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"An industry bill"

West Virginia Sen. Charles H. Clements, R-Wetzel, expressed concern with a bill subsequently passed by the Legislature designed to change the methodology by which oil and gas property taxes are valued, calling it “an industry bill.”

So much was being taken from under his constituents’ feet that he had to take the floor.

In the waning moments of the third-to-last night of the legislative session, state Sen. Charles H. Clements rose to raise concern about a bill scheduled for a vote the next day that would change how the state values oil and gas wells in property tax assessments.

“Don’t fool yourself,” Clements said. “This is basically an industry bill.”

The Wetzel County Republican argued that constituents in rural areas lack the strength in numbers to defend their interests when they don’t align with the industry.

Echoing fellow legislators from gas-producing counties, Clements said local school boards and county commissions were “not deeply involved” in crafting the bill he was previewing — House Bill 4336.

Local governments feared HB 4336 and a state law passed last year would result in devastating reductions to their gas and oil property tax revenues.

Work toward a new rule to be crafted by the State Tax Department came after the state gas and oil industry complained last year’s HB 2581 gave too much leeway to the department to determine property tax valuation, resulting in higher tax assessments.

HB 2581 was partly in response to a 2019 state Supreme Court ruling that the Tax Department improperly capped operating expense deductions for gas wells.

Local governments also expressed unease because of estimates the rule would thin their property tax revenue streams.

HB 4336 was a do-over that lead sponsor Delegate Dianna Graves, R-Kanawha, presented as a compromise between the oil and gas industry and county officials as well as some state lawmakers who opposed the former bill.

A state estimate based on Tax Department data projected the 10 counties with the highest oil and gas property tax revenues would have received 19% less for this tax year under HB 4336 than the $100 million anticipated under the current emergency rule provided for by HB 2581.

Clements reluctantly urged his fellow senators to pass HB 4336.

Legislators left themselves little choice, having already voted to reject a rule the Tax Department adopted as an emergency move in July under HB 2581 with no alternative in place.

“Look for a little different outcome this year given the extra and extraordinarily devoted amount of time that went to get this particular bill passed,” Gas and Oil Association of West Virginia Executive Director Charlie Burd said of HB 4336’s eventual impact.

It took Burd more than 10 minutes to run through some of the most prominent measures supported by his industry group that the Legislature passed during the session that ended earlier this month.

In addition to HB 4336, there was Senate Bill 694, a controversial measure that failed in past sessions and drew bipartisan opposition that would force nonconsenting landowners to participate in an oil or gas producing unit.

There was SB 650, which would eliminate the required number of royalty owners with whom an operator must negotiate to use an oil or natural gas mineral tract.

There was HB 4491, which would set up a state regulatory program for underground carbon dioxide storage and establish permit guidelines for drilling injection wells and sequestering the carbon.

“Those 134 legislators, the 34 [in the Senate] and the 100 [in the House of Delegates], they really dedicate a lot of time and effort,” Burd said. “And it doesn’t go unappreciated or unnoticed.”

The industry also noticed the failure of two bills that would have increased funding for the state’s well cash-strapped, downsized well inspection unit.

SB 480 and SB 613 would have allowed the Department of Environmental Protection’s Office of Oil and Gas to restore staffing levels at the agency, whose ranks were trimmed in 2020 to 25 from about 45. The number of inspectors was halved to nine.

Burd spoke out against SB 480, arguing that its $100 annual oversight fee for unplugged wells producing 10,000 cubic feet or more of gas daily was too onerous. Burd did not oppose SB 613 given its dedication of a portion of an already existing severance tax to funding the Office of Oil and Gas.

None of the bills has been signed into law by Gov. Jim Justice, but he is unlikely to oppose them given his amplified pro-fossil fuel rhetoric in recent weeks following the U.S. ban on Russian energy imports.

The Legislature has left the state’s oil and gas industry with limited inspection and fewer constraints on development with it already reaching record-breaking production levels.

The nearly 2.6 trillion cubic feet of natural gas produced in West Virginia in 2020 was about 10 times more than the state’s 2010 total.

West Virginia’s total crude oil production reached an all-time high of 20 million barrels in 2020, more than 10 times greater than in 2010.

The Legislature’s moves have left many landowners and environmentalists concerned the state has gone too far in loosening oversight.

“One of these days we’ve got to start helping individuals and quit giving these blasted companies everything they come to us and beg for,” Delegate Tony Paynter, R-Wyoming, said.

‘You’re stealing’

Paynter was among the 44 delegates who voted against SB 694 in the final week of the session following an often-heated 90-minute House floor debate.

The bill forces the combination of mineral interests regardless of whether a landowner consents if certain conditions are met.

SB 694 sets requirements for applicants seeking to combine, or unitize, oil and gas tracts or tract portions to form a consolidated horizontal well unit.

Under the bill, applicants controlling a horizontal well unit and seeking to combine tracts must get agreement from royalty owners of 75% or more of the net acreage in the target formation.

SB 694’s backers hailed it as bringing together interest groups that long have fought over provisions to establish unitization in West Virginia. A similar measure failed to pass the House in a 49-49 vote in 2015.

“It’s quite an accomplishment this year, given the fact that we have for the past several years attempted to craft a piece of legislation that was acceptable to all [the] major groups,” Burd said.

The West Virginia Royalty Owners Association and state Farm Bureau supported the bill, praising in part the 75% threshold and the legislation’s provision of production royalties for natural gas liquids.

