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Fewer New Wells in 2016 Has PA Forecasting Another Impact Fee Decline

Pennsylvania's Independent Fiscal Office (IFO) this week revised its outlook for 2016 impact fee collections, saying they would once again decline compared to 2015 but not as sharply as the office once thought or as they have in the past.

The IFO now estimates that the state would collect $174.6 million in impact fees from unconventional natural gas wells in 2016, or $13.1 million less than the amount collected for the prior year. While the forecast is an improvement from one the office released in mid-2016, it still reflects how the commodities downturn has hampered natural gas development in the state over the last couple of years.

The fee is levied on all unconventional wells in the state during their first 15 years of 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 fee schedule and the amount companies must pay for each well depends on the number of years they've produced. Although the impact fee doesn't react directly to the price of natural gas, collections are again expected to decline because fewer wells were drilled last year and the fee is highest for those in their first operating year.

Revenue from the 503 new wells spud in 2016 is not expected to offset reduced collections from older wells as their fees decline. The IFO estimated that this would negatively affect fees by $9.6 million, while reduced collections from newly exempt wells (those falling below the 90 Mcf/d threshold) and other variables such as disputed fees would cost $3.5 million.

Unconventional wells drilled peaked at 1,370 in 2014. After the downturn hit in the middle of that year, shale producers drilled 785 wells in 2015, according to the Pennsylvania Department of Environmental Protection.

Impact fee collections were $187.7 million in 2015, or $35.8 million less than what was collected in 2014. Shortly after the 2015 collections were announced by the state Public Utilities Commission (PUC) -- which oversees them -- the IFO projected last July that they would again decline to between $129.3 million and $170.6 million in 2016.

Since then, commodity prices have started to inch back up. The U.S. Energy Information Administration said earlier this month that it expects Lower 48 natural gas and crude oil production to trend higher this year compared to last, reflecting rising prices. Producers have picked up activity as well. At the end of last week, 694 rigs were running in the United States, up 57 from the same time last year. In Pennsylvania, there were 33 rigs running, up from 23 a year-ago.

Producers are required to self-report and submit annual impact fee payments to the PUC by April 1. Annual collections are announced after that deadline. Since the fee was enacted in 2012, the state has collected more than $1 billion for distribution to local communities and state agencies.

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