Natural Gas Impact Fee Payments Expected to Drop To New Low in 2020

Counties and municipalities in Pennsylvania saw a drop of about 20 percent in the Act 13 impact fee payments they receive from natural gas development in 2019. An analyst from the Independent Fiscal Office says they should expect to see even less money in 2020 due to low prices and demand.

Jesse Bushman, an IFO revenue analyst who studies natural gas production trends and does budget projections of Act 13 revenues, was the speaker at the final webinar in the “Effects of COVID-19 and the Economic Downturn on Western Pennsylvania Shale Gas Development” series hosted by Washington & Jefferson College Center for Energy Policy and Management.

Act 13 money is paid to counties and municipalities that have natural gas drilling activity. The per-well fees are paid by the producer according to a fee schedule that takes into account the well’s age and the price of natural gas. The revenue is split annually among several state agencies, counties, and municipalities and the Marcellus Legacy Fund. There are thirteen categories in which entities receiving impact fee revenues must spend the money. These categories are broad but focus on the idea of remediating negative effects of the industry within a locality.

Bushman noted that Act 13 collections reached a high in 2018 at $251.8 million and then dropped to about $200.3 million in 2019 as gas prices dropped. According to the state Public Utility Commission, gas prices in 2019 averaged $2.63 per MMBtu (million British Thermal Units), nearly a half dollar down from 2018’s $3.09 per MMBtu average, and pushing the fee for new wells down by $5,000 each.

The IFO is “projecting another pretty significant decline from 2019 – a decline of about $53 million” in 2020, Bushman said, taking the total to $146.9 million, a drop of about 27 percent. He said the Natural Gas Spot and Futures Prices (NYMEX) projects the price of gas at $1.79 at the end of July and likely no higher than $2.25 by year’s end, which would again drop the per well fee paid.

“Low prices were already present,” Bushman said. “COVID-19, frankly, is making it worse” by reducing demand. That, in turn, leads to fewer new wells being drilled, which is important because producers pay higher fees for new wells. Through the end of June, 270 new wells had been drilled in Pennsylvania, and Bushman is projecting a 26 percent decrease for 2020 from the 613 drilled in 2019.

This means that counties and municipalities will likely receive “the smallest disbursement they have gotten since the start of the fee despite increased production,” he said.

He also pointed out that municipalities have put about 39 percent of Act 13 money in their capital reserve funds while spending 31 percent on infrastructure and 13 percent on public safety. The money in capital reserve funds may provide municipalities with a cushion to help them through the economic downturn in the industry, but local leaders should be aware of emerging trends and the volatility of the payments.