The bill’s backers argued it would foster economic growth and sufficiently compensate nonconsenting landowners.

But SB 694’s opponents have predicted it would result in lower compensation for royalty owners and that the bill is tantamount to stealing.

“Each and every one of you that vote for this bill, you’re stealing and you become a thief,” Delegate D. Rolland Jennings, R-Preston, said on the House floor before a March 9 vote.

Assistant Minority Whip Lisa Zukoff, D-Marshall, one of SB 694’s most vocal critics in the Legislature, called it an “anti-freedom bill.”

“I just want to point out that you don’t represent every royalty owner,” Zukoff noted to Royalty Owners Association President Tom Huber after he said his group’s membership of 1,500 royalty owners was a low percentage of the state’s overall total.

“[G]as companies are going to just come in and run rampant across us,” Scott Sonda, a Northern Panhandle owner of 500 acres, said during a March 7 House Energy and Manufacturing Committee hearing held after the Senate and two House committees already had passed the bill.

Industry leaders rallied around the bill at the hearing.

Northeast Natural Energy President and CEO Mike John noted that gas wells his company drills mainly in Monongalia and Marion counties are “long-reach” horizontal wells 16,000 to 18,000 feet in length, resulting in wellbores that intersect a significant number of properties draining a large area.

Maribeth Anderson, director of government affairs for Antero Resources, said longer laterals — the horizontal portion of a well — enabled by technological improvements have made it harder to get to 100% agreement on every piece of property targeted for drilling.

“So, of course, we support a solution to that problem,” Anderson said.

SB 650 would eliminate a state requirement that at least seven royalty owners must own an oil and gas interest for an operator to develop it.

“That will certainly provide our producers the opportunity to assess and include more individual tracts of land into drilling units,” Burd said.

Annual oversight fee killed

The DEP’s Office of Oil and Gas needs $1.3 million more annually just to get back to previous staffing levels advocates say were already inadequate. Declining revenue from permit fees drove the shortfall.

The office is responsible for monitoring and regulating oil and gas drilling, storage and production, and it manages the state’s abandoned well-plugging and reclamation program.

There are 75,000 wells statewide, among them roughly 6,000 orphaned wells, for which inspectors are responsible, DEP Deputy Secretary Scott Mandirola told lawmakers.

“We can’t go another year with nine inspectors for 75,000 wells and counting,” West Virginia Rivers Coalition Executive Director Angie Rosser said. “That’s unacceptable.”

SB 480 would have raised an additional $1.35 million annually based on 2020 well production data, according to a fiscal note for the bill. But the measure was dead on arrival in the House of Delegates, where it languished in the Finance Committee.

“This is an unfortunate reflection on our legislators’ prioritization in protecting our air and water,” West Virginia Environmental Council Linda Frame said.

The West Virginia Surface Owners’ Rights Organization has suggested the office needs about 40 inspectors, citing a 2018 study of West Virginia well sites published in the peer-reviewed journal Science of the Total Environment that found active conventional wells are a significant source of methane emitted to the atmosphere.

The study estimated each active conventional well loses roughly 9% of production.

Methane has a 100-year global warming potential of 28 to 36 times that of carbon dioxide, according to the U.S. Environmental Protection Agency.

Carbon Tracker, a London-based think tank researching climate change impacts on financial markets, estimated in 2020 that plugging costs in West Virginia exceeded $7.6 billion. The total value of bonds to cover that expense was just $28.7 million.

During the 2020 legislative session, state lawmakers passed HB 4090, which created an oil and gas abandoned well-plugging fund supported by a 2.5% severance tax on marginal oil and gas wells.

But Ted Boettner, senior researcher at the Johnstown, Pennsylvania-based pro-clean energy think tank Ohio River Valley Institute, said state lawmakers have done little to address the risk from thousands of hazardous wells. Boettner argued lawmakers exacerbated that risk in the 2022 legislative session.

Boettner said well leaks contaminate groundwater supplies and undermine drinking water, potentially impairing agricultural activity and lowering property values.

Meanwhile, the industry profits.

Stock in Antero Resources, the state’s top operator for Marcellus gas production in 2020, is up 57.1% from six months ago. Stock in EQT, the state’s third-leading Marcellus gas producer in 2020, is up 43.4% over the same span.

“Instead of addressing the state’s billion-dollar crisis associated with thousands of hazardous oil and gas wells, lawmakers are allowing industry to take more from West Virginians while ensuring that the DEP doesn’t have the resources to protect the health and safety of the public,” Boettner said.

Drill, baby, drill

Burd said the industry looks forward to the drilling that SB 694 and SB 650 will open up.

“You’re probably going to see several companies with multi-well drilling programs,” Burd said. “I think they’ve been waiting to see this and see how they can best utilize the acreage they have here in the state.”

In his Senate floor speech, Clements noted a difference between the coal industry influencing coal-related tax laws in the 20th century and the 21st-century gas industry.

“The gas is owned by the local people,” Clements said.

But it’s governed by the Legislature.

“What I’d really like to see in this bill that hasn’t been put in this bill is transparency,” John Leonetti, owner of 192 acres in Brooke County, said of SB 694 during the hearing on the bill.

“We’ve been taken advantage of for hundreds of years in West Virginia, and our natural resources have just been stripped away from us unfairly,” Zuloff said. “It’s what they do here.”

Mike Tony covers energy and the environment. He can be reached at 304-348-1236 or mtony@hdmediallc.com. Follow

@Mike__Tony on Twitter.

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