The following article is from the January 2021 issue of The PIOGA Press.

Revenue from the Act 13 impact fee—a tax collected on unconventional natural gas wells—is expected to drop to an all-time low of $144.85 million for the 2020 calendar year, according to an estimate by the state’s Independent Fiscal Office (IFO). That’s a decline of $55.9 million from the 2019 amount and 42 percent less than the record $251.83 million collected for 2018.

The steep decline for 2020 is attributable to low natural gas prices, triggering an automatic adjustment in the fee schedule, as well as fewer newer unconventional wells being drilled. The fee is structured so that wells pay less as they age. Consequently, the existing population of shale-gas wells generates less in impact taxes if not offset by revenue from new wells.

Proceeds from the impact fee are distributed to local governments and state agencies to provide for infrastructure, emergency services, environmental initiatives and various other programs. Local governments receive funds based on the number of wells located within their boundaries or their proximity to jurisdictions where natural gas extraction took place. Of the $144.85 million anticipated to be collected for 2020 and distributed by the Pennsylvania Public Utility Commission in mid-2021, the IFO estimates $75.87 million will go to counties, municipalities and housing (a decline of $33.3 million from calendar year 2019); Marcellus Legacy Fund, $50.58 million (-$22.2 million); commonwealth agencies, $10.5 million (no change); and county conservation districts, $7.89 million (no change).

The primary reasons for the decrease in collections cited in the IFO report include:

  • Lower fee schedule. The average annual price of natural gas on the New York Mercantile Exchange for CY 2020 was $2.08 per MMBtu. Due to the price dropping below $2.25, the impact fee schedule decreased by $5,000 per horizontal well compared to CY 2019 levels. Estimated impact: -$52.1 million.
  • New and existing wells. The net impact of (1) reduced collections from aging wells that pay lower fees and wells that become exempt offsetting fees from new wells and (2) any payments for the prior year that were not received in time for disbursement. Estimated impact: -$3.8 million.

Effective tax rate

The IFO also calculates an unofficial effective tax rate (ETR) for the impact fee each year, with the 2020 rate increasing to 3.3 percent from the 2019 rate of 2.1 percent. This is the first time the rate has topped 3 percent in the past four years.

The ETR is equal to annual impact fee revenues divided by the total market value of unconventional natural gas production. The market value is equal to the product of (1) the annual average regional hub price of natural gas net of post-production costs and (2) the total production from all unconventional wells.

The ETR computation for CY 2020 uses these data:

  • Annual production of 7.0 Tcf. This figure is based on statewide well production data published by the Department of Environmental Protection through October.
  • An annual average hub price of $1.43 per Mcf, prior to the deduction of post-production costs. This price is a weighted average of spot prices at the Dominion South and Leidy trading hubs.
  • Post-production costs of $0.80 per Mcf. This amount reflects costs for gathering, processing and transporting gas to markets. Such costs are deducted to approximate the value of gas at the wellhead, the point at which other states levy severance taxes.

The higher ETR “is due to a significant reduction in the market value of natural gas more than offsetting the decrease in estimated impact fee collections. Market value is projected to decline by 52.9 percent from the prior year, due to a 54.2 percent decline in the regional price of gas. The projection assumes that CY 2020 production expands by 2.6 percent over 2019, the weakest production growth on record,” the IFO report said.

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