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PA Impact Fees Seen Declining in 2016 and Beyond on Lower Prices, Less Drilling

Unless shale drilling activity increases meaningfully or natural gas prices spike, Pennsylvania's 2016 impact fee collections from producers could again decline, the state's Independent Fiscal Office (IFO) said in a report.

While many analysts are projecting firming natural gas prices heading into the end of the year and into next on increasing demand and slowly dwindling gas supplies, even at current trends the IFO predicts that the state's impact fee collections could still decline (see Daily GPI, June 1; June 23). In June, the state said it collected $187.7 million from producers in 2015 impact fees, or $35.8 million less than what it collected in 2014 as a result of the steep year-over-year decline in benchmark prices (see Shale Daily, June 16).

Depending on a variety of scenarios that include current trends holding-up through the end of the year, a drilling pick-up or a fee reduction, the IFO said 2016 impact fee collections are likely to be between $129.3 million and $170.6 million.

While the impact fee has brought in more than $1 billion since it was enacted in 2012, the state Public Utility Commission, which collects the fee, said shale producers paid about $5,000 less per well in impact fees for the 2015 collection year (see Shale Daily, Feb. 1).

The fee is charged for all unconventional wells in the state during their first 15 years in operation, regardless of how much they produce. It is calculated with a multi-year schedule based on the average annual price of natural gas. The average New York Mercantile Exchange price for 2015 was $2.66/MMBtu, down from $4.42/MMBtu in 2014, which lowered the 2015 fee schedule.

If the average price falls below $2.25/MMBtu during 2016, the IFO said, the impact fee schedule would decline by another $5,000 per horizontal well compared to 2015. Through the first six months of the year, the NYMEX price averaged $2.11. The IFO expects the benchmark price to average $2.73/MMBtu for the last six months of the year for a 2016 average of $2.38, or just above the threshold for lowering the impact fee again.

Wells spud between January and June of this year declined by 60% compared to the same time in 2015, according to the Pennsylvania Department of Environmental Protection (DEP). No vertical wells, some of which pay the impact fee, have been spud this year. Wells in their first year of operation pay the impact fee at the highest level.

"Revenues from new wells are important to total impact fee collections because they offset the decline in fees received from existing wells as they age," the IFO report said.

During 1Q2016, horizontal wells in the state produced 1.275 Tcf of natural gas, or 12.8% more than the 1.130 Tcf they produced at the same time last year. Those gains were driven largely by wells spud in 2014. That year, 1,352 wells were spud, of which 1,006 produced gas in 1Q2016. In 2015, however, just 784 wells were spud of which 219 produced gas in 1Q2016, according to DEP data compiled by the IFO.

Pipeline capacity delays and NYMEX futures that show gas hovering at or below $3/MMBtu, and Appalachian basis differentials that are expected to continue trending below the benchmark in the coming years, are likely to subdue drilling activity through 2018, the IFO said. That would also curtail impact fee growth.

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