After more than three years of wrangling, Pennsylvania lawmakers have passed an impact fee on unconventional gas drilling, but as the bill awaits an anticipated signature from Gov. Tom Corbett, it is garnering plenty of disdain from detractors and backhanded compliments from supporters.
The Republican-led state Senate approved House Bill 1950 by a 31-19 vote last Tuesday and the Republican-led state House of Representatives followed suit the next date by a vote of 101-90. Corbett has indicated that he will sign the bill (see related story).
HB 1950 updates Pennsylvania's oil and gas statutes for the first time in nearly three decades, attempts to standardize local zoning and imposes an annual per-well fee on unconventional drilling. The bill would allow counties to impose an annual fee on unconventional gas wells at a tiered rate based on the average annual price of gas at the Henry Hub as quoted by Nymex and adjusted for inflation. The state public utility commission will collect and dole out the fees.
The fee could generate around $180 million in its first year by charging between $40,000 and $60,000 per horizontal unconventional natural gas well, with the per well rate declining thereafter (up to 25% of that amount for vertical shale wells). That structure would generally raise between $190,000 and $355,000 per well over 15 years after the spud date.
Despite the declining rate per well, the tax is expected to raise more each year as drilling increases.
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. 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.
The bill effectively balances the need for state and local revenue, regulatory certainty for industry and environmental safeguards, according to Senate President Pro Tempore Joe Scarnati, a central Pennsylvania Republican and for the past year a driving force behind the impact fee legislation.
"The Marcellus Shale industry is here to stay in Pennsylvania -- bringing us jobs, huge economic benefits and the potential for energy independence," Scarnati said. "It makes sense to impose a reasonable impact fee on the industry to provide the funding necessary to further protect our natural resources, particularly at a time when our state is being forced to stretch our tax dollars."
However, State Sen. John Yudichak, a Democrat from northeastern Pennsylvania and a dissenting member on the conference committee that drew up the final legislation, called HB 1950 "the art of maybe...Maybe a fee is imposed by counties, maybe jobs will be created, maybe environmental regulations will be enforced to protect our environment. Maybe," he said. "Pennsylvanians deserve better than maybe when it comes to an opportunity to breathe clean air and drink clean water."
In particular, Yudichak scoffed at the idea of counties where drilling occurs choosing whether to impose a fee administered by the state, calling the approach unique among industries in Pennsylvania. With only 40% of the proceeds from the fee going to the state coffers and 60% to counties and municipalities directly impacted, that provision limits state revenue, he said. Additionally, he noted that his home county of Luzerne, in shale country but without any operating wells, would not get a share of the county pie despite hosting pipelines and compressor stations.
The bill would give counties the authority to opt-out of the fee, but that decision could be overruled by a majority of the municipalities within that county. Only counties that participate in the fee would get to collect revenue from it. Of the money designated for local governments -- 60% of the total revenue collected -- 37% would go to municipalities that host drilling, 36% would go to counties that host drilling and 27% would go nonhosting municipalities in host counties.
Statewide, the bill sets aside money for environmental and emergency programs, as well as for economic development projects such as alternative fuel vehicles and downstream processing plants. It also offers tax breaks to large businesses could also be used to help the state lure an ethane cracker and the thousands of jobs it would provide. The bill would add up to 15 new Keystone Opportunity Zones (KOZ) to the state and offer incentives -- namely tax exemptions, deductions, abatements and credits -- for 10 years. Companies that invest at least $1 billion and create at least 400 new, permanent, full-time jobs within seven years would qualify for another five years of the incentives, for a total of 15 years.
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.
State Rep. Jesse White, a Democrat from southwestern Pennsylvania and the founder of the Marcellus Municipal Cooperative, compared HB 1950 to the sale of Manhattan for $24 in trinkets. Pointing to Range Resources Corp., the most active company in his district, he said, "How can you cry about how hard it is to operate over the same period of time your stock price doubled?" White believes the bill is "loaded with goodies for the industry," pointing to a provision that he claims would subsidize temporary housing for out-of-state workers at the expense of local hotels.
Numerous legislators -- especially Democrats and lawmakers from southeastern Pennsylvania, the most populous region of the state and also the only region that doesn't overlie the Marcellus Shale -- called for the House to vote against the bill in order to get a larger impact fee, stricter regulations or more local control. However, many also called for a compromise, saying that more discussion would further delay the flow or revenue and the implementation of shale-specific regulations.
But House Majority Leader Mike Turzai, a Republican from southwestern Pennsylvania, closed the debate by saying, "Either you are for a common sense, balanced approach to the development of the natural gas discovery, or you are just always 'no.' You don't get to have it both ways."
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