Marcellus Shale Impact Fee Alert – If You Drill It, You Will Pay
February 1, 2012
In February 14, 2012, Pennsylvania Governor Tom Corbett signed House Bill 1950, commonly known as Act 13 of 2012, into law. The law is multifaceted as it aims to provide stricter environmental standards and regulations on natural gas drilling operations, provides incentives for converting vehicle fleets to compressed natural gas and authorizes counties to adopt shale well impact fees. The primary focus of this article is on the impact fee aspect of the new Marcellus Shale law.
- County-by County Fee System
This law authorizes counties located within the shale region (approximately 35 counties) to adopt an impact fee, county-by-county, proceeds from which will be used by local communities to offset the actual impact of unconventional shale gas drilling activities. Drillers will be charged a per-well fee which will likely vary annually as the fee is based on the average price of natural gas from the preceding year to account for the fluctuating price of natural gas.
There have been varying estimates on the total projected impact fee revenue the Commonwealth in total anticipates receiving. If all eligible counties adopt the fee, $180 million in fee revenue is anticipated in 2012 with more than $1 billion over the first five years and $3 billion over the next decade.
State agencies with a role in mitigating shale gas impacts will receive a fixed dollar amount off the top of any impact fee revenue collected. Such agencies include the Department of Transportation, the Department of Environmental Protection, the Public Utility Commission, the Pennsylvania Emergency Management Agency, the State Fire Commission and the Fish and Boat Commission. Next, a cut will go to a state-wide program (known as the Natural Gas Energy Development Program) to help buy natural gas-powered fleet vehicles. After these state agency and fleet vehicle program haircuts, a significant portion of the fee revenue will be distributed, based on a variety of formulas, directly to the impacted counties and municipalities to assist in offsetting the public costs of drilling with the remaining funds to be distributed to non-impacted counties and municipalities located in the Commonwealth.
Pennsylvania is the only major gas-producing state that does not specifically tax the activity, but the primary purpose of the fee is to offset the public costs of drilling operations.
- Impact Fee Calculation
The impact fee for a particular well is structured on a sliding scale from $40,000 to $60,000 the first year depending on the price of natural gas and inflation. The annual impact fee then declines over the next 14 years commensurate with a well’s natural declining production cycle (e.g., year 2 – fee range is $30,000 to $55,000; year 3 – $25,000 to $50,000; years 4-10 – $10,000 to $20,000; and years 11-15 – $5,000 to $10,000). Some legislative estimates put the per-well revenue yield at more than $300,000 after 15 years but there is no guarantee that all counties will adopt impact fees.
Act 13 will assess the equivalent of a 1% rate over the life of a typical shale well, according to an analysis by the Pennsylvania Budget and Policy Center. By comparison, drillers pay effective drilling tax rates of 3.4% in Arkansas, 5.4% in Texas and 6.1% in West Virginia on comparable deep gas wells. Impact fees which are paid to the Pennsylvania Public Utility Commission are generally due by April 1 of each year with county specific reports being generally due April 1 and September 1.
- Next Step – County Votes
Pursuant to the new law, county commissions or county council members now have 60 days or until April 13, 2012, to decide whether to impose the 15-year impact fee on their local Marcellus Shale wells. If a county board votes against imposing the fee, they could be overruled if, within 60 days, half of the municipalities or towns representing half of the county’s population approve their own resolutions in favor of a fee.
- Conclusion
Eckert Seamans can assist you in understanding this new law, the tax and regulatory implications and its impact on your drilling operations. Importantly, we can also advise you how to maintain compliance with the new regulatory mandates of the Marcellus Shale law especially as each county begins the task of deciding whether to impose an impact fee on drilling activities. If you would like more information on the new law, please contact Daniel Clearfield at 717.237.7173 or dclearfield@eckertseamans.com, Scott Dismukes at 412.566.1998 or sdismukes@eckertseamans.com, or any one of our other Energy Group attorneys at Eckert Seamans.
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