Pennsylvania Enacts Fee on Natural Gas Wells

Gov. Tom Corbett on Monday night signed a bill that would let Pennsylvania counties impose a fee on natural gas wells in the Marcellus Shale region. The state Legislature passed the bill last week.

Moody’s Investors Service in a report Monday called the new law a credit positive for most counties and municipalities. Moody’s expects revenue from the new fee to bring in more than $210 million in fiscal 2013 and increase total annual revenues in some counties by as much as 50%.

Pennsylvania stands to become the last major drilling state to impose such a fee or tax. Corbett, a Republican, insists on calling it a fee. Under the bill, each county could charge a fee on wells within its borders, using a metric hinged on inflation and the average price of natural gas. A majority vote of cities and towns can override a county decision not to impose a fee.

The drop in natural gas prices could prompt less drilling and result in lower-than-anticipated revenues, according to Tom Kozlik, a director at Janney Capital Markets in Philadelphia.

“I think it is really too early to tell whether the impact-fee legislation is really going to be a positive,” he said. “At first glance the preliminary data shows anticipated revenues that are not all that impressive, especially if you consider that they are going to be spread out. In a way I think it is not so positive that the revenues are so limited.”

The Marcellus Shale Coalition, a Canonsburg, Pa., industry group, expressed ambivalence. “The legislation, while not perfect, provides the industry greater certainty to operate across Pennsylvania,” president Kathryn Klaber said in a statement. But “without question, it will further increase costs, in terms of both time and resources, at a time of historically low natural gas prices, which will affect decisions made into the future.”

Technology over the past 10 years has enhanced the ability to extract natural gas through hydraulic fracturing, or “fracking.” The shale, which derives its name from a visible exposure near Marcellus, N.Y., essentially covers all of Pennsylvania but its southeastern corner.

Last year, a 30-member panel that Corbett commissioned recommended drilling companies pay a fee to offset local infrastructure and environmental costs. Some lawmakers in the Democratic minority had pushed for a severance tax.

“While drilling activity is going to create some economic benefits, I am on the lookout for the unintended consequences that this activity might bestow upon local governments, especially the smaller ones,” said Kozlik, who envisions the expansion of some government services to keep pace with demand. “Local governments are going to need to efficiently and effectively collect funds and pay for these services,” he said.

Moody’s said the state’s southwestern and northern regions will most likely benefit from shale-related growth. Moody’s rates Pennsylvania’s general obligation bonds Aa1.

Fitch Ratings assigns Pennsylvania an equivalent AA-plus rating, while Standard & Poor’s rates it AA.

The bill adds environmental protections and limits the ability of municipalities to regulate the drilling industry. The Pennsylvania Public Utility Commission will collect the fee annually.

Fracking has generated extensive debate in neighboring states as well.

In New York, Gov. Andrew Cuomo is expected to decide within a couple of months on the future of fracking in his state. New Jersey lawmakers, meanwhile, are weighing a bill to impose a statewide ban on fracking.

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