Orange County fourth, and the Southeast in fifth. The Midwest in 2015 has so far invested $1.31 billion across 265 deals.
  • States – Thus far, the top five states are California, Massachusetts, New York, Texas and North Carolina. Missouri comes in at number 15 with 14 deals at $100.96 million while Ohio sits at number 17 with 11 deals at $79.78 million.
  • Industries – Software and Biotechnology remain the top two investment sectors followed by Media and Entertainment, IT Services, Financial Services, Consumer Products and Services, Medical Devices and Equipment, Industrial/Energy, Healthcare Services, and Computers and Peripherals. Additional industry sector investments include Semiconductors, Retailing/Distribution, Business Products and Services, Telecommunications, Electronics/Instrumentation, and Networking and Equipment. Ten of the seventeen investment industries experienced increases in capital invested in quarter three versus quarter two.
  • Development Stages - Expansion Stage investments total more than $6 billion, Early Stage investments total more than $5 billion, Later Stage investments total more than $4 billion, and Seed Stage investments total approximately $200 million. Compared against quarter 2 in 2015, Seed and Later Stages investments were up, while Early and Expansion Stages were down.
  • First-Time Financings – Dollars in first-time financings to companies increased 7% in quarter 3 to $2.5 billion while the number of deals declined 3% to 372. These first-time investments accounted for 15% of all dollars invested and 35% of all deals in the third quarter. The average first-time deal was $6.7 million, an increase of $600,000 versus second quarter. Companies in the Seed and Early Stages received the largest percentage of first-time investments, with 66% of dollars invested and 79% of the deals.

As of the close of the third quarter, $47.17 billion has been invested in 3,329 deals. 2015 is on track to have the highest amount of investments since 2000, when $104.99 billion was invested in more than 8,000 deals.

Investments in energy sector technology companies has been growing over time. Historically, investments in energy sector early stage tech companies has been growing. While venture EnergyVCInvestmentscapital investments in energy industry early stage tech companies varies by year, it has illustrated growth over time. 2015 is proving to be a banner year for energy industry early stage tech companies—with total investments reaching 2,557,065,900 in the first three quarters alone in 2015.

For additional information and statistics regarding both 2015 and historical investments and trends, results are available at and

Energy Intensive Industries Attraction Strategy: Food Products

As the United States has become more energy independent with the shale energy boom of the last decade it has created opportunities for locations that have assets strategically available to attract companies that are dependent upon energy for the output of its products. Regions such as Ohio, Pennsylvania, and Texas among others with access to low cost energy are uniquely positioned to attract industries that are highly reliant on energy to manufacture products.

According to the US Energy Information Administration, there are eight industries in the manufacturing sector that are defined as energy intensive:


Source: US Energy Information Administration, Model Documentation Report, Industrial Demand Module of the National Energy Modeling System, September 2013

Taking a look at each industry by size and scope helps to identify the opportunities for growth in each sector and assists economic development professionals in positioning its attraction efforts.

Here we look in-depth at the food products sector.

The North American Industry Classification Sector (NAICS) defines this sector in the following way: Industries in the Food Manufacturing subsector transform livestock and agricultural products into products for intermediate or final consumption. The industry groups are distinguished by the raw materials (generally of animal or vegetable origin) processed into food products. The food products manufactured in these establishments are typically sold to wholesalers or retailers for distribution to consumers, but establishments primarily engaged in retailing bakery and candy products made on the premises not for immediate consumption are included. Source:

In 2013 the food products industry used 1,162 trillion btu of energy with 75,407 million kwh coming from electricity and 567 billion cu ft coming from natural gas. Source: US EIA,

According to the US Bureau of Economic Analysis the Gross Domestic Output of the food products industry is $970.3 billion as of November 5, 2015. The food products industry has seen 25% growth in gross domestic product from 2008-2014 as the chart below indicates:


Further evidence of the strength of the Food Products industry is the foreign direct investment into the United States made by companies in this industry from 2008 to 2014. According to the US Bureau of Economic Analysis foreign owned firms in the Food Products industry invested $25.7 million USD in the United States in 2008 and more than tripled that investment to $83.67 million USD by 2014, as the chart below shows.


