Recent months have brought a lot of commentary about increasing the severance tax on natural gas in West Virginia.
But will increasing the tax on natural gas production really increase state revenue? Or drive producers away?
West Virginia’s severance tax rate is already measurably higher than that of neighboring states. Increasing the severance tax rate would not automatically increase state revenues if producers found it less profitable to drill in West Virginia.
Natural gas production involves a factor known as depletion. Once drilled and put into production, the volume of gas produced from a well begins to decline.
As much as 50 percent of the life of a Marcellus shale well may expire in the first year of production. The balance of the gas to be produced from that same well will gradually decline to virtually no production over a period of several years.
Current levels of production in West Virginia are not a constant number. Without new drilling, the level of production declines quite rapidly. Tax benefits decline accordingly.
Increased revenues from natural gas severance taxes are dependent on sustained or increasing levels of production. This means West Virginia must be regionally competitive with Ohio and Pennsylvania in terms of attracting the massive amount of risk capital involved in drilling horizontal wells in the Marcellus and Utica shale formations.
Contrary to the comments we see in print and hear for increasing revenue, West Virginia does not have a corner on the market of natural gas. Neither does Pennsylvania or Ohio. It is true that, regionally, the three states have a bountiful reserve of natural gas to be explored and developed.
But such is also true of the Permian Basin in West Texas, the Haynesville shale in Louisiana, Alaska’s oil and gas field, and prolific discoveries recently revealed in Wyoming, just to name a few.
Moreover, there is international competition as well. Why mention these other jurisdictions? Horizontal wells with lateral lines extending between 8,000-10,000 feet involve a cost of between $8 million to $10 million. Governing policies in Ohio and Pennsylvania facilitate laterals extending 20,000 feet and more, promoting far more cost efficient production than we allow in West Virginia.
Just think about six to eight wells on a single pad producing energy from underneath two miles of land. It represents an investment in our state of $60-$80 million for just one pad.
Companies capable of attracting investment capital to engage horizontal drilling are generally well-capitalized companies. They have the flexibility to move their equipment to natural gas fields where they can get the greatest return on investment.
We must recognize that these gas fields are not confined to West Virginia. We also must recognize that we have to directly compete with Ohio and Pennsylvania. Businesses must rely on profitability in order to sustain operations. Competition is a real factor in deciding where to make an investment.
West Virginia’s severance tax on natural gas is levied at 5 percent of value received by the producer. Ohio’s tax rate on natural gas is linked to the price of natural gas received by the producer on a graduated scale. Last year, the effective severance tax rate in Ohio was 1.3 percent.
Pennsylvania has no severance tax but merely a local impact fee which terminates after 15 years. Last year the effective tax rate for the local impact fee in Pennsylvania was 2.9 percent.
Increasing the natural gas severance tax in West Virginia would reduce West Virginia’s competitiveness and its ability to attract job-creating investment. It would result in less production, which would result in less severance tax revenue collected for use by state and local governments.
Without being competitive with other natural gas producing regions in terms of tax burden, as well as governing policies which provide a more cost efficient and industry friendly environment, the whole question of increasing severance taxes becomes moot.
West Virginia should not diminish its capacity to compete by making our state less attractive as a location to invest. Natural gas is the one industry that offers greatest hope for a future of jobs, investment, economic diversification, revenue generation and the ability to keep our youth in state.
Natural gas — clean, abundant and cheap — represents West Virginia’s best hope for the future. It may not always be so, but in the foreseeable future and for several years, there is no denying its promise for our state.