Severance Tax – Efforts to Educate BRIAN CHAVEZ, CHRISTY CHAVEZ, MATT LUPARDUS JOE BROOKER, GENE HUCK, JERRY JAMES Proposed Tax Changes Severance Tax: ◦ Increase the Severance Tax on Horizontal Wells – 6.5% Oil, 4.5% NG ◦ Tax is assessed at the “spot price” determined by Tax Commissioner ◦ Ties the severance tax to the General Fund ◦ 20% will go to local needs, such as “road repairs and increased first responders” AFTER extracting revenues for regulatory needs ◦ Eliminates Regulatory Cost Recovery fee of $60/well/year ◦ Eliminates severance tax for wells less than 10/mcf/day ◦ Creates a $60/well “Qualified Gas Well” fee for exempt domestic wells and low producing non-horizontal wells Additional Increased Taxes: ◦ Commercial Activities Tax (CAT) Increase from 0.26% to 0.32% ◦ Sales Tax Increase from 5.75% to 6.25% and broaden the sales tax base ◦ Cigarette Tax Increase by additional $1/pack Tax increase impacts This does not only impact “Big Oil”, it impacts the local producers and future development of our state. Significantly impacts the economic development window ◦ Pushes the “sweet spot” north and east Ties revenue to the state general fund – “Reverse Robinhood” ◦ 80% to share with the state, “20%” back to the local governments; however: ◦ 5% to the endowment fund, 5% to the infrastructure fund ◦ Money dedicated to management of these and other funds ◦ If anything left of the remaining 10%, it could go back to local ◦ Easy to change the rate at any given time ◦ Can make it apply to all wells Efforts to Date SOOGA retained Lobbyists with 21 Consulting – Steve Dimon/Shawn Nelson ◦ Coordinated House Testimony ◦ Testified before the Ways and Means Committee ◦ Coordinated meetings with Legislators and members of the administration ◦ Meetings with: ◦ 37 House Representatives ◦ 14 Senate Members SOOGA, OOGA, API are all coordinated and collaborating SENATE: HOUSE: Senator John Eklund, Chair Criminal Justice Committee Rep. , House Finance member Senator Cliff Hite, Chair Agriculture Committee Rep. , House Ways & Means member Senator , Chair Transportation Committee Rep. Bill Patmon, Ways & Means member Senator Rep. John Barnes, Ways & Means member Senator Bill Beagle, Senate Ways & Means Committee Rep. Nick Celebrezze, Assistant Minority Leader Senator Dave Burke (met with his aide) Rep. Kevin Boyce, Assistant Minority Whip Senator Lou Gentile, Assistant Minority Whip Rep. Jonathan Dever, Ways & Means member Senator Keith Faber, Senate President Rep. Bill Blessing, Finance Committee member Senator , Chair Finance Committee Rep. Denise Driehaus, Ranking Minority Member of Finance Senator , Chair Insurance Committee Committee Senator Bill Coley, Chair Civil Justice Committee Rep. Fred Strahorn, House Minority Leader Senator Joe Schiavoni, Senate Minority Leader Rep. Mike Henne, Ways & Means member Senator Bob Peterson, Chair Ways & Means Committee Rep. Tim Derickson, Finance Committee member Senator Troy Balderson, Chair Energy & Natural Rep. Terry Boose, Chair Transportation & Infrastructure Resources Committee Committee Rep. Sean O’Brien, Ranking Minority Member of Energy & NR HOUSE: Rep. Doug Green, Finance Committee member Rep. Jeff McClain, Chair House Ways & Means Rep. Dave Hall, Finance Committee member Rep. Ryan Smith, Chair Finance Committee Rep. Scott Ryan, Ways & Means member Rep. Al Landis, Chair Energy & Natural Resources Rep. Bob Hackett, Finance Committee member Rep. Christina Hagan, Vice-chair of Energy & NR Rep. , Ways & Means member Rep. , Vice-chair of Finance Rep. Jack Cera, Ranking Minority Member on Ways & Means Rep. Cliff Rosenberger, Speaker of the House Rep. Rob McColley, Ways & Means member Rep. Ron Amstutz, House Speaker Pro Tempore Rep. Tony Burkley, Ways & Means member Rep. Barbara Sears, House Majority Floor Leader Rep. Robert Sprague, Finance Committee member Rep. Jim Buchy, Assistant Majority Floor Leader Rep. Gary Scherer, Vice-Chair Ways & Means Rep. Mike Dovilla, Majority Whip Rep. Brian Hill, Chair Agriculture Rep. Dorothy Pelanda, Assistant Majority Whip Rep. Andy Thompson, Chair Finance Subcommittee on Agriculture, Development, and Natural Resources CURRENT EFFECTIVE TAX RATES FOR OIL AND GAS VS. OTHER INDUSTRIES (BASED ON AN AVERAGE UTICA TYPE WELL - BLEND OF DRY GAS, WET GAS, & OIL AREAS) 5.00%

4.45% 4.50%

Income tax presumed for 4.00% pass-through entities (S Corporations, LLCs and partnerships) to reflect 3.50% an effective tax rate. INCOME, 2.05%

