Natural gas companies, already facing low prices and reduced demand due to the COVID-19 pandemic, now have another factor to include when making decisions on drilling new wells.
A fee hike of 150 percent took effect Aug. 1 for a permit to drill a new unconventional well in Pennsylvania, taking the cost from $5,000 to $12,500.
The increase had been announced in January after receiving approval from regulators with the state Department of Environmental Protection. The last fee increase had been in 2014.
The permit fees are a primary source of funding for the DEP’s Oil and Gas Program, which regulates the drilling industry. It also gets $6 million in funding each year from the Act 13 impact fee paid by drillers and from civil penalties paid for violations of environmental regulations.
“Program obligations and operations remain at least static every year, but more typically expand annually due to the additional well inventory, development activity, and the need for guidance and technical tools to stay current,” the executive summary of the proposal states.
“Since the unconventional natural gas industry began ramping up in 2007, the number of unconventional gas wells has increased more than ten-fold or 1,000 percent,” the DEP’s three-year fee report indicated in 2018. At the same time, the program has cut staff from 226 to 190 employees and reduced operating costs by 38 percent.
The department recognizes that the number of permits being issued for new unconventional wells in the Marcellus and Utica shale region have been declining and has not reached 2,000 since 2015. In the most recent 2019-20 fiscal year that ended June 30, just 1,154 permits were issued.
A further drop is anticipated this year as many gas companies slashed their budgets for drilling new wells due to the continuing low prices for natural gas and drilling techniques have gotten much more efficient, allowing more gas to be recovered from each well. COVID-19 has also resulted in a drop in demand and continuing low prices and some companies actually shut in some production from existing wells in hopes that prices will rebound later this year. In the first half of 2020, just 486 permits were issued.
Before the fee hike was enacted, public comments on the proposal were received, including that of the Marcellus Shale Coalition, which represents the interests of the industry. It was critical of the size of the increase, which it said would be the highest in the nation. However, Pennsylvania does not impose a severance tax on gas production, as some other states do.
MSC members “strongly urge DEP and the (Gov. Tom Wolf ) Administration to pursue a more sustainable and equitable funding mechanism for its oil and gas program; sustainable, so the agency does not need to reappear before this Commission seeking even higher permit fees, and equitable, so that the level of funding derived from the unconventional industry bears a reasonable relationship to its costs,” the comment stated.
If the number of new unconventional wells being drilled continues to decline, the DEP and Wolf administration may have to again revisit the funding mechanism that drives oversight of the natural gas industry so it can remain viable. Wolf has repeatedly proposed enacting a severance tax, but that is opposed by the industry and by the Legislature, so a consensus would have to be reached on what type of sustainable funding could be implemented.