Drilling decline in Pennsylvania hurts funding for DEP regulators

Low natural gas prices that have companies dispatching fewer drilling rigs to Pennsylvania’s fields and forests are taking a toll on the industry’s regulators, too.

The state Department of Environmental Protection is exploring additional funding options for its oil and gas regulatory program because permit applications to drill shale gas wells — the program’s dominant revenue source — are down about 30 percent compared to this point last year.

PG graphic: Shale drilling permit trends
(Click image for larger version)

DEP uses permit fees, fines and $6 million each year from the state’s impact fee levied on Marcellus Shale and other unconventional wells to pay for the oil and gas program’s roughly $21 million annual budget. That means the program has not had to rely on the fickle state general fund budget process each year to support its work.

But now its primary funding source has turned out to be equally fickle, as natural gas operators have responded to low oil and gas prices by reducing their capital spending and improving efficiency by coaxing more gas from fewer wells.

The department won’t disclose what possible funding options it is considering, or how soon additional revenue might be necessary. Spokeswoman Amanda Witman said no decisions about alternative funding have been made at this point, and the permit decline has had no impact on the program’s day-to-day operations.

“While permit revenues are down, the department has maintained the same standard of service and will continue to do so,” she said.

DEP just raised drilling permit fees last summer from $3,200 to $5,000 for an average horizontal shale well and from $2,900 to $4,200 for an average vertical shale well. The hike was necessary, the agency said, because the department’s mandate to supervise wells, pipelines and other oil and gas infrastructure was growing, while permit revenues had declined.

At the time, the department projected that it would raise an additional $4.8 million each year with the higher rates — enough to hire additional staff, improve its information technology and keep the account that funds the oil and gas program solvent through June 2018 — but those projections were based on DEP’s expectation that companies would apply for 2,600 horizontal well permits and 80 vertical well permits annually.

So far this year, permit volumes have fallen short of those expectations. The department issued 789 shale well permits by May 1, the lowest number for the first third of the year since 2009.

(Companies submit their payment when they apply to drill a well, not when the permit is issued, but DEP’s public permit databases track how many permits the agency has issued. The figures are similar to the number of permit applications the agency receives.)

If the rate stays flat, DEP is on track to issue fewer than 2,400 shale well permits this year — which means permit revenue could be $1.5 million less than projected.

“It’s not an insignificant amount of money,” said David Hess, a DEP secretary from 2001 to 2003 who now sits on the department’s Citizens Advisory Council, where the permit declines were first discussed. “I don’t know that they anticipated such a sharp drop in the number of permits.”

DEP might have some time to shore up the program’s funding, he said, depending on the balance in the account now and an unexpected boost from several large fines that gas companies have paid in recent months.

DEP fined Range Resources $4.15 million for violations related to its wastewater impoundments in September and fined Vantage Energy $999,900 for a landslide and other violations at a Greene County well pad in December. DEP is also seeking a $4.53 million fine against Downtown-based EQT Corp. through an administrative court.

The department generally anticipates receiving just $1 million in fines and penalties annually.

“That goes into the same pot of money,” Mr. Hess said. “So they have somewhat of a cushion there that they could rely on to get them through the hump.”

Another possible funding source for the program is a severance tax on the volume and value of gas extracted from the state’s shale formations. Democratic Gov. Tom Wolf’s severance tax proposal calls for transferring $10 million to DEP for oil and gas oversight.

But whether the Republican-controlled legislature passes a severance tax and whether DEP’s allocation would remain unchanged are open questions, said Davitt Woodwell, CEO of the Pennsylvania Environmental Council, an environmental advocacy group.

“Right now, those are ifs,” he said.

Some other DEP programs are not self-sufficient — they depend on a combination of fees and allocations from the taxpayer-funded general fund for revenue. The oil and gas program could also shift toward that model.

“You could use general fund dollars to be able to pay for that if you really wanted to decouple the funding of the oil and gas program from the ups and downs of the industry,” Michael Wood, research director for the left-leaning Pennsylvania Budget and Policy Center, said. But a benefit of the current fee-funded program is that “you don’t have to compete with other education funding, health care funding and everything that is in the general fund,” he said, “because that ends up being problematic.”

A roundtable brought together by the University of Pittsburgh's Institute of Politics anticipated the program’s funding problem in 2013 when it released recommendations for shale gas development in the Marcellus region. One of its core conclusions was that the state should regularly evaluate if permit fees and budget allocations are providing adequate support for oil and gas regulation, noting that “with current low natural gas prices and slowed drilling, it is unclear if new permit fees will be able to sustain the necessary oil and gas regulatory staffing level.”

DEP regulations require the agency to review the well permit fees at least every three years and recommend changes if the program’s costs and income are not in line.

The roundtable suggested that the General Assembly could consider enabling DEP to establish an annual permit fee for active wells to help defray the costs of ongoing compliance inspections.

The North Carolina Department of Environment and Natural Resources came to the same conclusion in 2012, after it surveyed the nation’s oil and gas regulatory programs to develop its own modern regulatory program for managing oil and gas exploration and development in the state.

It is common for oil and gas programs in other states to be funded by the industry, either through permit fees, a severance tax or both.

The North Carolina agency recommended that the legislature there should authorize an annual fee to pay for oil and gas oversight, rather than depending on a one-time fee or “a volatile revenue source,” like a severance tax, that fluctuates based on the natural gas market.

“The need to inspect oil and gas sites exists whether or not the market is booming,” the agency wrote.

Laura Legere: llegere@post-gazette.com

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