PA Shale Wells Drilled Soars 56% in 2017; Impact Fee Up $5,400/Well

In early 2012, Pennsylvania enacted the most sweeping rework of oil and gas laws in the state in decades (see Gov. Corbett Signs New Marcellus Drilling Law). Called Act 13, one of the provisions of the law is an “impact fee” collected on each horizontal shale well drilled. The fee is intended to offset the impacts of drilling in places where drilling happens, hence the name. However, in order to get enough support to pass Act 13, politics were played and 40% of the “fee” got re-allocated to non-impact uses–i.e., 40% of the fee became a tax (see PA’s New Tax on Drilling (er Sorry, Impact Fee)). In reality, PA’s impact “fee” is the equivalent of a severance tax. The main difference is that the fee is calculated according to a sliding schedule based on how long a well has been around. Beginning with the first year a shale well is drilled, and every year thereafter, drillers pay a set fee, regardless of how much gas is produced. If a driller drills a well but doesn’t complete it in year one, that driller still pays the same (very steep) fee, regardless of no production. In that way, an impact fee is superior to a severance tax as a revenue generator for the state. Impact fees are paid for 15 years. In setting up the somewhat complicated schedule for how much a driller will pay, it depends on how old the well is. The PA Public Utility Commission (PUC), the agency in charge of assessing and collecting the fee, periodically adjusts the fee schedule up to account for inflation. The fee assessed depends on how much the price of natural gas is selling for at the benchmark Henry Hub trading point (in Louisiana). In 2017 (which collected fees from drilling in 2016), if the price of natgas at Henry Hub averaged between $2.26 – $2.99 for the year (which it did, at $2.46/Mcf), the impact fee for a newly drilled well during the year of 2016 was $45,300. In 2018 (collecting fees from 2017), the price of natgas at Henry Hub was in the next higher bracket, averaging between $3.00 – $4.99 (2017 averaged $3.11/Mcf). So the fee for first year wells drilled last year will be $50,700–which is $5,400 higher than a driller would have paid the previous year. Our point: Drillers in PA pay big bucks in “fees” (i.e. taxes) to drill in the state. Slapping a severance tax on top of the impact fee would be a disaster, virtually shutting down any new Marcellus drilling. Yet that’s what Gov. Wolf and his Democrat comrades insist on doing. Below is the newly released impact fee schedule for 2018 (covering wells drilled in 2017), along with details on the whopping increase in the number of wells drilled in 2017 vs. 2016…

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