3.00% Sev. tax represents the current effective rate based on local natural 2.50% gas, oil, and natural gas liquids futures pricing as of 2-24-2015. 2.00% SEVERANCE, 1.14% The Ad Valorem tax is 1.50% paid directly to the County where the oil & gas activity takes place. It is similar to a property 1.00% tax, but is based on the The Oil & Gas Industry AD VAL, 1.00% oil / gas reserves pays the C.A.T. in produced during the tax 0.50% year. This tax is paid in 0.26% addition to the many other taxes listed. "arrears", so there is a 2 CAT, 0.26% CAT, 0.26% year delay from when 0.00% the activity takes place to OTHER INDUSTRIES OIL & GAS INDUSTRY when tax payments are (C CORP STRUCTURE) (S CORP OR LLC STRUCTURE) actually received.6 PROPOSED EFFECTIVE OHIO TAX RATES FOR OIL AND GAS VS. OTHER INDUSTRIES (BASED ON AN AVERAGE UTICA TYPE WELL - BLEND OF DRY GAS, WET GAS, & OIL AREAS) 12.00% Income tax presumed for pass-through entities (S 10.34% Corporations, LLCs and partnerships) to reflect 10.00% an effective tax rate. INCOME, 1.72% Sev. tax represents what would be the effective rate based on the higher 8.00% spot price of natural gas (as determined by Tax Commissioner) and not the lower actual price received by Ohio 6.00% producers. This rate is also a blend of the tax paid on natural gas, oil, SEVERANCE, 7.30% and natural gas liquids.

4.00% The Ad Valorem tax is paid directly to the County where the oil & gas activity takes place. It is similar to a property tax, but is based on the 2.00% The Oil & Gas Industry oil / gas reserves pays the C.A.T. in produced during the tax addition to the many year. This tax is paid in AD VAL, 1.00% 0.324% other taxes listed. "arrears", so there is a 2 year delay from when CAT, 0.32% CAT, 0.32% 0.00% the activity takes place to OTHER INDUSTRIES OIL & GAS INDUSTRY when tax payments are (C CORP STRUCTURE) (S CORP OR LLC STRUCTURE) actually received.7 OHIO DRILLING RIGS RUNNING DECEMBER 2010 - APRIL 2015 50 $4.0 BILLION PER YEAR DROP IN 45 CAPITAL INVESTMENT IN OHIO SO FAR DUE TO 23 RIG LAYDOWNS. 40 23 RIG LAYDOWNS X 18 WELLS PER RIG PER YEAR X $10 MILLION CAPEX PER WELL = $4.0 BILLION PER YEAR 50% DROP IN LAST 35 3 MONTHS

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# RIGS 25 DEC. 2012: FIRST UTICA 20 PERMIT ISSUED ONE RIG LAYDOWN = LOSS OF AT LEAST 120 DIRECT & INDIRECT JOBS*. 15 - In Ohio, 23 rigs have been laid down, which equates to 2,760 jobs lost since January - If the average wage is $60,000/year, that would be 10 over $160 million/year in total lost wages *Source: Domestic Energy Producers Alliance & Continental Resources 5

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YEAR Source: Baker Hughes CAPITAL INVESTED IN OHIO ON UTICA SHALE SINCE 2010 TOTAL: $30.4 Billion

$13.7 Billion on Pipelines1

$4.1 Billion on Midstream1

1Source: Bricker & Eckler Economic Development Study $12.5 Billion on 2 Source: ODNR; $10MM/well for Well Drilling2 "Producing" or "Drilled" status and $5MM/well for "Drilling" status

NOTE: Estimate does not include lease bonuses paid to landowners, which is likely greater than $1 billion. 9 Feedback Thought the Severance Tax will only impact “big oil” Believe Gov’s “two dimes” rhetoric ◦ Did not fully understand all the taxes the Ohio Independent Producer pays Most meetings have the same theme: ◦ Tell our story, share our graphs, explain the impacts to us and our communities ◦ Vast majority of the meetings end with a much better understanding Status House of Representatives removed all tax increases from budget bill Next the Budget Bill goes to Senate for consideration ◦ 23 of 33 members are Republican but indications are that they are likely to put tax increases, including Severance Tax, back into the budget If Senate puts taxes back in, the bill goes into a “Conference Committee” with members trying to work out differences. ◦ Negotiations and compromises Governor has Line Item Veto power on a budget bill ◦ Likely will remove any positives negotiated and leave us with the tax increases What to do: Keep educating at every opportunity Contact every Legislator you know and let them know the answer is: “no tax increase” ◦ Industry has spent money, provided jobs, local economies, etc.. ◦ Rig count is dropping dramatically ◦ Speak up at this meeting today and tell the legislators what you think of sending money from this area to pay for a small tax decrease for folks in Cleveland, Cincinnati, Columbus, Toledo, etc ◦ Which Republican Senator ran on a platform of raising taxes? Join the Protect Ohio Jobs Coalition ◦ Contact: Mike Chadsey, OOGA