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Ohio Legislative Service Commission

 

 

Brian Hoffmeister

Fiscal Note & Local Impact Statement

Bill:

S.B. 165 of the 128th G.A.

Date:

October 21, 2009

Status:

As Introduced

Sponsor:

Sen. Niehaus

Local Impact Statement Procedure RequiredNo — Minimal cost

 

Contents:

Makes various changes to the Oil and Gas Law

 


State Fiscal Highlights

STATE FUND

FY 2010

FY 2011

FUTURE YEARS

General Revenue Fund

Revenues

- 0 -

- 0 -

- 0 -

Expenditures

Potential decrease

Potential decrease

Potential decrease

Oil and Gas Well Fund (Fund 5180)

Revenues

Gain of approximately
$3.1 million from new fee collections

Gain from new fee collections

Gain from new fee collections

Expenditures

Increase for transitional and start-up costs in the first year of implementation

Continuing additional administrative costs

Continuing additional administrative costs

Increase of approximately
$1.9 million in payroll costs

Increase of approximately
$1.9 million in payroll costs

Increase of approximately
$1.9 million in payroll costs

Note:  The state fiscal year is July 1 through June 30.  For example, FY 2010 is July 1, 2009 – June 30, 2010.

 

·         The bill creates or modifies several oil and gas fees, which would all be deposited into the Oil and Gas Well Fund (Fund 5180) in the Department of Natural Resources (DNR).  These fees could generate revenue of approximately $3.1 million over current levels in their first year of collection, with possible further gains in future years depending on actual collections.

·         Any additional administrative expenses would be paid from Fund 5180 and reduce the Division of Mineral Resource Management's reliance on the GRF to fund certain administrative costs for the oil and gas program.

·         The Division would incur a significant increase in administrative expenses in the first year of the bill's enactment for start-up costs and other necessary implementation actions, with ongoing costs thereafter. 

·         DNR anticipates hiring 33 new staff members in the Division of Mineral Resources Management, resulting in approximately $1.9 million in additional annual payroll costs.

 

Local Fiscal Highlights

LOCAL GOVERNMENT

FY 2010

FY 2011

FUTURE YEARS

Counties

Revenues

Potential minimal gain from recordation fees and compliance agreement penalties

Expenditures

Potential minimal increase to courts of common pleas

Note:  For most local governments, the fiscal year is the calendar year.  The school district fiscal year is July 1 through June 30.

 

·         The bill requires that liens, and the cancellation of liens, imposed on oil and gas properties by the Division of Mineral Resources Management be filed with the applicable county recorder, which may result in a minimal gain in recordation fees.

·         The bill requires penalties paid for violations of Oil and Gas Law compliance agreements to be deposited into the treasury of the county in which the violation took place.

·         County courts of common pleas may incur minimal additional costs to handle appeals of enforcement actions taken by the Division of Mineral Resources Management under the bill.


 

 

Detailed Fiscal Analysis

Overview of the bill

The bill makes a variety of changes to the Oil and Gas Law that affect the Department of Natural Resources (DNR), and the Division of Mineral Resources Management (DMRM) in particular.  For the purposes of this fiscal analysis, the most significant provisions of the bill relate to new fees and changes to existing fees established in statute.  These include:

·         A new oil and gas regulatory cost recovery assessment;

·         A new injection well disposal fee;

·         A new gas storage well regulatory fee;

·         A new mandatory pooling fee;

·         A new temporary inactive well fee;

·         A new well transfer fee;

·         Increasing the current fee for small township drilling permits;

·         Decreasing the current fee for expedited review of certain drilling permit applications;

·         Increasing the current fee for permits to plug and abandon wells;

·         Increasing the current fees for expedited reviews of applications to plug and abandon wells; and

·         Increasing the current fee for brine injection.

Additionally, the bill contains many provisions for which the fiscal effect is more administrative in nature.  These include new requirements for well owners to file surety bonds with DNR under certain circumstances; provisions granting DMRM priority liens against well owners who fail to pay fees or severance taxes; changes to current laws regarding oil and gas well permitting, drilling, and maintenance requirements; new well owner liability insurance requirements; new enforcement authority for DMRM; changes to the allowable use of moneys in the Oil and Gas Well Fund (Fund 5180); and various other provisions.  

