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Pennsylvania Projected to Lose Millions in Impact Fee Revenue

Pennsylvania could see a significant decline in impact fee revenue from shale gas wells this year, and could receive the smallest amount since the controversial fee was enacted in 2012, according to projections by the commonwealth's Independent Fiscal Office (IFO).

In a six-page report released Monday, the IFO said a combination of factors -- low natural gas prices, fewer new wells drilled and existing wells paying lower fees -- could cause impact fee revenue to decline somewhere between $14.9 million and $33.9 million. The commonwealth received $223.5 million in impact fee revenue in 2014.

The IFO said the average natural gas price on Nymex is projected to fall below $3.00/MMBtu this year. At that price, revenue would decline by $5,000 per well compared to 2014. The Henry Hub spot price -- upon which Nymex, and consequently the impact fee, is based -- has been forecast by Bentek Energy to average $2.72/MMBtu in 2015, according to the IFO.

However, the Energy Information Administration said Tuesday that it thinks the 2015 average will be $2.97 (see related story)

Fewer shale gas wells are also being drilled in Pennsylvania. According to figures from the state Department of Environmental Protection (DEP), there was a 30% decline in the number of new horizontal wells spud between January and June. That doesn't bode well for the state, the IFO said, because wells pay the highest impact fee during their first year of operation, and revenue from new wells help offset a decline in revenue from existing wells.

According to the IFO, new wells spud in 2015 are projected to account for 24.7% of impact fee revenue, or $48.4 million, for the year. That's down from previous years -- new wells accounted for 29.5% ($59.7 million) of revenue in 2012; 26% ($58.6 million) in 2013; and 30% ($67.1 million) in 2014. By comparison, existing wells will account for 75.3% ($147.7 million) of revenue in 2015, up from 70.5% ($142.8 million) in 2012; 74% ($167.1 million) in 2013; and 70% ($156.4 million) in 2014.

DEP data also showed that 252 horizontal wells were now in their fourth year of operation, while another 468 horizontal wells were in their fifth year. Both sets now qualify for the state's stripper well exemption.

The IFO laid out three possible scenarios. Under the first, where the number of horizontal wells spud is unchanged from 2014, impact fee revenue would still decline by $14.9 million. A second, baseline scenario, which the office said is "more plausible," would see a $27.4 million decline. The latter assumes a 20% decline in the number of wells spud in 2015, and a 25% increase in wells achieving stripper status.

"Even under very optimistic assumptions, 2015 impact fee revenues will decline substantially if the fee schedule is reduced due to the low NYMEX price," the IFO said.

A third, current trend scenario by the IFO projects a $33.9 million decline in revenue, thanks to a 30% reduction in the number of horizontal wells spud and a 50% increase in the number of wells achieving stripper status.

"Low regional prices motivate much of the recent decline in drilling activity," the IFO said. "DEP production reports through April 2015 also reveal significant unused production capacity. The reports show 973 wells currently spud but not completed and 760 wells that are shut-in.

"This large inventory of non-producing wells, as well as low spot prices, suggest that new drilling activity will not offset reductions from the first half of the year."

The IFO said that while impact fee revenue may decline, "low regional gas prices imply a much higher ETR [effective tax rate] for 2015.

"Going forward, new pipeline capacity should facilitate a recovery in regional gas prices, an increase in the market value of gas production and lower ETRs. The level of future ETRs will depend on regional prices, production levels and impact fee remittances."

The IFO added that Bentek projects that by 2018, regional prices will revert to their 2013 levels and production will nearly double. "If those assumptions hold and impact fee revenues do not change, then the computed ETR would fall by roughly half from 2013 (2.5%) to 2018 (1.3%)."

Lawmakers in the Pennsylvania General Assembly and Gov Tom Wolf are at loggerheads over the merits of enacting a severance tax on oil and gas production, and are grappling to pass a state budget (see Shale DailyJune 29).

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