After three years of declines, the Pennsylvania Independent Fiscal Office (IFO) on Thursday forecast that the impact fees natural gas producers pay in the state could increase by up to $49 million this year depending on two scenarios.
With benchmark natural gas prices trending higher this year compared to last, and with new horizontal well spuds through the first six months of the year well above where they were during the same period in 2016, the IFO expects impact fee collections to increase.
The fee is levied annually on all unconventional wells in the state during their first 15 years of operation, as long as they produce more than 90 Mcf. It is not a volumetric fee, but rather one calculated using a multi-year schedule based on the average annual price of natural gas. The fee schedule, and the amount companies must pay for each well, depends on the number of years they've produced. Fees are highest for wells in their first operating year.
Although the impact fee doesn't react directly to the price of natural gas, annual collections can decline when there are not enough new wells to offset reduced collections from older wells as their fees decline.
Last year, the state collected $173.3 million in impact fees -- a decline from the $187.7 million collected in the prior year. Pennsylvania shale gas production increased 11% year/year to 5.1 Tcf in 2016, despite the fact that the number of new unconventional wells drilled hit the lowest point since 2008 at 504. Shale producers relied heavily on a deep backlog of drilled but uncompleted wells to grow production during a year in which it fell across the Lower 48 for the first time since 2005.
From January to June of this year, the IFO said, 398 new horizontal wells were spud, a 118% increase over the same period last year. Through the first seven months of the year, the office said, benchmark natural gas prices have averaged $3.22/MMBtu, while future prices for the remainder of the year are averaging $3.15, for an estimated calendar year average of $3.19. If the price reaches above $3, IFO said the fee schedule would increase by $5,000 per well.
Under two scenarios put forward by the IFO, the impact fee should increase. In both, the office expects a moderate increase in the number of new wells spud, among other similarities. The difference between the scenarios is whether or not a fee schedule increase occurs. If nothing changes from 2016, the IFO forecasts that impact fee collections would increase by $8.7 million from last year's total. If the fee schedule changes, the IFO expects collections to increase by $49 million.
Despite a slight price increase last year, the price of natural gas remained near its lowest point in the last decade at an average of $1.55. Combined with fewer new wells drilled, that helped reduce collections. The IFO said producers paid an effective tax rate of 4.5% in 2016, down from 6.3% the prior year on the lower market value of natural gas. But as a debate continues in the General Assembly about whether to enact a separate severance tax on natural gas production to plug a $2 billion budget deficit, some in the industry have noted that when producers factor in post-production costs and their actual realizations, they typically incur a higher effective tax rate.
Producers are required to self-report and submit annual impact fee payments to the state Public Utility Commission by April 1. Annual collections are announced after that deadline and distributed to local governments and state agencies to provide for infrastructure, emergency services, environmental initiatives and other programs.