By Oil & Gas Financial Journal staff

On Monday, October 3, Pennsylvania Governor Tom Corbett approved key recommendations made by the Marcellus Shale Advisory Commission, including changes to enhance environmental standards, an impact fee, and a plan to help move Pennsylvania toward energy independence.

Key recommendations 
As a part of this proposal, Corbett announced a series of prudent standards related to unconventional drilling in the Marcellus Shale, including: 

• Increasing the well setback distance from private water wells from the current 200 feet to 500 feet, and to 1,000 feet from public water systems;
• Increasing the setback distance for wells near streams, rivers, ponds and other bodies of water from 100 feet to 300 feet;
• Increasing well bonding from $2,000 up to $10,000;
• Increasing blanket well bonds from $25,000 up to $250,000;
• Expanding an unconventional gas operator’s “presumed liability” for impairing water quality from 1,000 feet to 2,500 feet from a gas well, and extending the duration of presumed liability from 6 months after well completion to 12 months;
• Enabling DEP to take quicker action to revoke or withhold permits for operators who consistently violate rules;
• Doubling penalties for civil violations from $25,000 to $50,000; and
• Doubling daily penalties from $1,000 a day to $2,000 a day. 

In a prepared statement Monday, Gov. Corbett commented: “This natural resource will fuel our generating plants, heat our homes and power our state’s economic engine for generations to come. This growing industry will also provide new career opportunities that will give our children a reason to stay here in Pennsylvania. We are going to do this safely and we’re going to do it right, because energy equals jobs.”

Impact
Overall, said Stifel Nicolaus analysts in a note to investors October 5, “the new regulations should have a minor impact on Marcellus economics (an incremental $0.04-$0.07/mcf breakeven), should improve implementation of best practices given the higher liabilities, and could potentially result in operators moving to larger wells (longer laterals, bigger fracs) to minimize the impact of the per well impact fee.”

One of the key provisions, the $160,000 per well impact fee, will have limited impact on well economics, continued Stifel analysts. The fee will be spread over ten years with nearly $90,000 collected in the first three years. “On a present value basis, we estimate the impact fee will add roughly $113,000 per well, which assumes a 10% discount rate. Such a fee will marginally lower returns on a given well, with smaller wells feeling a greater impact from the fee. For larger wells, such as Cabot's that cost around $7 million, we expect break-even prices to creep up from $2.95/mcf to $2.99/mcf and the IRR to decrease 2% from 61% to 59% assuming long term gas price of $5.25/mcf. The impact on smaller wells that cost roughly $4.25 million will see break evens increasing from $3.57/mcf to $3.64/mcf and IRRs decreasing 2% from 29% to 27%,” analysts explained.

The plan allows for the impact fee to be adopted by counties for use by local communities experiencing the actual impacts of the drilling. The fee will be used by local governments, counties and state agencies that respond to issues that arise as a result of Marcellus Shale gas drilling. “Estimates show that this impact fee will bring in about $120 million in the first year, climbing to nearly $200 million within six years,” Corbett said.

One likely constraint is the increase in setback distances from 200 ft to 500 feet for private water wells and to 1,000 feet for public water systems. Additionally, the setback distance for wells near water bodies increased from 100 feet to 300 feet. “We expect the implementation of the new setback distances to have an impact on well orientation, but more likely the lateral length for wells located adjacent to water bodies,” said the analysts.

Overall, the Marcellus Shale Advisory Commission issued 96 recommendations. About one-third require legislative changes; more than 50 are policy-oriented and can be accomplished within the state agencies.

The legislative priorities outlined by Gov. Corbett will be submitted to the legislative leadership in the near future.