Pennsylvania may miss out on Marcellus riches
The first round of Pennsylvania’s natural gas impact fee has been collected and the media is crowing. Collections of the fee, which applies to drilling in horizontal and vertical wells regardless of their production, came in at $197 million, according to the state Public Utility Commission. This figure is about ten percent higher than a recent legislative report had predicted, and is assessed on wells drilled through December 2011.
Media and fracking proponents are focusing on the fact that revenues bested the legislative estimate, but no one has taken the trouble to measure fee revenues against what the state could have collected if they had followed the practice used by other energy rich states like Oklahoma and Texas. All other energy-producing states collect severance or royalty fees based on well production. I have never understood why Pennsylvania chose the flat fee. However, Governor Tom Corbett and state Senate President Joseph Scarnati, who pushed the legislation, have received substantial contributions from gas companies and drillers.
The Pennsylvania gas fee — dubbed an Impact 13 fee — is a fee assessed on the well itself. The fees rapidly step down from $50,000 per well in the first year of production to $20,000 per well in the fourth year (based on natural gas prices between $3.00 and $4.99 per thousand cubic feet). After the 11th year of production, the fee is $10,000 per well. The fee step-down, which varies with the price of gas, can be seen in the chart above.
The impact fee step-down mirrors the decline in production that gas wells typically encounter. When a new well is drilled, the underground natural gas is often under pressure and it quickly rises to the well-head. As pressure diminishes, the well production declines.
Four legislative plans were proposed for taxing natural gas drilling in Pennsylvania. Three of them would have imposed a five percent severance or royalty on drillers. These proposals eventually were defeated in favor of a flat fee. The way to evaluate the fairness of the current impact fee is to compare the revenue that was just collected against the proposed five-percent fee using production data from last year.
According to the Pennsylvania Department of Environmental Protection, gas production reached 435 billion cubic feet in the first six months of 2011. If we double this figure and use a wellhead price of $4 per thousand cubic feet (mcf), fees would have been $174 million. That is $23 million less than the revenues raised by the impact fee.
But 2012 production has doubled to 895 billion cubic feet of gas during the first six months of 2012.
Even when we reduce the gas price to $3, projected 2012 state severance revenues would be $268 million. Under the current impact fees, collections will likely be between 15 percent and 30 percent less than 2011, since the per-well fee declines to $35,000 from $50,000. This would net the state approximately $137 million for 2012. This decline comes from the fees stepping down between year one and two, and also because the wellhead price of gas has gone below $2.99 mcf. There will be an increase in the number of active wells between 2011 and 2012.
A Post-Gazette analysis of state Department of Environmental Protection data shows drillers are picking up stakes in northeast Pennsylvania, long the center of shale development, and moving in greater numbers to Western Pennsylvania and Ohio. Over the last year, the number of drill rigs boring wells in Pennsylvania dropped from 115 to 78, while drills in Ohio increased from 12 to 20.
Fewer drill rigs boring new wells in Pennsylvania means less revenue from high early year impact fees. With another year of data it will be very clear to Pennsylvania residents whether they are missing out on the riches of their Marcellus shale gas reserves.