For a more detailed summary of the bill's provisions, please see the LSC bill analysis.

Oil and gas fees

DMRM currently collects most of its revenue from a combination of regulatory and administrative fees and severance taxes on the extraction of mineral resources, with a portion of the Division's budget consisting of GRF funds.  Severance taxes are levied on oil and natural gas, as well as coal and other mineral deposits.  DMRM's oil and gas programs are funded by oil and gas severance taxes and fees charged for drilling permits and plugging abandoned wells, which are deposited into the Oil and Gas Well Fund (Fund 5180), as well as an allocation from the Division's GRF line item.  The new fees and changes to existing fees proposed in the bill are intended to reduce the Division's reliance on the GRF and provide a dedicated source of funding for oil and gas regulatory and administrative activities.  Table 1 below shows a list of all proposed new fees or fee modifications in the bill, as well as DNR's estimates of the revenue expected to be generated by each, if known.

 

Table 1.  New and Modified Fees in S.B. 165

Fee

Current Rate

S.B. 165 Rate

Estimated New Revenue

Regulatory cost recovery assessment – oil

N/A

$0.10/barrel

$495,641

Regulatory cost recovery assessment – gas

N/A

$0.005/thousand cubic feet

$395,995

Injection well disposal fee – in-district

N/A

$0.05/barrel

$275,000

Injection well disposal fee – out-of-district

N/A

$0.20/barrel

$300,000

Gas storage well regulatory fee

N/A

$225/well

$396,450

Mandatory pooling fee

N/A

$5,000/well

$75,000

Temporary inactive well fee – new

N/A

$100/well

$500,000

Temporary inactive well fee – first renewal

N/A

$250/well

Temporary inactive well fee – subsequent renewal

N/A

$500/well

Well transfer fee

N/A

$100/well

$350,000

New well drilling permit fee – townships w/ population fewer than 5,000

$250/well

$500/well

$150,000

Expedited review fee – new wells not in gas reservoir area

$500/well

$250/well

Unknown loss

Well plugging permit fee

$50/well

$250/well

$160,000

Expedited review fee – well plugging

$250/well

$500/well

Unknown gain

Brine injection permit fee

$100/well

$1,000/well

Unknown gain

Total – all fees with known revenue estimates

$3,098,086

 

Based on the revenue estimates in the table above, DNR would experience a gain of approximately $3.1 million to Fund 5180 in the first full year of implementation, and possibly more, depending on the revenue received from the two fees for which revenue estimates are currently unavailable.  The decrease in the expedited review fee for new wells not located in a gas storage reservoir or reservoir protective area is unlikely to have a significant impact on the overall revenue gain anticipated under the bill.    Actual revenues to Fund 5180 totaled just under $3.0 million in FY 2009; therefore, the estimated gain of $3.1 million represents an increase of approximately 104.7% over that amount.  Any revenue gains in future years would depend on the actual amounts collected from these fees, which would in turn depend on the level of oil and gas industry activity in Ohio.

New fees

The bill creates several new fees that must be paid by well owners or operators in order to carry out certain activities or obtain certain services.  These new fees, like current oil and gas severance taxes and existing oil and gas fees, would be credited to Fund 5180, which supports DMRM's oil and gas operations.  These proposed new fees are:

·         Regulatory cost recovery assessment.  Currently, well operators pay a severance tax of 10 cents per barrel of oil or 2.5 cents per thousand cubic feet of natural gas produced by a well.  Under the bill, DMRM would charge an additional 10 cents per barrel of oil and one-half cent per thousand cubic feet of natural gas as a regulatory cost recovery assessment to be collected quarterly, alongside the severance tax.  The minimum amount of a quarterly assessment must be the greater of either (1) $15 times the number of an owner's wells, or (2) the amount of an owner's severance taxes plus the regulatory cost recovery assessment proposed by the bill.

·         Injection well disposal fee.  The bill creates a per-barrel fee on substances that are delivered for the purpose of being injected into a well.  The fee is 5 cents per barrel when the substance is produced within the same DMRM regulatory district as the well or in an adjoining district, and 20 cents per barrel when the substance is produced outside of such an area.  The bill specifies that income from the fee is to be used for DMRM's administration of injection well statutes.

