By Phil Reale
Attorney
Charleston, W.Va.
As a lawyer and lobbyist for IOGA of WV I read with interest the text of a recent article on the WV Metronews website discussing the state’s revenue and budget posture. As a past president of IOGA of WV years ago when my career was more exclusively grounded in oil and gas law, I took note of comments therein regarding potential new or increased taxation of oil and gas production activities.
Any analysis of the impact of new or increased taxation must begin with the fundamental appreciation that there is an oversupply of natural gas waiting on pipeline construction to move at least some of that gas to waiting markets nationally and to international export outlets. That oversupply factor has resulted in a very low commodity price for natural gas. This has worked a severe hardship on West Virginia producers.
Without going into detail, the fact is that most producers in our state are realizing a very minimal net revenue on a per unit basis for the natural gas they are producing. Due to the market dynamics of having a price per unit established at an indexing point in Louisiana and the distant location of the prolific shale gas fields of our region of the country (which are now the dominant force in supplying the nation with natural gas), there is something called negative basis applied to the price realized at the wellhead in West Virginia which very significantly reduces the price at the West Virginia wellhead. Additionally, there are very significant natural gas gathering and transportation charges associated with moving gas from the wellhead to market, which a WV producer is obligated to pay to owners and operators of those interstate pipelines. As a result, most producers realize far less than $1 per unit of gas produced, and in many cases not even $0.25, from which they must pay their operational costs. Operating costs many times far exceed the revenue realized by the operator.
In other words, they are upside down from the get go, yet due to the pipeline transportation contracts under which they are obligated, they have no logical choice other than to continue to produce and generate as much revenue as they can, if for no other reason than to avoid paying for pipeline transportation they must pay, regardless of whether they actually transport any gas or not.
It is for this reason that an increase in the severance tax under any format – tiered severance tax or otherwise – or for that matter any tax increase imposed on natural gas producers is an impediment to future natural gas drilling and industry investment in West Virginia. In fact, any additional cost burden to natural gas producers at this time is an anti-competitive force in terms of attracting drilling capital to West Virginia. Our state need not make it more difficult from a financial perspective to conduct business at a time when we need all the investment and legitimate, high wage jobs we can get.
Natural gas can be a solution. The capacity to generate revenue for West Virginia through the efforts of the natural gas industry should not be bypassed. There are other ways of achieving revenue and value from the industry which do not involve increased costs to producers. There can be progressive policies which foster the development of the industry and thereby stimulate investment and job creation. Actually, these ways are fairly simple and not difficult to understand.
First, we must recognize natural gas as a solution and not a problem. It is the only reliable energy source for electric power generation with a very recognizable reduction in carbon emissions as our nation transitions from coal as a fuel to natural gas as a fuel for electric power generation. It is the lowest cost new baseload fuel source for electric generation we have in our country. This translates into lower power costs for American manufacturers and helps keep America competitive. For those who prefer wind and solar power – which are intermittent sources of power – natural gas balances very well and assures us of a reliable source of electric power with a reduced carbon emission level.
One should note that there are no new coal fueled electric power plants which have been permitted and being readied for construction in the U.S. at this time. Economically, it does not make sense to utilize coal as a base fuel for power generation. With natural gas being so cheap, generating substantially less carbon emissions and with an abundant long term supply available for many decades, it only makes sense. Moreover, gas fueled power generation facilities also enjoy the lowest cost of operation.
Next, we need to recognize that with the shale gas revolution has come considerable and evolving technology to make natural gas more cost efficient to develop. Unfortunately, West Virginia has not accepted this proposition and denied modern policies which reflect the use of such technologies to maximize investment and production. Extended lateral drilling, consisting of drilling horizontally for 3 or more miles, and utilizing a technology known as “geo-steering” to modify the direction of the horizontal lateral from time to time to keep the lateral line in the “sweet spot” of the geologic formation, enables enhanced cost efficient production. This allows for increased production creating more investment dollars, jobs and severance tax revenue for West Virginia.
Adoption of policies to facilitate contemporary drilling and production of natural gas in West Virginia to produce clean burning, cost efficient natural gas, taking advantage of the riches of the shale gas formations underlying our state is just one answer to help stimulate the investment essential to help revitalize our economy and produce additional revenues for our state. Increasing taxes on an industry that is in a daily fight for survival is a counterproductive response to those objectives.
West Virginia, unfortunately, does not have a plethora of industries with known growth potential. However, natural gas is one which does and we need to focus on building value rather than diminishing value.
