Pennsylvania shale gas impact fees will continue to slide – report predicts

Oil pumps
Source: DollarPhotoClub

The impact fee collected in Pennsylvania – the home of the prolific Marcellus shale formation – is expected to drop yet again after it fell in 2015 due to low oil and gas prices, according to projections released by the state Independent Fiscal Office.

Pennsylvania remains the only U.S. state that has not imposed tax on extraction of natural gas after Governor Wolf failed to have the shale-tax included in the budget approved earlier last week. Instead, the state imposes an impact fee, which county and municipal governments can use on various expenses related to natural gas development such as: repair and maintenance of roads, emergency response preparedness, affordable housing, and social services.

However, when oil and gas prices fell, the revenues from the impact fee have also dwindelled. Although so far Pennsylvania’s impact fee has raised close to an impressive $1.04 billion since its enactment in February 2012, the majority of that sum, a total of $630 million, had been collected before June 2014. Since then, the numbers have been consistently falling.

Following the drop in oil prices, the impact fee revenue declined to around $218 million in 2015 and to a record low of of $187.7 million this year. And it seems that there’s no good news on the horizon, as according to latest projections from the state Independent Fiscal Office, fees paid by drillers are expected to go down even further.

In its recent “Impact Fee Update and 2016 Outlook” the office came up with three possible scenarios. The least optimistic of the three expects a drop in the annual average price of gas on the New York Mercantile Exchange to drive down the impact fee by $5,000 per well for most wells. That would translate to a total collection of $129.3 million.

Its middle scenario anticipates the currently sluggish pace of drilling will remain the same for the rest of the year but the price schedule will not drop, resulting in a $15.2 million reduction in impact fee collections to $170.6 million.

In the highest-revenue case, drilling will pick up to match the pace from the second half of last year and the fee collection will total $180.4 million.

In its analysis, the office expects that, in the long term, new pipeline capacity might be built to connect gas production to major demand markets in other states, allowing regional gas prices to rebound. Should this happen, producers may be inclined to resume drilling, and if so, the report suggests, impact fee collections would also rise.

However, industry analysts are unsure when this anticipated price rise will occur. There is expectation that much-needed additional pipeline capacity could come online as early as 2018 but this might not be enough to buoy up the prices; especially that several large projects have been delayed or cancelled.

“Currently, the NYMEX futures market suggests that the price will reach $3.00 MMBtu in 2017 and remain near that level until 2021,” the report reads. “Forecasts from Bentek Energy show regional hub prices will maintain their significant differential below the NYMEX through that time, so the current low-price environment is likely to continue.

“If these conditions hold, then drilling activity will likely remain subdued through 2018, and impact fee revenues will have limited opportunity for growth.”

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