Employment in this industry, while dipping in 2009-2011 due to the recession, is steady and is on the rise. In October 2015 the Food Products industry had employment of 1.48 million, an increase of 1.03% year over year. In the last 5 years employment in the Food Products sector has grown 3.07%. The chart below shows the changes in employment in the Food Products sector in the past 10 years.





The Food Products industry has 25,614 US establishments with $15.39 billion in capital expenditures in 2012 according to the American Fact Finder. The top companies in the industry:




Food Products Business Challenges: Volatile Ingredient Prices — The price of critical commodity inputs such as corn, soybeans, wheat, dairy, coffee beans, beef, poultry, vegetables, and sugars and oils can increase significantly due to poor farm yields, unpredictable weather patterns, and market reactions to government farm subsidies. Commodity price increases raise raw material and operating costs, which can be difficult to pass on to consumers in the form of higher product prices. Many companies hedge against commodity price increases to limit volatility. (Source:

Food Products Industry Indicators:

  • The consumer price index for food, an indicator of food product values, rose 1.6 percent in September 2015 compared to the same month in 2014.
  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 1.2 percent year-to-date in August 2015 compared to the same period in 2014.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 3 percent in the first nine months of 2015 compared to the same period in 2014.
  • Total US wholesale sales of nondurable goods, a potential measure of food demand, fell 7.5 percent in August 2015 compared to the same month in 2014.

For communities, regions and states that have strong access to reliable and low-cost energy, a strategy of trying to attract companies in the Food Products industry is logical and warranted. Energy is certainly not the only reason that companies chose a location, but 91.6% of the respondents in the 2014 Area Development Magazine Site Consultant’s Survey listed energy availability and costs as very important to their clients. The Food Products industry has seen steady and solid growth over the last 5 years and with low energy costs and steady commodity prices the industry will continue this growth pattern and solid employment trend for the next 5 years.

Update: The Million Dollar Opportunity: State Capital Bill/Project Financing Webinar

This webinar has already occurred. View it by clicking here.

Gaining state of Ohio Capital Bill funding is a million dollar opportunity for communities looking to redevelop historic, arts, cultural, economic development, Downtown or central city sites.  Join us on Thursday, October 29, 2015, from 10am-11am to learn about project financing from the Ohio Capital Bill and other state programs.  The state of Ohio Capital Bill, along with Ohio Historic Preservation Tax Credit, New Market Tax Credit, Ohio Department of Transportation TRAC funding and JobsOhio Revitalization Program are among the state’s best opportunities for Project Financing. The state of Ohio Capital Bill process will begin soon and this is an excellent opportunity for local projects to gain funding! The webinar will be led by David J. Robinson and Nate Green of the Montrose Group, LLC. Robinson offers expert insight as a former member of the Ohio House of Representatives and lobbyist for dozens of capital bill projects, and Green has served as an economic development leader for nearly two decades.


5 Steps to Capture the Boom in the Energy Revolution

Natural gas posted a new 52-week low this week of $2.47 per million BTU’s and oil remains below $50 dollars a barrel. Low energy costs drive economic growth. Energy is consistently a top ten factor impacting corporate site location decisions. Regions, states and companies looking to capture the benefit of lower energy costs should take five steps to create an economic boom.

The first step is to identify regional market strengths and connect them with energy intensive industries. Economic strengths are understood through industry cluster or market analysis. Regions with access to domestic energy should focus on energy intensive industries. 30% of the U.S.’s energy consumption is tied to the American industrial sector. As the U.S. Energy Information Agency graph below illustrates, energy intensive industry sectors such as chemical, aluminum, glass, food products, cement and lime, iron, steel, paper and pulp, glass and refining are the prime users of American energy.