·         Gas storage well regulatory fee.  The bill creates a fee of $225 for each well that is (1) used for gas storage, or (2) used to monitor a gas storage reservoir and that is located in a reservoir productive area.  DNR estimates that between 1,700 and 1,800 wells would be subject to this fee.

·         Mandatory pooling fee.  The bill creates a fee of $5,000 to be added to standard application fees for permits to drill a well if the application is for a permit that requires mandatory pooling.  According to DNR, only about 15 wells would be subject to this fee.

·         Temporary inactive well fee.  The bill creates a "temporary inactive well status" for wells that have annual production of less than a certain amount of oil or gas.  The bill creates a fee of $100 per well to be paid upon first applying for a one-year temporary inactive well status.  The fee for a first renewal would be $250 per well, and each subsequent renewal would be $500 per well.  DNR estimates that approximately 1,000 wells would qualify for temporary inactive well status and be subject to this fee. 

·         Well transfer fee.  The bill creates a fee of $100 per well to be paid (1) upon the assignment or transfer of the entire interest in an oil or gas lease, or (2) the transfer of the entire interest of a well to a landowner for use as an exempt domestic well.  DNR estimates that approximately 3,500 wells would be subject to this fee.

Changes to existing fees

The bill increases the rates of four fees, and decreases one fee, that oil and gas producers currently pay to DMRM.  The bill increases the fees for small township well drilling permits, well plugging permits, expedited review of permit applications to plug and abandon a well, and brine injections, and decreases the fee for expedited review of certain permit applications to drill a new well.  Income from the fees is deposited into Fund 5180, as would be any additional revenue from the increases proposed in the bill.  These proposed modifications are:

·         Well drilling permit fee.  Under current law, there is a fee of $250 for a permit to drill an oil or gas well in a township with a population of fewer than 5,000 residents, and a fee of $500 for a permit to drill in a township with at least 5,000 but fewer than 10,000 residents.  The bill consolidates these into a single fee of $500 for drilling in townships with populations of fewer than 10,000.  This change would only affect applicants for permits to drill in townships with fewer than 5,000 residents.  DNR estimates that approximately 600 wells would be subject to this fee.

·         Expedited review fee – new wells in nongas reservoir areas.  Under current law, there is a fee of $500 for an expedited review of an application for a permit to drill a new well, if the well is not to be located in a gas storage reservoir or reservoir protective area.  The bill decreases this fee to $250.

·         Well plugging permit fee.  Under current law, there is a fee of $50 to apply for a permit to plug and abandon a well if the well has produced oil or gas.  The bill increases this fee to $250.  Revenue from this fee increase would be used to address the backlog of idle and orphaned wells that have not yet been plugged.  DNR estimates that this fee would apply to approximately 800 wells.  According to the Department, the average cost to plug a well is between $8,000 and $12,000, though some wells may cost as much as $20,000 to plug.

·         Expedited review fee – well plugging.  Under current law, unless the Chief of DMRM has ordered a well to be plugged, there is a fee of $250 to apply for an expedited review of an application to plug and abandon a well.  The bill increases the fee from $250 to $500.

·         Brine injection fee.  Under current law, there is a fee of $100 for a permit to inject brine or other waste substances into an underground formation unless the Chief of DMRM expressly authorizes the injection.  The bill increases this fee to $1,000.

As noted above, presumably the additional revenue generated to Fund 5180 by the four fee increases, as well as the new fees proposed in the bill, would more than offset any loss that results from decreasing the expedited review fee that would apply only to proposed new wells that are not located in a gas storage reservoir or reservoir protective area. 

Administrative provisions

Use of money in the Oil and Gas Well Fund

Current law requires that money in the Oil and Gas Well Fund (Fund 5180) be used to (1) plug wells and properly restore land surfaces for which bonds have been forfeited, (2) plug abandoned wells for which no funds are available, (3) inject oil or gas production wastes in abandoned wells, (4) correct conditions that the Chief of DMRM reasonably determines are causing imminent health or safety risks, and (5) administer the Natural Gas Policy Act of 1978 and the Division's other functions.  The bill revises the uses of the money in Fund 5180 to require that at least 14% of the revenue credited to the fund during the previous fiscal year be used solely and exclusively for the purposes described below.

