Declining Impact: Impact Fee Collections Drop after Price Drops and Warm Weather in 2019
It was a difficult year for the natural gas industry in 2019. Warmer than usual temperatures in the winter months of 2019 decreased the need for gas used for heating. As a result of the low demand, the price of natural gas fell below $3.00 per British thermal unit which, to end-users, can be seen as a positive, but is a major problem for gas companies. With low demand and a massive excess in supply, gas companies were forced to store the gas in underground storage facilities, or vent excess gas into the atmosphere, as some operators in Texas have done.
Pennsylvania’s impact fee from natural gas drilling will see a 21 percent drop in collections for 2019 compared to 2018’s figures. Ironically, Pennsylvania led the United States in natural gas production in the same year. Though production levels were boosted, they do not have an effect on the impact fee. The price of natural gas does have an effect on impact fee payments.
Pennsylvania is estimated to collect $198.2 million for 2019, $53.6 million less than in 2018 according to the state Independent Fiscal Office. This translates to a smaller pot of money that will be distributed to the municipalities impacted by natural gas development. It is estimated that these local communities will receive a portion of $108 million, with the remainder held for the state government, the Pennsylvania Housing Affordability and Rehabilitation Enhancement Program, and the Marcellus Legacy Fund.
The impact fee is calculated using a formula that for each well declines year over year and takes into consideration the number, type (horizontal or vertical), and age of unconventional wells that a gas producer has spudded (or commenced drilling) and the average price of natural gas. The fees for each well are paid for the first 15 years of a horizontal well’s life and the first 10 years of a vertical well’s life, in a declining amount each year. The fees are paid to the Pennsylvania Public Utility Commission (PUC) by April 1 of the year following the year for which the fees were calculated.
Though this is not the worst year for impact fee collections, counties and municipalities that receive impact fee revenues will notice a lighter check than in previous years, which could impact their capital budgets and plans for improvements. The industry is also reacting to the low prices, slowing down or halting operations in the Marcellus and Utica plays. Pittsburgh’s EQT cut its drilling budget by $500 million in 2019, according to the Pittsburgh Business Journal, in response to the market. Should the slowdown in the gas industry continue, as industry representatives believe is likely, the amounts that local governments receive will continue to fall.