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Marcellus Shale

The legislature is now tasked with mapping a direction the state will take in developing the shale gas play. While details are still sketchy on the final-form of the Marcellus Shale package, there is a general consensus that some sort of impact fee will be established. It is generally accepted that the fee should be robust, but also fair. The balancing requires that the fee generate sufficient revenue without squelching job creation in the drilling industry.

There is also a consensus building to establish and impose the proper regulatory framework to ensure environmental and public safety. Tough negotiations loom and action is pending on a variety of issues that are part of a comprehensive shale package. To know where this negotiation may go, it is important to examine how we got to this point. To do that, it is necessary to examine the proposals that have been offered over the past few months.

Senate Democratic Proposal

Senate Democrats have developed a fair, responsible and comprehensive plan regarding the development of a new shale law. The proposal would:

Establish an impact fee, with price and volume adjustment factors, at an effective rate of around 5 percent, the national average amongst gas producing states (see chart attached). Based on a price of gas of $4.50 per mcf, this approach would raise an estimated $250 million in 2011-2012 and grow substantially in future years.

Establish a three-way distribution of fee revenues, split equally between local governments, the environment and infrastructure initiatives. Examples of allocations under this distribution matrix include:

• Funding for environmental (Growing Greener type) projects as well as weatherization, energy efficiency and energy conservation measures as part of the statewide allocation;
• Funding for local communities to repair roads and bridges that are damaged by drilling-related traffic under the local governments allocation;
• Funding to develop infrastructure to complement the use of natural gas as a fuel for vehicles and mass transit under the infrastructure allocation.

Include an additional allocation, separate from the three-way distribution, for the state Fire Commissioner to ensure that the state can effectively respond to emergencies caused by drilling.

Create new well drilling regulations and enhance existing standards to ensure
the safety of the public and environment from degradation from well drilling operations. These include:

• Create drilling notification procedures to inform the public about drilling in their areas;
• Mandate that proper emergency contact information is posted at each well site;
• Ensure that data is collected and records are kept on the operations of each well site;
• Establish appropriate protective measures for surface impoundments;
• Establish appropriate well location restrictions and the proper drilling setbacks from surface water, drinking water and existing buildings;
• Update bonding requirements to ensure that neglected well sites can be properly restored to their original state;
• Strengthen civil penalties to cut down on the frequency of violations;
• Preserve local zoning authority to safely and fairly regulate the industry.

The Governor’s Marcellus Shale Advisory Commission Report

On July 22, 2011, Gov. Corbett’s Marcellus Shale Advisory Commission issued its final report containing 96 recommendations for the administration and legislature to use in crafting new legislation. Most notable among the recommendations was the adoption of a local impact fee to recoup costs associated with drilling, such as funding for the maintenance of roads and bridges in areas where drilling is occurring. However, the rate of the impact fee suggested was never disclosed, nor was its structure.

The commission also made a number of other notable recommendations as suggested by its various subcommittees. These include, but are not limited to, the following:

Improve coordination between state environmental and emergency response agencies;
Develop a unified command center for responses to well pad emergencies;
Develop comprehensive training programs for local fire and emergency responders;
Allow for forced pooling, which requires land owners to have gas extracted from their property, even if they decline permission;
Develop infrastructure to complement the use of natural gas as a fuel for vehicles and mass transit;
Develop an in-state pipeline system to control costs, avoiding the cost of interstate pipelines;
Expand the rail system to maximize shale development;
Train and educate potential workers from the primary school level through college;
Require the Department of Environmental Protection to monitor drilling sites for soil erosion, as it does construction sites;
Require the Department of Health to create a public registry to monitor those who live within a mile of gas drilling sites.

