From The Charleston Gazette-Mail:
Recently, the state announced that Severance Tax Collections for the end of May were $40 million ahead of estimates. Much of the improvement in severance tax collections was attributed to the increase in the price of natural gas.
While it is true that there was modest increase in the price of natural gas, we are not out of the woods yet.
When one reads in national publications about the price of gas having rebounded somewhat, the reference is to the price established at a facility in Louisiana known as Henry Hub. That price is a marker from which all or most all natural gas derives its market price. It is 1,500 miles or so from the Appalachian Basin, which has become the largest producer of natural gas in the country, and has the capacity to be the largest in the world.
However, the gas we produce has a transportation factor to overcome that 1,500 miles, which creates a negative drag on the price West Virginia producers receive for their gas. This drag on the local price of our gas is referred to as negative basis.
The increase in the price of natural gas that has occurred over the last three months does not constitute an increasing trend as suggested by a recent news article in the Gazette-Mail on June 5.
Elsewhere it was reported that recent improvements to the Dominion pipeline helped reduce the glut of natural gas being experienced in the Appalachian Basin. However, Dominion just released its summer pricing scenario and stated that the “summer basis for DOMSP continues to reflect the oversupplied situation on Dominion Transmission.”
This has resulted in an increase of the negative basis on the Dominion system by another 4.5 cents bringing the current negative basis to $0.831 less per unit of gas produced than the price established by the market at Henry Hub. The glut we are experiencing in the supply of natural gas continues and is likely to continue for quite some time.
More important are the future forecasts on the price of natural gas. While most forecasters do not agree on the exact price of natural gas in the future, all agree that the price for natural gas is going to continue to remain low and predict that the price is going to be lower than it is currently.
For example, the net price for natural gas on the Tetco M2 system is $2.69 for January 2018, $2.39 for January 2019 and $2.29 for January 2020. This decreasing trend in price means that the oversupply of natural gas will continue to be a significant influence. Thus, severance tax projections must account for this factor in order to accurately reflect what can reasonably be anticipated by the state.
If only we could reverse the hands of time and return to 2007 when the per- unit price of natural gas was in excess of $10, West Virginia’s budget woes would not be.
The low price of natural gas has had a devastating effect on the natural gas industry in West Virginia and the economy it supports in so many of our communities. While producers continue to experience some of the lowest prices in recent history and the forecasters predict that this negative environment will continue for the foreseeable future, jobs are lost, families are despondent and those who supply goods and services to the industry are pinched.
Although gas producers and our state have reaped the benefits of a modest short-term uptick in commodity prices, the light at the end of the tunnel for both the natural gas industry and the State of West Virginia is a long way off.
Philip A. Reale is an oil and gas industry lawyer and lobbyist for the Independent Oil and Gas Association of West Virginia.
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