The Register-Herald, Beckley, West Virginia

Balancing Act

February 26, 2011

Marcellus shale will strengthen an already healthy gas industry

— While there are downsides to what some are calling the “industrialization of West Virginia,” some believe the potentially tremendous economic impact of the Marcellus shale will be a “game-changer” for a state long dependent on the coal industry.

Two reports, one an industry-funded study from West Virginia University and another from the National Energy Technology Laboratory, have gained a lot of attention after revealing natural gas was not only already a significant economic force in the state, but is also poised to grow. In 2009, the researchers from WVU’s Bureau of Business and Economic Research found the industry paid $65.9 million in state severance taxes, and the oil and natural gas industry paid $88.4 million in property taxes to the state.

“It has a lot of upside growth potential, particularly now because we have come to realize the potential of the extraction of natural gas liquids and the possible siting of ethane crackers in the state,” BBER Director Tom S. Witt said, noting lawmakers’ efforts to attract facilities that utilize natural gas byproducts.

Additionally, researchers found, the oil and gas industry in West Virginia employed 9,869 people and paid out $551.9 million in wages. Researchers estimated the industry generated a business volume impact of over $12 billion and created a total of about 24,400 jobs.

“Right now, the most popular places to drill are in the northern part, especially the Northern Panhandle of the state,” said Amy Higginbotham, one of the authors of the WVU report. “However, the Marcellus shale is throughout the state. I believe that as time goes on there will be more leases and more drilling activity into the southern part of the state.”

The number of people employed in the natural gas industry in West Virginia increased by about 34 percent from 2001 to 2009, and further growth is expected, WVU researchers found.

According to estimates from the NETL, the gross economic benefit of the natural gas industry is expected to increase from $371 million in 2008 to about $2.8 billion by 2020. Jobs created by the industry are expected to increase from around 2,200 to more than 16,800 in 2020.

“While these benefits are substantial and should provide some relief for a struggling economy, it should be noted that it is likely that these benefits are underestimated,” the report states. “This study has taken a conservative approach in estimating benefits.”

In order to take advantage of the coming boom, WVU researchers say it is important that West Virginia examines its policies and remains a competitor to other Marcellus states.

“Many of the producers are looking at the severance tax,” Higginbotham said. “The severance tax on natural gas is pretty prevalent here in West Virginia. In some of the other states where they are drilling for the shale, such as Pennsylvania, they do not have such a tax.”

However, not all believe the best idea is to lower taxes on the industry. Sean O’ Leary, an economist with the West Virginia Center for Budget and Policy, proposes an additional one percent tax to be stacked on the severance tax to cover potential effects of the industry. He said a mineral trust fund, like those established in New Mexico and Wyoming, could be used for workforce development, road repair and other needs for the state.

His estimates place the trust fund’s growth to about $600 million by 2040.

“There’s a lot of different things that affect economic impact of drilling,” O’Leary said. “Some good and some bad, particularly the pace of drilling, the scale of drilling and the strain that is put on communities by environmental impacts and things like that. What we found is that there are 10 counties that have dominated the natural gas drilling industry so far. They’ve produced 62 percent of the gas produced in state since 2000. These ten counties have higher rates of poverty, lower income, have been losing population and have less economic diversity than the rest of the state.”

He said it is important to address the lack of development in areas where natural gas is highest, and a mineral trust fund would capture the potential positive impact of natural gas.

A multiple-layered process is involved in developing the shale, and economic impact can occur within each layer.

The first stage is mineral leasing, in which companies negotiate with landowners for rights to drill the property.

The next phase is obtaining a permit to authorize the drilling of the well. In order to apply for a permit, surveys, drilling plans and other pieces of information must be gathered.

Then, road and well pad construction begins upon receiving the permit. Excavation of potential waste pits or other on-facility structures must also be done.

Once the site has been prepared, a well must be drilled and completed. The well casing must also be installed in this phase.

Once a well is drilled, workers can begin the process of hydraulic fracturing to stimulate the well for development.

Then the production stage begins. Unnecessary equipment from prior phases is removed, and gas is brought from the well and treated for market.

As production wanes, operators may conduct various operations such as cleaning, repairing or maintaining the well to increase or restore production of the well. This process may occur multiple times over the life of the well.

The final stage of the process is to plug the well and begin any reclamation efforts on the pad and access road.

At each stage, there are varying levels of economic and employment opportunity.

“It’s a very integrated system, which touches a different segment of our economy at each stage of development of that resource,” Witt said.

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