The Governor’s Plan

The Governor’s legislative proposal has three components:

Impact Fee: A county would have the option of establishing an impact fee that could begin at a maximum of $40,000 for each well in the first year of gas production and fall by $10,000 per year. The fee would remain at $10,000 in the 4th through 10th years for a maximum fee, per well, of $160,000. Twentyfive percent of the fee would be allocated to six state agencies that deal with drilling. The majority of this allocation would go to PennDOT for road repairs in impacted areas. Counties and municipalities would split the remaining 75 percent. It is unclear how much his impact fee proposal would generate since it is completely county-optional. If counties chose to impose the fee, they can offer a 30 percent fee waiver to specific companies drilling within their borders, making fee revenue projections even less clear.

Environmental protection: The governor called for increasing well setbacks and
the amount required for well bonds, increased penalties for violations and providing more
latitude for the Department of Environmental Protection to revoke drilling permits.

Market growth: Corbett called for fostering a shift to natural gas by building natural gas fueling stations along major highways; in addition to helping public vehicle fleets convert to natural gas.

Senator Scarnati’s Proposal

Senator Scarnati’s proposal has undergone a transformation since it was originally introduced. Details of those changes have yet to be finalized. The components of the original proposal include the following:

Impact Fee: The impact fee would have a base fee of $10,000 per well and would apply to vertical/horizontal shale wells only. The base fee would be adjusted independently for increases in production volume and the price of gas. The result is that if production and/or prices move substantially higher, revenues will increase as well. The fee would generate an estimated $121 million by 2012.

Distribution of Impact Fee: Revenues from the impact fee would be split two ways: 60 percent of the fee would be earmarked for local governments; 40 percent for statewide environmental and infrastructure impacts. A small additional allocation, separate from the distribution mentioned, would also be provided to county conservation districts statewide.

Local Zoning: The proposal would establish a model zoning ordinance to impose uniform standards for counties and municipalities to adopt. The ordinance prohibits a county or municipality that adopts a zoning ordinance that exceeds the model from receiving funding from the local impact fee.

Summary

The development of the Marcellus Shale gas play has created tremendous opportunities and challenges. The opportunity includes the managed development of an industry that has the potential to fundamentally alter Pennsylvania’s economic foundation. Through the sheer number of jobs that may be created over the next several generations combined with the access to low-cost, high-value energy, Pennsylvania can sustain long-term economic health. The gas play provides a means to fund local infrastructural improvements while generating new dollars the state can use to pay for safety upgrades.

At the same time, there are a number of great challenges that must be faced. The development of a fee or tax must be responsible and reasonable. It cannot be so high that it discourages job creation. At the same time, the state’s environment must be protected. Laws and regulations that serve to protect lakes, rivers, aquifers and other ground sources of water from pollution need to be developed. Reasonable property setbacks, zoning issues and other variables that impact the environment must be settled.

With various competing interest, as illustrated by the proposals discussed, and the potential for so much economic opportunity, lawmakers must use a thorough and balanced approach as they prepare to craft a new shale law. The law must produce sufficient revenue while still allowing room for the industry to grow and assure environmental protections that will serve the citizens for years to come.

Useful Links and Facts Concerning Marcellus Shale

The Utica Shale is a rock formation located a few thousand feet below the Marcellus Shale. This formation underlies most of New York, Pennsylvania, Ohio, and West Virginia and extends under adjacent parts of Ontario and Quebec in Canada and Kentucky, Maryland, Tennessee, and Virginia in the United States. Like the Marcellus Shale, the Utica Shale has the potential to become a significant natural gas resource. It is thicker than the Marcellus Shale, it is more geographically extensive, and it has already proven its capabilities to support commercial production. Drilling operators in Pennsylvania have already tapped into this formation, but its development in the commonwealth is slower to progress due to its depth. However, it is only a matter of time before extraction and production from this formation reaches and exceeds extraction and production from the Marcellus formation due to evolving drilling technologies and capabilities.

Governor’s Marcellus Shale Advisory Commission Report

This report contains recommendations to “develop a comprehensive, strategic proposal for the responsible and environmentally sound development of Marcellus Shale”. View Report →

Video of shale drilling process

Offices of State Senator Vincent Hughes

www.senatorhughes.com