As an example, the American chemical industry is a target for an energy intensive company attraction campaign as a chemical factory’s energy consumption can constitute 80 % of the company’s costs. Look at the Louisiana Chemical Corridor along the Mississippi River from New Orleans to Baton Rouge. This $50 billion industry cluster is one of 24 regions designated for support from the federal government’s $1 billion Investing in Manufacturing Communities Partnership.

Second, the energy that is being produced in a region must be captured to serve that region. Efforts to retain and attract energy intensive companies first must solve the infrastructure puzzle that will connect their community to the oil, natural gas and even electricity flowing from new local sources. Traditional infrastructure tools such tax increment financing, tax exempt bond financing, local, state and federal grants all come into play to fund the “last mile connection” from the massive national natural gas pipeline network shown below.


Again, Louisiana is a national model as they not only have turned the Haynesville Shale into a massive opportunity for the local shale play but are the preferred location for chemical processing for much of the rest of the nation’s oil and natural gas flowing from other shale developments.

Third, regions looking to attract energy intensive companies need to develop economic development incentives to retain and attract these companies but a particular focus needs to center on a workforce certified to by ready from day one to work in the industry they are recruiting. Regions should focus on creating a workforce pipeline to develop a pool of workers trained and ready to work in the facilities for the industry in which they are required. Again, Louisiana like much of the south benefits from lower labor costs compared to the Industrial Midwest, East or West Coasts of the U.S. but the Louisiana Chemical Corridor is working to provide training to lower-skill and lower-income workers through projects like the Louisiana Workforce Commission’s Incumbent Worker Training Program to better align K-12 and higher education with workforce needs.

Fourth, regions need to develop sites to fit the unique needs of the targeted energy intensive companies. Regions looking to capture energy intensive sites need to develop large scale sites with power, road, direct rail, and, in many cases, water access. The infrastructure needs to be in place to ensure the site is shovel ready. Again, traditional infrastructure tools such as tax increment financing, utility partnerships, and local, state and federal funding will be needed to develop these sites. The Louisiana Economic Development Certified Site program creates development-ready industrial sites that has completed a rigorous review process addressing zoning restrictions, title work, environmental studies, soil analysis and surveys by Louisiana Department of Economic Development and an independent, third-party engineering firm.

Finally, the region’s energy intensive industry strength needs to be connected with a marketing campaign. First, a deep dive needs to occur within the targeted energy intensive industries to create a target list of companies. This industry and the list of companies should be the targeted for a marketing strategy built on regional brand awareness tied to this industry as well as social media, earned media, paid media, trade association and conference participation and, ultimately through direct recruitment. Again, using the chemical industry as an example, there are over 90 industries within this one industry and research needs to determine which of these industries is the best partner based upon the industry market conditions and connections to the supply chain within a region. The Louisiana Chemical Corridor is one of the nation’s most recognized chemical industry clusters which is the result of a successful global marketing campaign.

Low energy costs offer a tremendous economic opportunity but capturing that market involves a complex strategy executed to perfection.

5 Keys to State of Ohio Capital Bill Community Project Funding Request Success

Good lobbying for state of Ohio capital bill community project requests start with complying with the technical requirements provided by the Ohio Office of Budget and Management. Guidance on the upcoming state of Ohio 2017-18 capital bill is expected out soon impacting the development of economic development, arts, theater, historic sites and other community projects. In fact, state agencies have until November 16, 2015 to submit their capital bill requests for a bill anticipated in early 2016. Five technical requirements exist to developing a successful state of Ohio capital bill request.

