Pennsylvania's shale gas impact fees set to break record this year

Anya Litvak
Pittsburgh Post-Gazette (TNS)

Revenue from Pennsylvania's shale gas impact fee collection is on track to yield a record $275 million this year, largely on the back of high natural gas prices and a slight uptick in the number of new wells drilled.

A new analysis from the state's Independent Fiscal Office anticipates there will be 570 new horizontal wells subject to the annual fee in 2022, an increase from 514 in 2021 and 465 in 2020, when both decreased drilling and a crash in the price of natural gas drove impact fee revenue down to $146 million. Last year, it recovered to $243 million.

Unlike other oil and gas producing states, Pennsylvania doesn't levy a severance tax on extraction, which is typically calculated based on how much gas is produced and the market price of that gas.

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Instead, it collects an annual fee that steps down each of the first 15 years after a new shale well is drilled. That fee is determined, in part, by the average annual price of gas at the New York Mercantile Exchange.

FILE - Work continues at a shale gas well drilling site in St. Mary's, Pa., March 12, 2020. Republican candidates for Pennsylvania governor are pledging to open up natural gas production, but there are constraints to what a governor can do. (AP Photo/Keith Srakocic, File)

Until this year, that price has stayed under $6 per million British thermal units. But in 2022, gas prices rose enough to shift the impact fee into the highest tier. A new horizontal well drilled this year comes with an impact fee of $69,800.

In June, the last time the Independent Fiscal Office released projections for fee revenue, it was already factoring in the higher fee structure based on natural gas prices. At that time, the agency believed collections would be between $245 million and $259 million for the 2022 reporting year.

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The revised estimate, released on Wednesday, reflects that more wells are being drilled than was anticipated a few months ago, even as overall gas production isn't likely to increase by much this year.

That's because wells become fee-eligible as soon as they're drilled. It may take months to get them fracked and put into production.

If these estimates hold true, they would amount to an effective tax rate for all wells in operation in Pennsylvania in 2022 of 0.7%, the Independent Fiscal Office calculated.

Drillers must remit their payments for the prior year in April and the funds are disbursed by the state in July.

Of the projected $275 million, about $153 million will go toward counties and municipalities that host gas wells and another $102 million will be put into the Marcellus Legacy Fund, which funds environmental, highway and water projects. The remaining $20 million will be split between state agencies and conservation districts.