When Gov. Tom Corbett approved Act 13 last month, he gave county officials across the state 60 days to impose an annual fee on unconventional gas wells, or to opt-out. With five weeks until the April 14 deadline, almost all of the eligible counties are on the road toward imposing the fee, but the biggest potential hold-out also happens to be the most active county in the Marcellus Shale (see Shale Daily, Feb. 15).
The first payments cover horizontal unconventional gas wells drilled before the end of 2011, some 3,987 wells in 37 counties, according to the Pennsylvania Department of Environmental Protection (DEP). The figures vary from estimate to estimate because some wells are inactive, and because operators must pay a lower fee for vertical wells drilled into deep shale formations. The standard fee is set at $50,000 per well for its first year, meaning the program could bring in $200 million this year for state and local programs.
But with 77% of those wells focused in just six counties -- Bradford, Tioga, Washington, Susquehanna, Lycoming and Greene -- the revenue projections are in the hands of a small group of local officials. And the biggest of that bunch is also the biggest question mark.
The 992 horizontal unconventional gas wells drilled in Bradford County through the end of 2011 account for nearly a quarter of all drilling in the state and could bring in nearly $50 million by some estimates.
But with two of the three commissioners publicly taking opposing positions on the fee, the issue could ultimately come down to the vote of the remaining commissioner, Doug McLinko. Although McLinko has said he doesn't support the fee, in particular for its retroactive elements, he recently told the Towanda Daily Review that he might vote to impose it if the program has enough support at the municipal level.
Under the rules of the program, if a county chooses not to approve the fee this year, a majority of the municipalities within that county would have until June 13 to vote to overrule the decision and opt-in.
Because 60% of the revenue stays at the local level, Bradford and its municipalities could be walking away from millions if they opt out. And because 40% goes to the state, their decision affects agency budgets.
The DEP says that uncertainty is not problematic. "We're not back-filling at DEP with these funds. We're supplementing. If we get them, and when we get them, we will use them in an appropriate fashion," DEP Secretary Michael Krancer told the state Senate Appropriations Committee during recent budget hearings. "We are humming along quite well, and will continue to do so, on the basis of the fees that are generated through permitting" and efficient governance.
As Bradford deliberates, its most active operator, Talisman Energy Inc. with 480 wells, is critical of the fee.
"I have to say that an impact fee coming in at a time when gas prices are $2.50/Mcf clearly doesn't help in any way, shape or form as the industry is looking to make returns in a very difficult environment," head of North American Operations Paul Smith told analysts recently (see Shale Daily, Feb. 16). "Our personal view is: it's done. The impact is relatively modest. But it does impact all of us producers in the Marcellus."
The region of northeastern Pennsylvania that includes Bradford County is the heart of the dry-gas window of the Marcellus, where companies have been cutting spending in response to low prices (see Shale Daily, Feb. 22). Chesapeake Energy Corp. is the second most active company in Bradford with 393 wells. Other major players include EOG Resources Inc., Chief Oil & Gas LLC and Southwestern Energy Inc.
Other counties in the dry-gas region aren't as angst ridden about the decision.
With 524 horizontal wells, Tioga County is the second most active in the state and could account for $26 million this year. The commissioners are scheduled to vote on the fee on March 13, a sign of support.
Through its subsidiaries East Resources Management LLC with 157 wells and Shell Western Exploration and Production LP, Royal Dutch Shell plc is the most active company in Tioga with 278 wells. Other major players include Talisman, the National Fuel Gas Co. subsidiary Seneca Resources and Ultra Petroleum Corp. Seneca recently cut $75 million from its capital budget for Appalachia in response to low gas prices.
The 401 wells drilled in Susquehanna County could generate $20 million in revenue this year. The county told NGI's Shale Daily that it plans to decide how to proceed after holding a public hearing on Tuesday.
Cabot Oil & Gas Corp., the most active operator in Susquehanna with 177 wells, is reducing its Marcellus spending by about $100 million this year in response to prices, but during a recent earnings call CEO Dan Dinges speculated that some operators might reduce spending because of the fee. Whatever the cause, he said the reduced drilling could fortuitously bring down the price of service contracts for operators.
Other operators in Susquehanna include Chesapeake and the Williams subsidiary WPX Energy Appalachia LLC. WPX recently dropped one of its four rigs in Susquehanna to focus on liquids-rich plays.
The three members of the Lycoming County Commission all publicly supported the fee before Corbett even signed it into law. The 398 wells drilled in the county could generate about $20 million this year.
Anadarko Petroleum Corp. is the most active company in Lycoming with 159 wells. The second largest player, Range Resources Corp., recently praised the fee, but the company is far more active in the liquids-rich region of the Marcellus, where the economics are better at current prices. "We believe the commonwealth now has some of the strongest safety and environmental legislation in the country. Range pioneered or advocated for many of the provisions and it has been implementing these standards voluntarily in the field for some time," COO Ray Walker said during a recent earnings call (see Shale Daily, Feb. 23).
Those economics could be the reason why southwestern Pennsylvania isn't struggling as much over the fee.
Washington County, third in Marcellus activity behind Bradford and Tioga, approved the fee last Thursday. Its 464 wells -- including 375 drilled by Range -- should generate about $24 million in revenue.
Allegheny, Armstrong, Beaver, Butler, Fayette and Lawrence counties have either approved the fee, scheduled a vote or plan to vote soon. The 321 wells in those counties would raise about $19 million.
"If we don't do this, we chance losing this money," Butler County Commissioner A. Dale Pinkerton told the Valley News Dispatch shortly after Corbett signed the impact fee into law. "So it's important that we act as soon as we can so the money coming in will be divided among all the counties and we can get our share."
Officials in neighboring Greene County plan to vote on the fee March 21. The 276 wells drilled in the county would generate about $14 million. "I can only speak for myself, but I am in favor of the fee," Board of Commissioners Chairwoman Pam Snyder told NGI's Shale Daily.
The most active player in Greene, EQT Corp., prided itself on supporting the impact fee back in November, calling the original Senate version "very reasonable." The fee in the final bill is similar to that earlier version, but keeps more revenue at the local level and shortens the life of the fee.
In central Pennsylvania, a region of growing importance between the two major hotspots, Clearfield and Centre counties intend to adopt the fee, and neighboring Clinton County appears to be headed toward opting-in, despite distaste for the program. "The money is a pittance compared to the cost of giving up zoning regulations locally, and giving up the ability to protect the environment and communities," Clinton County Commissioner Joel Long told the Lock Haven Express, referring to provisions in the bill that restrict local regulation over drilling. The three members of the board suggested it could adopt the fee soon.
The 254 wells in the three counties could generate about $12.6 million. The Pennsylvania Public Utility Commission (PUC) is charged with collecting and distributing the fee.
The PUC recently posted answers to frequently asked questions to help stakeholders understand the new law. The PUC is also publishing a monthly list of eligible wells, as well as a backdated list of wells drilled through the end of 2011. That list will account for the first round of payments, due on Sept. 1, 2012.
The PUC will set the rate for wells drilled this year on Jan. 31, 2013 using a tiered structure set according to the average price of natural gas on New York Mercantile Exchange for the last day of the preceding 12 months and adjusted for the Consumer Price Index. The payments for the 2012 fee are due April 1, 2013.
The fee lasts for the first 15 years of the life of a well and decreases annually.