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.