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Proposed permit fee increase in Pennsylvania not expected to slow drilling in state

Industry and state leaders agreed that a plan by Pennsylvania regulatorsto more than double permit fees for unconventional wells would likely not puta damper on producers' plans to continue to drill and produce gas from theprolific Marcellus shale play.

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A proposed rulemaking, which the state Department of EnvironmentalProtection has submitted to its Environmental Quality Board, would increasecurrent well permit application fees to $12,500 for all unconventional wellsfrom $5,000 for non-vertical unconventional wells and $4,200 for verticalunconventional wells.

DEP contends that the proposed fee increases are needed to fund itsefforts to regulate the oil and natural gas industry and pay for thedepartment to augment its Oil and Gas Division staff, which has been stretchedthin by the drilling boom in the Appalachian shale.

The proposed fee increase is part of a package of reforms to the drillingpermit regulatory scheme that Governor Tom Wolf announced in January, andwhich he is expected to roll out later this year.

Scott Robert, a regulatory consultant for the Pennsylvania IndependentOil and Gas Association, said raising the permit fee on individual wells wouldlikely have a minimal effect on a producer's bottom line. "I don't think it'sgoing to make or break people's decisions" as to whether or not to drill,Robert said in an interview.

But he said regulators should ensure that monies collected from the feeincrease go the DEP's Oil and Gas Division and are not used to fund otherDEP programs, such as those for clean water or clean air. He also calledfor "a fair and independent analysis" of the financial effect of theproposed fee increase. According to a state analysis, the proposed fee increase would result inan additional annual increased cost to the industry of $15 million. Thiscompares with the average cost of $8 million to drill a singleunconventional well in Pennsylvania.

"An increase of $7,500 to a flat fee of $12,500 for an unconventionalwell represents .001% of the overall cost to drill a well and will haveno impact on Pennsylvania's competitiveness with other states," the DEPanalysis says.

FEE HIKES NOT EXPECTED TO GO INTO EFFECT UNTIL NEXT YEAR AT LEAST

In any case, the permit fee increase is not likely to go into effect anytime soon.

Under the time line for the rulemaking, the state attorney general'soffice must approve the regulatory language of the proposed order forpublication in the State Bulletin, DEP spokesman Neil Shader said. Oncethe rulemaking is published, there will be a 30-day comment period. Thefinal rules are expected to be approved some time in 2019 or 2020.

In documents outlining the need for the fee increase, the DEP said thatin recent years it has had to dip into the state's Well Plugging Fund tomake up for funding shortfalls not covered by revenues collected throughpermit fees and the state's gas drilling impact fee. Given expectedproject cost increases and declining revenues, the department expects theWell Plugging Fund to be insolvent by fiscal year 2019-20.

Meanwhile, as the workload to oversee the state's rapidly growing oil andgas industry has expanded, the DEP itself and its Oil and Gas Division haveshrunk. Since 2006, the department's total staff has been reduced 43%,according to DEP's earlier statement on the fee increase.

"The Oil and Gas Program reduced staff over the past few years from 226employees to 190 employees today," the department said in its currentdocuments. "The Oil and Gas Program is currently challenged to provide anadequate level of service to the public and to the oil and gas industry."

When the comment period opens, representatives of the oil and gasindustry are expected to come out strongly in opposition to the permit feeincreases, challenging them as unnecessary burdens on an industry stillstruggling to recover from the recent price-related downturn.

"We haven't developed an official statement, but we definitely don'tagree with it. We feel that we pay enough fees as it is," PIOGA President DanWeaver said in an interview.

DEP SHOULD MANAGE ITS RESOURCES BETTER: WEAVER

Weaver said the DEP should do a better job of managing its resources,particularly in the Oil and Gas Division, rather than continually turningto the oil and gas industry for increased funding.

"Maybe we should look at why they have 190 employees under that division.It was different when we had 112 rigs running ... we now have 39," hesaid.

"They should do what most businesses do, look at shifting resources,"Weaver said. "They've lost 36 people. We're dealing with companies thathave lost thousands of people."

He said much of the funding for DEP goes to hiring water- and air-qualityspecialists, whose duties pertain to other industries besides oil andgas. "Why not increase the permit fees across the board for allindustries?" he asked. --Jim Magill, jim.magill@spglobal.com

--Edited by Valarie Jackson, newsdesk@spglobal.com