Well plugging, surface restoration, and injection.  The bill generally maintains the requirements in (1) and (3) above, but specifies that wells to be plugged are "idle and orphaned wells," removes item (2), and no longer requires that the fund be used for land surface restoration for which bonds have been forfeited.  The bill further specifies activities that may be performed under contracts for well plugging or land restoration, and expressly prohibits the use of expenditures from the fund for contractor salaries, maintenance, equipment, or other administrative purposes except for costs directly attributed to plugging idle and orphaned wells.

In addition, under current law, a landowner who has not properly plugged and abandoned a well or has not properly restored the land may be reimbursed by DMRM for the reasonable costs of doing so under certain conditions.  The bill generally maintains this authorization, but requires that DMRM's expenditures be consistent with the bill's new requirements for well plugging and land restoration contracts as described above.

Correction of health and safety risks.  The bill adds the requirement that the imminent health and safety risks included in requirement (4) above be located at an idle or orphaned well.  The bill authorizes money in Fund 5180 to be used to initiate a corrective action on a well for which the owner cannot be contacted, and requires DMRM to issue an order requiring the well owner to reimburse the Division for the actual documented costs of such an action.

Administration.  The bill adds that expenditures from Fund 5180 must be used solely and exclusively for the administration of the Oil and Gas Law and the Underground Storage of Gas Law (encompassing the requirements described above), including for purposes that are critical and necessary for the protection of human health and safety and the environment related to oil and gas production in the state.  The bill additionally prohibits money in the fund from being used for the purchase of real property or to remove a dwelling in order to access a well.

Administration of new requirements

The bill makes a number of changes to various parts of the Oil and Gas Law that DMRM will be required to implement and enforce.  The LSC bill analysis contains more detailed descriptions of these provisions.  Briefly, these include:

·         Changes to the terms and conditions of an oil or gas permit;

·         Changes to mandatory pooling requirements;

·         New notification requirements for permittees;

·         New requirements for conducting well stimulation activities;

·         A new procedure for designating wells as temporarily inactive (see above for a description of the temporary inactive well status fee);

·         Modified requirements for well construction;

·         Modified requirements for filing statements of production and wireline electric well logs;

·         Modified requirements for determining the suitability of a well for plugging;

·         Modified requirements for conducting secondary or additional recovery operations;

·         Modified requirements for the storage, disposal, or injection of brine and other waste substances;

·         Modified requirements for administrative rulemaking regarding oil and gas drilling, production, and plugging;

·         Modified requirements for land surface restoration;

·         New authority for DMRM to enforce provisions of the Oil and Gas Law;

·         Modified requirements for well owner liability insurance coverage;

·         Modified permitting requirements for plugging and abandoning a well;

·         Modified requirements for assigning or transferring wells and leases; and

·         New requirements related to the transportation and application of brine.

Fiscal effect – DNR

It is likely that there will be significant administrative expenses associated with implementing the changes required by the bill, including the new and modified fees and the various other administrative and regulatory changes listed above.  Such costs would largely be borne by Fund 5180, though some of DMRM's GRF funding may be used before additional revenue can be generated by the fees in the bill.  In FY 2009, DMRM spent approximately $2.9 million on oil and gas regulation, including
$2.7 million (92.4%) from Fund 5180 and $220,266 (7.6%) from the GRF.  Appropriations for oil and gas operations under H.B. 1 currently total approximately $6.6 million in
FY 2010 and $4.8 million in FY 2011, as shown in Table 2 below. 

Note that while both line items in Fund 5180 are used exclusively for DMRM's oil and gas programs, only a portion of the GRF funding is used for these purposes.  However, DMRM is relying on an increased portion of GRF line item 744321, Division of Mineral Resources Management, to fund oil and gas operations in FY 2010.  In this fiscal year to date, $390,463 has been spent from line item 744321 for oil and gas programs, approximately 77.3% above the total amount spent in FY 2009.

 

Table 2.  Appropriations for Oil and Gas Programs, FY 2010-FY 2011

Fund

Line Item

FY 2010

FY 2011

GRF

744321, Division of Mineral Resources Management*

$2,800,000

$1,000,000

5180

725643, Oil and Gas Permit Fees

$2,974,378

$2,974,378

5180

725677, Oil and Gas Well Plugging

$800,000

$800,000

Total

$6,574,378

$4,774,378

* Funds in this line item also support DMRM activities not related to oil and gas.

