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Pennsylvania Natural Gas Impact Fee on Its Last Lap

As a compromise bill to impose an impact fee on unconventional natural gas plodded through the Pennsylvania legislature Tuesday, Gov. Tom Corbett assumed a favorable outcome, commending lawmakers for their cooperation, saying he was "looking forward to signing the legislation into law."

The state Senate did its part Tuesday morning, voting 31-19 for the bill, which could generate estimated industry payments of $190 million this year, to be divided 60/40 between the state and individual communities. The state House was expected to vote Tuesday night or Wednesday, ending more than three years of wrangling over legislation to tax natural gas production.

This time around both houses of the legislature have a Republican majority, and Corbett is a Republican, which may be why the legislation is called a "fee" and not a tax, an end-around for lawmakers who had signed the Tea Party pledge against new taxes.

In his speech, the governor also commented on the additional jobs the energy industry has brought to the state and "the estimated 40% average drop in home heating prices" for natural gas users. "Right now we are hard at work to bring a major natural gas processing plant to southwestern Pennsylvania," Corbett added (see Shale Daily, Dec. 5, 2011).

Not everyone was as happy with the bill as the governor.

"I don't know anything about sausage, but I can't believe it'd be any worse than making this," Lou D'Amico, president of the Pennsylvania Independent Oil and Gas Association (PIOGA), said about the three-year slog to negotiate the legislation.

Speaking at PIOGA's winter meeting on Tuesday morning, D'Amico offered limited praise for parts of House Bill 1950, but he said it would generally create economic and regulatory hardships for the industry. "Overall, our position is: we don't really care for this bill," he said, but added "this is probably the least impact, financially, we're going to get."

A Republican-led joint House-Senate conference committee approved a 174-page bill Monday night by a 4-2 party-line vote. The bill would allow counties to impose a fee on unconventional gas wells, upgrades drilling rules and regulations and sets up a program incentivizing natural gas vehicles (see Shale Daily, Feb. 7). Revenue would be split, 60% to the counties where the wells are drilled and 40% to the state. Counties could elect not to participate in the program, thereby forfeiting revenues.

The bill is designed to cover impacts of development that D'Amico believes the industry is already covering. As a result, he thinks counties will either opt out of the program for fear of pushing away a potential larger source of voluntary industry dollars, or that the industry will end up "paying twice."

For instance, while HB 1950 would set aside money for road maintenance, the industry has paid $420 million to repair roads in Pennsylvania over the past four years, according to D'Amico. "We've already been spending money on these impacts," he said. "What's going to happen now? I don't know."

The proposed fee would be tiered based on the average annual price of gas and adjusted for inflation. The fee would range from a floor of $40,000 per well to a ceiling of $60,000 per well during the first year and would decline every year according to a set schedule. That structure would generally raise between $190,000 and $355,000 per well over 15 years after the spud date.

The draft bill would require fee payments for unconventional wells spud in 2011 and prior to 2011 by Sept. 1, 2012. After that fees would be due annually on April 1 of the following year.

By starting from the spud date, rather than the start of production, though, the fee would burden drillers constrained by midstream bottlenecks, D'Amico said. Some operators must wait three to four years to begin production after drilling wells because of the lack of gathering lines across much of the state. "They've collected no money in that three to four years, but they'll be expected to pay a fee," he said.

And by imposing an annual fee that begins when a well is spud, operators that drill wells late in the year could also end up paying their first two years of the fee in a matter of months, according to D'Amico.

The fee structure includes five tiers based on average prices from the New York Mercantile Exchange (Nymex). "That would be somewhat of a fair thing if people were actually getting that price," D'Amico said, but production in prolific northeastern Pennsylvania is trading at a discount to Nymex.

Additionally, he said, the fee adds to a high tax burden for industries in Pennsylvania, including a corporate net income tax, a stock franchise fee and what D'Amico considers excessive regulation.

PIOGA is also worried that if future lawmakers ultimately impose a traditional severance tax on natural gas production, the current impact fee would remain on the books, doubling the tax burden on drilling.

Despite those complaints, PIOGA isn't entirely unhappy with the bill.

The group is pleased that HB 1950 would not impose a fee on conventional gas wells and would impose a smaller fee on vertical unconventional wells than their horizontal counterparts. It is also pleased that the bill would restrict the ability of local governments to regulate development, something PIOGA believes the state needs, even though the legislation does not completely pre-empt local control.

The measure is unpopular among critics of shale development. "The revisions we have seen are just lipstick on a pig," said Jan Jarrett, CEO of Citizens for Pennsylvania's Future. "Under the revised proposal, the drilling fee will be among the lowest in the nation, making Pennsylvania a laughing stock for allowing its natural resources to be plundered with little benefit to the citizens."

Provisions of the bill state a county electing to impose a fee will have to pass an ordinance to that effect within 60 days of the effective date of the legislation. If a county does not file during the time allotted, then during the following 60 days if at least half of the municipalities or municipalities representing at least 50% of the county's population, adopt resolutions electing to impose a fee, the fee shall be imposed.

A provision setting aside funds to promote natural gas vehicles would focus on dedicated vehicles of at least 14,000 pounds fueled by compressed natural gas (CNG) or liquefied natural gas or bi-fueled vehicles, using CNG and either gasoline or diesel. Fifty percent of the funds would go to local transportation organizations. Other organizations which plan to convert five or more eligible vehicles could receive funding to help pay the incremental cost of conversion to natural gas fuels.

The legislation also includes a host of new rules affecting well permits, well locations, input from affected municipalities, containment of drilling fluids and protection of water supplies, handling of wastewater, well site restoration and well control emergency response.

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