The production fees that will be implemented by Pennsylvania's Marcellus shale bill, which Pennsylvania Gov. Tom Corbett signed into law earlier this week have generated concerns among some energy industry groups that the costs will negatively impact shale gas exploration and production in the state.
However, some industry observers say the fees in the legislation are reasonable, and will allow for the implementation of safety guidelines for exploration and development of the state's Marcellus shale resources.
"The fees are not excessive by any means, and it's below [fees] imposed by many other states, including Texas," said Charles Dewhurst, partner and national practice leader of law firm BDO's natural resources practice.
Dewhurst noted that the legislation also addresses safety and environmental concerns surrounding the impact of hydraulic fracturing. The legislation requires the set backs of the actual drilling sites from buildings, streams and waterways, and limits drilling entirely on flood plans. It also contains provisions to protect groundwater and aquifers, another issue that has arisen in other states where hydraulic fracturing activity is taking place.
"I don't believe this legislation is going to cause a depression in employment in the state," Dewhurst commented as to whether the legislation would negatively impact oil and gas exploration and production activity in Pennsylvania. While there will be more focus on the oil-bearing part of the Marcellus, but the potential for liquefied natural gas exports for Marcellus and other shale gas will allow gas producers to ride up the price curve, he added.
"While some entities may complain about the new fee, it has value since it will directly compensate Pennsylvania counties and municipalities where shale development is occurring," said Alan Herbst, principal at New York-based Utilis Advisory Group.
Herbst noted that the majority of residents in these counties may not own any shale acreage, but they still feel the affects of shale gas development, such as greater traffic on roads.
"Under the new impact fee, these residents will be able to see concrete examples of how their local communities are benefiting from the surrounding shale development," such as parks, schools or public facilities that have been funded by shale.
"I don't believe the new fee will drive many firms out of the Pennsylvania portion of the Marcellus," Herbst said. "However, should New York State open its portion of the play in the near future, drillers may look at fees and costs over the border in New York and possibly choose to develop New York assets if they prove to have lower costs than those in Pennsylvania."
David Wochner, who is a partner in the Washington, D.C.-based Sutherland, Asbill & Brennan law firm and co-head of the firm's natural gas regulatory practice, said the industry as a general matter always expected that some sort of fee or tax would be imposed in Pennsylvania.
"It is just too much money for the state to leave on the table," he noted.
Wochner attributed some of the scaling back to depressed natural gas prices and to a number of leases coming due.
Wochner noted that funds generated from the fees will be diverted to development infrastructure for the use of natural gas vehicles. He credits Pennsylvania Gov. John Corbett with advocating that money from fees to go towards the communities most impacted.
While some of the setback requirements for the distance of drilling sites to buildings streams will have some economic impact – including the fact that the distance requirements change the technical drilling pattern – Wochner does not expect the economic impact to be hugely significant.
One provision that Wochner finds interesting is the presumption of liability over pollution of local water supplies, in which producers can be freed from liability over a contaminated well if they can demonstrate that water was already contaminated prior to drilling. This demonstrates the need for establishing an existing baseline of water data, which the energy industry has gotten exponentially better at in recent years.
Wochner noted that some parties felt the bill didn't go far enough in the protection of local communities.
"The bill is a good starting point," Wochner noted. "It's important to get something on the books, and then if data and experience show that changes need to be made, it's a good starting place."
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