Pain of natural gas price drop spreads through Pennsylvania

The fallout from a year of low natural gas prices and little new drilling is reaching Pennsylvania state agencies and local governments that have come to depend on the shale gas industry for crucial funding.

The state’s departments of Environmental Protection and Conservation and Natural Resources are already warning of significantly less revenue from natural gas royalties and drilling permits in a year when the economic shock of the pandemic will make it harder to shift revenue from other state sources to fill in the holes.

At the same time, low natural gas prices are projected to drive down total impact fees assessed on Pennsylvania’s shale gas wells by $56 million — to a record low of $145 million. That will leave less money to share among the counties, municipalities, state agencies and conservation initiatives that split the fees

to offset the industry’s demands on the environment, public services and infrastructure.

The impact fee rate is pegged to the average annual price of natural gas on the New York Mercantile Exchange. It fell to $2.08 per million British thermal units in 2020 — the lowest level since the impact fee was established by Act 13 in 2012, according to the Independent Fiscal Office, which released the new projections.

Impact fees are collected in April and distributed in July.

The average natural gas price at major Pennsylvania trading hubs was even lower — $1.38 per MMBtu — according to the fiscal office’s weighted average of spot prices.

Lower local gas prices means lower royalties for landowners who have leases with companies to extract gas from their properties, including the state.

Natural gas revenue was down 23% — from $79 million in 2019 to $60.5 million in 2020

— on the 250,000 acres of state forest that are leased for shale gas development, the Department of Conservation and Natural Resources said.

Since the Rendell administration initiated major leases of state forest for Marcellus Shale development in 2008 and 2010, natural gas revenue has made up a significant but fluctuating portion of DCNR’s annual budget. It has often offset reductions from the taxpayer-funded General Fund, which had traditionally paid for the agency’s operations.

At the Department of Environmental Protection, the office for oil and gas oversight is funded by the industry, primarily through well drilling application fees, but also from penalties on violations and a share of impact fees.

In August, the agency more than doubled the cost of a shale gas drilling permit to $12,500 per well to fully fund the oil and gas program’s $25 million annual budget.

It had counted on receiving 2,000 permit applications a year. Seven months into the fiscal year, it has received fewer than 500 shale well permit applications.

Scott Perry, deputy secretary for the Office of Oil and Gas Management, told an oil and gas advisory board in December that at the current rate, the office could be short $17.5 million for the year — which is nearly the cost of its entire staff budget for 190 employees.

“I’m sorry,” he told the board. “It is a very disturbing forecast, but we are in very bad shape.

“Even though we are attempting to maintain our current level of inspection responsibilities and permitting responsibilities, the industry’s current level of activity is not supporting it.”

Every three years, the office is required to produce a report on whether permit revenues are matching program expenses, with recommendations for adjustments. This year, Mr. Perry said, it will propose alternatives to the current fee-based system that has been in place since the 1980s.

Communities, too, will see less natural gas revenue for the second straight year when impact fees are distributed this summer.

Of the $144.9 million the Independent Fiscal Office expects in payments this year, about $71 million will go to counties and municipalities based on how many wells they host. That amount for local distribution is 46% smaller than it was two years ago, when the impact fee hit a record high.

In Greene County, which has received between $3.8 million and $6 million in impact fees each year over the past five years, the money had increasingly been used to balance the county budget — until this year, when newly elected commissioners changed course.

“As we saw a forecast decrease in Act 13 funding as revenue, the new board of commissioners took the hard stance that that is not general fund money. It is investment dollars for future development,” county Commissioner Mike Belding said.

The funding will be needed for development initiatives so the county can reduce its dependence on another depleting fossil fuel funding source: coal.

To make up most of the difference, the board raised property taxes for the first time in a decade.

“To revert back to traditional property tax income as revenue and normal expenditures is a painful process,” Mr. Belding said. “Nobody wants to do that. But for the fiscal survivability of the county, we had no other choice.”