  1. Give the request a succinct descriptive project name and project summary. A project name sells to local leaders, legislators and the Governor—all of whom need to support the project to gain state of Ohio capital bill funding. This should be a brief statement of what is being requested and why and should not be longer than one page.
  2. Develop a white paper that addresses the nature of the capital bill request. This white paper should address
    1. What is the public need for the request?
    2. What is being done now by your grouop and others to address the problem/need?
    3. What resources are being expended currently in the budget related to the request, i.e., dollars and positions?
    4. Why can the problem not be resolved within existing resources?
    5. What are the adverse impacts if this proposal is not approved? (Be realistic in this assessment.)
    6. Why are current efforts insufficient?
    7. How will the project be coordinated with other similar activities?
    8. What is the priority of this request versus other activities in which the group or others are involved?
    9. What is the authority (state/federal law, regulation, master plan, etc.) for the program activity/service?
    10. What capital appropriations have previously been authorized for this project/activity and what is the status of the project if it is ongoing in nature?
    11. What clientele are being served; who benefits?
    12. What other (similar) activities, past and present, address this general area and are they effective/efficient?
    13. How does this project/activity relate and fit into the agency’s broader capital plan over the next six years?
    14. Will this proposal actually solve a problem, and how?
    15. Is each component in the proposal essential or just desirable (i.e., needs versus desires)?
    16. Is this a high-priority long-term need; if so, how does the proposal affect the long-term problem?
    17. Why is the recommended program level the correct one?
    18. Why does this have to be done now?
    19. Are or can other non-state funding sources be made available?
    20. Are there any legal considerations?
    21. Is the proposal technologically sound?
    22. What type of cost estimation methodology was used?
    23. Will the proposal result in operational efficiencies and/or savings?
    24. What are the adverse actions that will result if the request are not funded?
  3. Focus request on allowable items. State of Ohio capital bill requests must comply with the Ohio Office of Budget and Management capital bill regulations related to which items are eligible for state capital bill expenditures. Capital appropriations for buildings or structures, including remodeling and renovations, are limited to: acquisition of real property or interests in real property (i.e., the purchase of land or easements), buildings and structures, which includes construction, demolition, complete heating, lighting and lighting fixtures, and all necessary utilities, ventilating, plumbing, sprinkling, and sewer systems, architectural, engineering, and professional services expenses directly related to the project (including feasibility studies), and machinery related to the operation or functioning of the building or structure at the time of its initial acquisition or construction. To be financed with capital funds, expenditures for equipment or furnishings that are part of a broader project or facility must meet all of the following criteria:
    1. Essential in bringing the facility up to its intended use and necessary for the facility to function. The equipment or furnishing must be an integral part of or directly related to the basic purpose or function of the facility.
    2. Have a unit cost of at least $100.
    3. Have a useful life of at least five years.
    4. Used primarily in the rooms or areas covered by the financed project. Allowable equipment and furnishings would include computers and computer peripherals, workstations, lab and research equipment, desks, chairs, tables, bookshelves, file cabinets, carpeting/flooring, blinds, and curtains provided that they satisfy all of the above criteria. An appropriation item specifically for equipment is allowable provided the equipment meets the above unit cost and useful life provisions.

Non-allowable equipment and furnishings include those not integral to the broader project or the facility’s intended use, motor vehicles of any kind (e.g., cars, trucks, modified vehicles), general supplies, low-cost equipment, equipment and furnishings being purchased as part of a regular maintenance, upgrade or replacement effort, and consumable supplies and low-cost equipment such as fuel, oil, adding machines, calculators, trash cans, common tools, paper stock, staplers, tape dispensers, etc. are not eligible uses of capital funds.

  1. Fourth, state of Ohio capital bill requests must be bondable or connected to a state agency. Thus, state capital bill requests for community projects must be owned by the state of Ohio, connected to a state program such as the Ohio Facilities Construction Commission or have a joint use agreement with a state institutions such as a public college or university. Many arts, cultural, historical and economic development projects will be funded through the Ohio Facilities Construction Commission as designated by the Governor and legislators often based upon local recommendations.
  2. Finally, gain the political support of the local legislators and community leaders. Local support is an important lobbying aspect to gain support from the Kasich Administration and legislative leaders in the Ohio House and Senate. Majority party members and key legislative leaders are generally more likely to a larger share of the capital bill but all districts with a strong lobbying effort can gain capital bill funding—remember over 300 individual community project line items were in the last capital bill.

Gaining funding from the state of Ohio capital bill for a community project related to economic development, arts, cultural, sports, historical or other project is a million dollar opportunity for many regions and a strong, well-thought out lobby effort can achieve great results.