 

Foremost among the new costs the Department would incur in administering the bill's revisions to its oil and gas programs are those for payroll.  Currently, DMRM employs 35 full-time equivalent (FTE) employees in its oil and gas programs.  Under the bill, the Division anticipates that it would need to hire another 33 FTEs for a total of 68 FTEs, a staffing increase of 94.3%.  These would include field inspectors, permitting staff, information technology staff (including mapping and well database management), and administrative staff.

Personnel costs (including salaries and fringe benefits) incurred by the oil and gas program totaled slightly over $2.0 million in FY 2009.  Of this amount, 3.7% was paid out of the GRF, while 96.3% was supported by Fund 5180.  However, the GRF has assumed a larger portion of oil and gas payroll costs incurred to date in FY 2010.  Total FY 2010 payroll costs for the oil and gas program have been approximately $817,000, of which $433,000 (53.0%) was derived from Fund 5180 and $384,000 (47.0%) came from the GRF. 

Using the FY 2009 payroll expenditures of $2.0 million for a staff of 35 employees, this represents an average payroll cost of just over $57,000 per employee, including wages and fringe benefits.  At the same average pay rate, an additional 33 employees would cost the Division an additional $1.9 million annually, not taking into account variable costs such as regular step increases and other adjustments.  Presumably, all of this additional payroll would be paid out of Fund 5180 rather than the GRF, supported in large part by the new and increased fees proposed in the bill.

Fiscal effect – local governments

Some of the provisions listed above would have an effect on local governments, particularly those related to enforcement of the Oil and Gas Law.  Current law allows well owners to appeal certain actions by the Chief of DMRM to the court of common pleas in the applicable county.  The bill's modification to some of these requirements may result in additional appeals and thus additional costs to county courts to handle the cases, though these are not likely to be more than minimal.  These expenses may be offset by a provision requiring penalties associated with violations of a compliance agreement entered into under the Oil and Gas Law to be paid into the treasury of the county in which the violation occurred.

Other provisions

Surety bonds

The bill makes some changes to current law and institutes new provisions regarding the circumstances under which an oil and gas producer must provide a surety bond to DMRM.  Under current law, a producer must file a surety bond with DMRM before being issued a permit for a well.  The bill adds that a bond must be filed before a well is operational and productive, and prohibits the operation of a well if a surety bond has not been filed.  The bill also requires any owner, operator, producer, or other person who forfeited a surety bond to post a new bond in the amount of $15,000 for a single well, $30,000 for two wells, or $50,000 for three or more wells.  For a well owner who applies more than three times for a renewal of temporary inactive well status, the bill authorizes the Chief of DMRM to require a surety bond in an amount up to $10,000 for each temporary inactive well.  Finally, the bill makes changes regarding surety bond requirements for brine transporters.

The effects of these provisions are likely to be mostly administrative in nature, as DNR only holds surety bonds as security for the compliance of well owners and operators and only accepts the proceeds of surety bonds in the event of a forfeiture, in which case the forfeited amounts are deposited into the Oil and Gas Well Fund (Fund 5180).  Overall, the provisions of the bill may result in some additional surety bonds being held by the Department, which would most likely be held by the Bond Refunds Fund (Fund R017) within the Holding Account Redistribution Fund Group.  The fund holds bonds posted by various entities required to file surety bonds or performance bonds with DNR for statutorily required purposes.

Priority liens

The bill grants DMRM the authority to impose a priority lien against an owner's interest in an oil or gas well (1) if the owner fails to pay applicable oil or gas fees or severance taxes, or (2) if DMRM incurs costs to correct imminent health and safety risks associated with a well.  Any lien would be in the amount of fees and taxes owed and costs incurred, and amounts collected pursuant to a lien would be deposited in the Oil and Gas Well Fund (Fund 5180).  Additionally, the bill requires DMRM to file a statement of the lien, and upon release of the lien, a certificate of release, in the office of the county recorder in the county in which the well is located.  This may result in the collection of some minimal additional recordation fees by county recorders.

 

 

 

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