Did PA DEP Undercount Act 13 Wells & Forfeit $303M in Revenue?

Note: MDN’s headline originally stated “$100M” in revenue was forfeited. The study’s lead author, Joel Gehman, contacted MDN to correct that number. We misunderstood. They believe the DEP has forfeited two to three times that amount: $205-$303 million.

In an attempt to shame the Pennsylvania Dept. of Environmental Protection (DEP) into action to improve their data reporting for unconventional shale wells, researchers at the University of Alberta and McGill University (both in Canada) have published a paper in the journal Environmental Practice claiming the DEP undercounted the number of natural gas wells used for assessing the new Act 13 impact fee, thereby denying the state an extra $100 $205-$303 million they could have received in tax revenue (see article below).

The article/study is titled “An Analysis of Unconventional Gas Well Reporting Under Pennsylvania’s Act 13 of 2012” and is peer reviewed, which supposedly blesses it as being accurate. However, the PA DEP strongly objected to the methodology used by the researchers and has said, point blank, they misunderstand the Act 13 requirements for what constitutes an unconventional well under the Act 13 law. DEP says there is no missing tax revenue due to an undercount. The researchers glibly reply the purpose of the article is to needle the DEP into “fixing” their data problem.

Here’s how the kerfuffle is being reported:

Pennsylvania and its counties and municipalities may have missed out on as much as $303 million in gas well impact fees in 2012 because state regulators undercounted the number of wells covered by the law, according to an article published this month in the journal Environmental Practice.

The state Department of Environmental Protection was required by the updated drilling law, known as Act 13, to compile a list of all unconventional gas wells that have been "spud" in the state – the first step of drilling. But in a case of "potentially widespread and systemic omissions," the department likely left between 15,300 and 25,100 wells off its list because of errors in its own databases and a failure to include early wells drilled deep into rock formations that fit the law’s definition of unconventional wells, researchers at the University of Alberta and McGill University reported in the peer-reviewed paper released late last week.

DEP called the article "fundamentally flawed" in its conclusions and argued against it being published.

According to the paper’s authors, the missing wells include more than 1,500 recently spud Marcellus Shale wells the researchers found by comparing five DEP databases that report differing information on the number of wells that have been drilled or inspected or produced waste or gas.

The researchers also tallied nearly 9,800 deep wells spud between 1888 and 1991 that pierced the Tully Limestone, a geological formation deeper than shales they said should have triggered the wells’ definition as "unconventional" under the law. And they count about 4,000 wells drilled between 1992 and early 2007 into the Medina Group, a formation they said requires hydraulic fracturing to produce commercial amounts of gas.

The authors have identified 15,300 of the wells by name, number and location. Another 9,800 deep wells identified by the state Bureau of Topographic and Geological Survey would also fit the "unconventional" definition, but are considered "missing" from the state’s records, they found.

If all of the known and probable wells identified by the researchers had been levied impact fees in 2012, the state would have collected an additional $303 million – more than double the $204 million the state did collect.

In a response to the article, the state disputed the researchers’ interpretations of key terms in the law and argued they ignored its legislative intent and the department’s work to improve the list.

A DEP spokesman said the department provided an accurate and complete list of unconventional wells to the state Public Utility Commission, which collects and administers the fee, and the wells the researchers identify as omitted were never subject to the fee.

"The authors of this report simply do not understand the criteria for what is and is not eligible for the impact fee, despite having been presented information in the past that clearly explained this to them," DEP spokesman Kevin Sunday said.

"Pennsylvanians are not missing out on any impact fee revenue whatsoever."

The researchers acknowledge their primary goal was less counting the money than highlighting DEP’s "long-standing problem" with information management and offering "rather straightforward" suggestions to address it.

"Act 13 basically put a dollar sign on not getting this right," the study’s lead author, Joel Gehman, Ph.D., an assistant professor of strategic management and organization at the University of Alberta, said Wednesday.

"What I really want is for them to just fix the problem and give us good, clean data."*

*The Scranton (PA) Times Tribune (Jan 10, 2013) – Article: DEP missed more than 15,000 wells in impact fee count

MDN located the manuscript version of the article and has embedded it below. You will notice is says “insert table/figure x about here” in a few places. According to Gehman this was the manuscript version of the paper with instructions for the typesetter. The tables and figures referred to are located at the end of the manuscript.