Issue Summary (Updated May 2012)
Marcellus Shale Gas Development
The Marcellus Shale formation lies beneath most of Pennsylvania and extends into West Virginia, Ohio, and New York. While geologists have known about this formation and its vast natural gas reserves for about a decade, the ability to extract the gas only recently became available in the last several years with the advent of the horizontal drilling process. Shale drilling in Pennsylvania began in 2007 when less than 20 wells were drilled. By the end of 2011 there were nearly 5,000 wells drilled across the Commonwealth. This new industry's economic impact has been credited for thousands of new jobs and millions in increased tax revenues. What does the Marcellus formation hold in store for the region and the state in terms of economic and fiscal impacts?
What We Know:
Marcellus Shale rigs are found in 37 counties across the Commonwealth including all seven counties that comprise the Pittsburgh region-Washington (553), Westmoreland (190), Fayette (183), Butler (106), Armstrong (100), Allegheny (9), and Beaver (6).
The Marcellus Shale gas industry has been the Pittsburgh area's fastest growing sector for employment. Jobs in the mining and logging sector grew 70 percent from 5,000 to 8,500 over the last seven years. This industry has had a direct and indirect impact on other industries such as the manufacturing sector, construction, and leisure and hospitality, all of which posted healthy employment increases in 2011, a portion of which can be attributed to the Shale gas growth in the area.
Another area where the economic impact has been felt is with taxable income, specifically taxable income from "Rent, Royalties, Patents, and Copyrights". Looking at the data from 2006, before drilling and leases were secured, to 2008 the beginning of drilling activity, the taxable income from rents and royalties in Washington County more than doubled (112 percent). In Butler County (57 percent) and Westmoreland County (37 percent) there were large jumps as well. But the largest increases were found in the Northeast counties where the heaviest drilling has occurred. Susquehanna County saw taxable income due to rent and royalties jump by nearly sixteen fold. Bradford had eight times as much while Lycoming and Bradford Counties increased fourfold. In areas where there was a lack of Marcellus Shale activity, such as the Northwest, the increases to this taxable income went up modestly at best (24 percent in Crawford and Mercer Counties).
On February 14, 2012, Act 13 was signed into law. Act 13 gives counties where horizontal (unconventional) gas wells have been drilled into the Marcellus Shale formation the right to impose fees on such wells. All 37 counties that currently have such wells adopted the fee as did 14 other counties that currently do not as yet have any such wells.
The impact fee is based on the average price of natural gas as traded of the New York Mercantile Exchange settled price for the near-month contract as reported for the last trading day of each month of a calendar year ending December 31st. Based on this price and the year drilling began on a well (spud) will determine the amount of the fee. For any rig spud from 2007-2011 the first year is 2011 and the amount owed is $50,000. The fee schedule is designed to decrease as the well ages phasing out after fifteen years. It is also designed to decrease/increase as the price of natural gas decreases/increases.
Once the fee has been collected from each well, it will be placed in the "Unconventional Gas Well Fund". Before any money is distributed back to the counties and their municipalities, the State will take a share off the top. In the first and second years, the State will claim the first $23 million, $20.5 million in the third and $18 million every year thereafter. This money will be distributed to the Public Utility Commission, Fish and Boat Commission, the Emergency Management Agency, the State Fire Commissioner, PennDOT, and county conservation districts.
After this initial amount has been distributed the remainder in the Fund will be split 60/40 between the participating counties (and their municipalities) and other statewide initiatives. The counties will each receive an allocation based on the percentage of wells that are located within their borders. They must then share this money with their municipalities based on a formula that gives 36 percent to the county, 37 percent will go to municipalities with wells and the remaining 27 percent will go to municipalities without wells. The only constraint is the amount of money received by any municipality shall not exceed the greater of $500,000 or 50 percent of its total budget for the prior fiscal year.
Pennsylvania by extremely good fortune sits on top of the gas rich Marcellus Shale formation. So far in its early stages this new industry has been responsible for providing thousands of jobs either directly or indirectly and enriching the tax coffers of the state, counties, and municipalities. The State has been afforded a chance to foster this industry into a powerful economic engine for decades to come. It cannot squander this opportunity by imposing onerous taxes and regulations on this fledgling industry.