Pennsylvania is projected to collect higher impact fees from unconventional natural gas producers for 2021, reversing losses tied to lackluster demand and low commodity prices in recent years.

The state’s Independent Fiscal Office (IFO) released projections this week estimating that unconventional producers will pay $233.8 million in impact fees for 2021, up by nearly $88 million from 2020. Collections declined from a record high of $251.8 million in 2018. The IFO bases its projections on data published by the state Department of Environmental Protection, which regulates the oil and gas sector. 

Average New York Mercantile Exchange prices jumped to $3.84/MMBtu last year. Annual production is also projected to increase to 7.6 Tcf in 2021 from about 7 Tcf in the prior year. Unconventional natural gas production in the state grew at pre-pandemic rates in 2021 as prices and demand rebounded.

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Because prices were in the range of $3 to $4.99, the impact fee schedule increased by $10,000 per horizontal well compared to 2020 levels. Along with an inflationary adjustment, higher prices are likely to boost impact fees by $98 million when they’re paid by producers in April, the IFO said.

The state’s impact fee collections don’t respond directly to natural gas prices or production volumes. Instead, the fee is levied annually on all unconventional wells during their first 15 years of operation, as long as they produce more than 90 Mcf. It is calculated using 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, depend on the number of years the wells have produced. Fees are highest for wells in their first operating year.

Higher prices helped to offset reduced collections from aging wells that pay lower fees. The IFO said nearly 3,200 wells entered their 11th operating year in 2021, cutting in half the fees due from each and impacting overall collections by $10.4 million. 

Pennsylvania is the nation’s second largest natural gas producer behind Texas. The impact fee is a stand-in for severance taxes that are more common in other states. Since they were enacted in 2012, the fees have generated more than $2 billion. 

Proceeds are distributed to local governments and state agencies to provide for infrastructure, emergency services, environmental initiatives and other programs. Local governments receive funds based on the number of wells located within their boundaries or their proximity to jurisdictions where natural gas extraction took place.

“Levied on top of all other business taxes paid in the commonwealth, this tax structure empowers local leaders with the ability to target revenues to best meet their community needs, while creating a predictable, workable climate that’s key to attracting job-creating investment and growth,” Marcellus Shale Coalition President David Callahan told NGI.