The Register-Herald, Beckley, West Virginia

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Balancing Act

February 26, 2011

Not just the North: Boom to affect all

Much of the buzz from the Marcellus shale gas industry has been rightly focused on a handful of northern West Virginia counties, but impacts are likely to spread throughout the state.

In addition to natural gas resources other than the Marcellus shale play, spin-off industries and other indirect impacts from the natural gas industry could potentially ripple throughout all 55 West Virginia counties.

Acting Gov. Earl Ray Tomblin said he hopes to see “a number of positive announcements and developments” in the next 18 months. The state, he said, is already seeing a substantial economic impact as a result of interest in the Marcellus shale.

“A rising tide lifts all ships. The more jobs we have, the more opportunities everyone has,” Tomblin said. “The production of coal in southern West Virginia not only benefits the miners making salaries, but it is a central cog that permeates our entire economy. Just as it is important that the entire state support the production of coal, we all need to support ways to diversify our economy.”

Drilling operations and their employees will also pay taxes. A large boost in state revenue has potential to be a shot in the arm across the board for government services.

Tom S. Witt, director of the Bureau of Business and Economic Research (BBER) at West Virginia University, has been tracking the economic impact of the gas industry. Witt said there are several ways natural gas benefits will spread across the state.

“There are going to be some tax revenues that accrue at the state level,” Witt said. “Certainly, there will be other types of fees and taxes paid by the individuals that work in the industry.

“For example, the individuals employed by the industry are going to pay personal income taxes to the state government used to support a wide variety of government services. They’ll pay sales tax, and the companies will pay use taxes on the materials that go into production, and that certainly goes into the state general revenue fund.”

Marcellus shale drillers currently face a severance tax at the rate of about 5 percent of the gross value of natural gas production. According to the West Virginia Department of Revenue, the state collected more than $86.4 million in severance taxes from natural gas in 2008 and $65.9 million in 2009.

Severance taxes are paid by West Virginia companies extracting a multitude of natural resources, including gas, coal, oil, limestone and gravel. About 82 percent of severance taxes in 2009 came from the coal industry, while natural gas severance taxes accounted for about 15.8 percent of the total $416.9 million in state severance taxes.

Severance tax funds are redistributed locally to areas of high production, the general revenue fund or the infrastructure fund. Currently, 75 percent of severance tax funds are redistributed to counties based on levels of production. The remaining 25 percent is distributed statewide based on county population.

Approximately 61 percent of the local oil and natural gas severance tax distribution went to 10 West Virginia counties.

About 40 percent of local oil and natural gas severance tax distribution went to six counties in southern West Virginia: Wyoming, McDowell, Kanawha, Logan, Mingo and Boone. North central counties, such as Doddridge, Lewis, Harrison and Ritchie, received 21 percent of the distribution.

Severance taxes accounted for nearly 8 percent of the total state tax revenue in fiscal year 2009. Of the Marcellus shale states, West Virginia has the highest rate of severance tax collection as a percentage of total budget.

Those companies also pay property taxes. According to estimates from the West Virginia Tax Department Property Tax Division, 11 counties in West Virginia collected more than $3 million in property taxes from the oil and gas industry. Kanawha, McDowell and Wyoming counties had the highest, collecting more than $7.6 million each in property taxes from the oil and gas industry.

According to a report from WVU’s BBER, Marcellus shale wells have been drilled in 45 of 55 counties, the first being drilled in Kanawha County in 2002.

As the natural gas industry becomes increasingly comfortable with the deep drilling methods associated with the Marcellus shale, they may be emboldened to go even deeper. Even thicker, broader and denser than the Marcellus shale formation is the Utica shale.

Though drilling in the Utica shale has been largely limited to just a few operations, development appears promising. Consol Energy drilled a Utica shale well in Ohio last year. The well produced gas at a higher rate than Consol’s vertical wells.

While most of the Marcellus wells were hydrofractured, the Utica shale did not require any stimulation to produce high levels of gas in the Belmont County, Ohio, well. Fracture of the Utica shale would likely result in further increases in natural gas production.

Nearly the entirety of West Virginia overlays the Utica shale, which is several thousand feet deeper than the Marcellus.

Currently, the Marcellus shale is less expensive to develop and easier to reach. While the Utica shale striates to regions beyond the range of the Marcellus shale, areas with Marcellus wells could develop an infrastructure advantage over other states by the time the Utica shale becomes widely developed by industry.

— E-mail: tkuykendall@register-herald.com

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