More shale wells to be levied fee than first thought

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By Laura Legere (Staff Writer)
Published: May 7, 2012

Lackawanna and Luzerne counties may get a cut of the state’s shale drilling impact fee after all.

The state’s Public Utility Commission, which is charged with collecting and distributing the fee, said its interpretation of the law allows the state to levy a fee on Lackawanna County’s two exploratory Marcellus Shale wells, at least for one year.

The same might hold true with Luzerne County’s two wells, even though they were not considered productive and were subsequently plugged and abandoned.

PUC spokeswoman Jennifer Kocher said there may be a possibility for one year’s worth of fees from the Luzerne County wells.

“It would all depend on how the wells fit into the definitions that were laid out by the law,” she said.

Encana Oil & Gas USA Inc. drilled two wells in the summer of 2010, one on Route 118 in Fairmount Township and the other on Zosh Road in Lake Township. The company announced in November 2010 that the wells were not economically viable.

Kocher said the potential for Luzerne County and Lake and Fairmount townships to get a share of the drilling revenue for the two wells depends on the definition of “spud,” or the actual start of drilling an unconventional well.

Asked what Luzerne County might stand to receive, Kocher said, “We’re not providing any numbers at this time, because we’re still scrubbing data” from the state Department of Environmental Protection.

Because Lackawanna County’s wells are considered shale or “unconventional” gas wells subject to the law, the county and its municipalities will likely get a small share of the approximately $207 million that will be collected from drillers for wells drilled prior to Jan. 1, 2012.

If all 4,802 of the unconventional wells included in the state Department of Environmental Protection’s official list are subject to the fee, Lackawanna County would receive $16,215, Benton and Greenfield townships would each get about $8,330 and all the county’s municipalities would get a portion of $12,160, according to the distribution formula outlined in the drilling law, known as Act 13.

Although the law levies a smaller fee on vertical wells – like those drilled in Lackawanna County – than horizontal ones, it does not distinguish between the two types of wells for distributing the fee to local governments. Vertical wells are assessed at 20 percent of the horizontal well fee, which is $50,000 for wells drilled before 2012 and may change each year based on the average price of natural gas.

Kocher said Lackawanna County’s two vertical wells “are subject to the 20 percent fee in year one. In year two if they are not producing at the designated levels outlined in the act, they do not have to pay the fee.”

After the law was adopted in February, the fee fate of the state’s exploratory wells and their host communities was not clear.

The law defines a vertical gas well as one that has been hydraulically fractured and produces more than 90,000 cubic feet of gas per day – a definition that the law’s architects said was intended to exclude low- or non-producing wells that are used to assess the quantity of gas in an unexplored region of the shale.

But the law defines an “unconventional well” more expansively, as “a bore hole drilled … for the purpose of or to be used for the production of natural gas from an unconventional formation,” and the state’s official list of unconventional wells includes many vertical, non-producing wells, along with inactive wells and unsuccessful wells that have been plugged.

Organizations that commented on the PUC’s draft interpretation of the law suggested different ways of dealing with the uncertainty.

Three trade organizations for natural gas producers pointed out that the law, and the PUC’s interpretation of it, is not clear about whether the impact fee would be levied on wells drilled into the shale for reasons other than direct gas production, like geologic analysis, although they suggested the answer should be no.

They also wrote that the law does not directly address what to do with “dry holes” – wells that are plugged because they would not produce economic amounts of gas. They suggested that wells drilled and plugged before Jan. 1, 2012, “owe no fee” and that any future wells drilled and plugged in the same year also “do not owe the fee.”

The Pennsylvania State Association of Boroughs offered an opposite interpretation and advocated that any well drilled and plugged in the same year pay at least one year’s fee.

“The fact that a well does not produce quantities above a stripper well or is plugged will not mitigate the impacts to the communities from the drilling of the well,” the group wrote.

The PUC has delayed issuing its final implementation order for the law in response to a court injunction that temporarily postponed some aspects of the act relating to local zoning rules.

Luzerne County Council voted 6-5 on April 16 to pass an ordinance enabling the county to accept a share of natural gas revenue if available.

Councilman Stephen A. Urban, one of the “no” votes, said council never got a definite number on how much revenue the county might be eligible for. However, he voted against the ordinance because he believes Act 13 is unconstitutional, going against the provision in the state constitution allows municipalities and counties to do their own planning and zoning.

“It wasn’t a money issue to me. It was a matter of constitutionality and a matter of principle,” Urban said.

Elizabeth Skrapits, staff writer, contributed to this report.

llegere@timesshamrock.com