Bloomberg News

Pennsylvania Poised to Let Counties Impose Fees on Gas Wells

February 09, 2012

(Updates with governor’s comments in sixth paragraph.)

Feb. 7 (Bloomberg) -- Pennsylvania’s Senate passed a bill to let counties levy fees on natural-gas wells, which the state estimates may generate revenue of about $211 million this year.

Proceeds of the 15-year annual fees, based on the average price of natural gas, would mostly be used to help communities affected by drilling in Marcellus Shale deposits, according to the bill, which passed today, 31 to 19.

The action in Harrisburg comes as several states consider measures to mitigate the effects of hydraulic fracturing, or fracking, to extract gas. In Ohio, lawmakers are weighing a fee on drillers that use the technique, while in Maryland, the government is evaluating whether to levy fees and taxes on the practice if it lets companies employ it there. Pennsylvania is also coping with receipts that have trailed budget estimates by $497.2 million, or 3.5 percent, this fiscal year.

“This money will serve numerous worthwhile purposes,” Senate President Pro Tempore Joe Scarnati, a Republican from Brockway, said today before the vote. Some of the money would go to statewide environmental needs, according to the bill.

Pennsylvania, the only major U.S. natural-gas producer that doesn’t seek extraction taxes from drilling companies, has more natural-gas reserves contained in the Marcellus Shale formation than any other state. Governor Tom Corbett, a first-term Republican who campaigned on a pledge to hold the line on levies, has said taxing the industry would deter development.

Far-Reaching Benefits

“The benefits of this growing industry are reaching every corner of our state and we are determined to see this industry produce new jobs and increased savings,” Corbett said. He said he would sign the bill should it reach his desk. The measure may be voted on in the House of Representatives this week.

Corbett spoke on the legislation during his budget presentation today, in which he unveiled a $27.1 billion spending plan. The amount is little changed from the current fiscal year, in which funds for schools such as Pennsylvania State University were cut. The governor would reduce aid to the college by 30 percent next year.

The fee measure provides a compromise that meets the needs of communities without overburdening the industry, Scarnati said. Municipalities can’t pass more stringent ordinances against drilling, and companies that run into barriers can sue or ask a state agency to review local rules. The legislation also creates statewide standards for well setbacks.

Local Support

Organizations including the County Commissioners of Pennsylvania and the Pennsylvania State Association of Township Supervisors backed the bill in letters to lawmakers.

In its first year of production, a well would be assessed in a range of $40,000 to $60,000, based on gas prices, according to a committee report released yesterday. With prices averaging about $2.74 per cubic foot in 2012, Pennsylvania would charge $45,000 for each well in its initial year.

If the price falls below $2.25 per cubic foot, each well would be charged $40,000 to start. The fee would be levied at $60,000, the highest amount, if the average jumped to $6 per cubic foot. By the 11th year and until the end of the fee period, the levies would decrease to either $5,000 or $10,000 per well, based on prices.

The bill would let counties decide through resolutions whether to demand the fee, and if they don’t, they could be overruled if half of their municipalities by population agree to seek the levies.

‘Selling Out’

“We are selling out” to energy companies posting billion- dollar profits, said state Senator Andy Dinniman, a West Chester Democrat, before the vote. He wanted a higher fee to go toward education and other services. Republicans hold a majority in both the Senate and the House.

Shale wells in southwest Pennsylvania cost about $4 million each, Range Resources Corp., one of the most-active drillers in the region, said today in materials prepared for a Credit Suisse energy conference presentation. The Marcellus Shale is the second most-profitable unconventional U.S. formation, thanks to a high proportion of ethane and other petroleum derivatives sought by chemical makers. Only the Eagle Ford Shale in Texas yields higher returns, according to the Fort Worth company.

The Keystone State has experienced a boom in companies seeking to tap Marcellus deposits since 2008, when 195 wells were drilled. In 2011, 1,976 wells were drilled, according to the Pennsylvania Environmental Protection Department.

Fee as Tax

Although the proposed fee would be left to counties to implement, it should be considered a tax since the rate is tied to gas prices, said Matthew J. Brouillette, president and chief executive officer of the Commonwealth Foundation for Public Policy Alternatives, a Harrisburg-based organization that promotes free-market policy and opposes a levy on drillers.

Fracking, which involves pumping water mixed with chemicals and sand deep into subsurface rock to release gas, has been employed in states such as Texas and Oklahoma since 1949. Use of the technique has expanded with the adoption of horizontal drilling that lets wells bring up more gas.

Ohio, which already taxes companies based on how much gas they produce, may add a fee similar to the one contemplated in Pennsylvania. Governor John Kasich, a Republican, wants to charge drillers state-set fees to help local governments pay for damage to roads and infrastructure caused by the activity, and to avoid local communities enacting their own levies.

In Maryland, where no fracking permits have been issued, each 1 percent of a tax could raise as much as $93.7 million over 50 years, according to a study requested by Governor Martin O’Malley, a Democrat.

--With assistance from Christine Buurma and Joe Carroll in New York, Mark Niquette in Columbus, Ohio, and Katarzyna Klimasinska in Washington. Editors: Ted Bunker, Mark Schoifet.

To contact the reporter on this story: Romy Varghese in Harrisburg, Pennsylvania, at rvarghese8@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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