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West Virginia Prepares Bills to Revamp Drilling Rules

Two bills aimed at revamping West Virginia's quarter-century-old drilling regulations are slated for introduction in the state legislature this week. The measures, variously directed at water management and horizontal drilling, would also increase horizontal well permit fees from $400 to $10,000.

The first bill, slated for introduction Monday, was drafted by the state's Department of Environmental Protection (DEP). It has three main provisions outlining the department's goals for handling Marcellus Shale production, said DEP Secretary Randy Huffman. One is that drilling permits on exploration of five acres or more will require the submission of a water management plan, including a withdrawal and disposal process (see Shale Daily, Jan. 12).

All drilling permits also must have slippage and erosion plans certified by an engineer. And finally, the higher horizontal well permit fees will enable the department to expand its staff. Right now DEP has only about 10 inspectors for 1,000 wells. There also is a need for more staff to process permits, Huffman said.

The second bill, which came out of a joint judiciary sub-committee, is slated for introduction toward the end of the week. The main provisions in this legislation focus on regulating the high-volume hydraulic fracturing operations and horizontal drilling, according to counsel for the Senate Judiciary Committee.

A controversial provision on pooling, which was pulled during subcommittee meetings, is expected to be in the final bill, counsel said. Producers in the state are split on the issue with large producers being in favor of forced pooling, while smaller producers oppose it.

Landowner groups give the bills tepid support. "Both are good starts," said Julie Archer of West Virginia Surface Owners' Rights Organization. Archer noted that both bills could have taken a stronger stand on environmental issues, since extracting Marcellus Shale gas is "like drilling on steroids."

Republican Delegate Kelli Sobonya, a member of the West Virginia House Natural Resources Committee, described the measures as "new guidelines" for drillers. "While [the Marcellus Shale] is a huge economic opportunity for us, we have to have accountability and limit the risk factors" of drilling, she said.

Only recently have lawmakers and state officials become aware of the size of the resource, its potential development and the need to write new regulations for drilling. Another politician said, "We know the vastness of it, but we're just getting an idea of how to deal with it."

During his state of the state address, Acting Democratic Gov. Earl Ray Tomblin said West Virginia needs to "embrace" the Marcellus Shale because of the economic impact it could have on the state (see Shale Daily, Jan. 14). Yet, while he was president of the state senate Tomblin was lukewarm on the shale play, and during a brief interview Tomblin said "it is too early to tell" what impact the basin will have on West Virginia.

Recent reserves estimates show about 25 Tcf to be underlying the Marcellus in West Virginia. According to DEP figures, within the last four years the number of horizontal well permits has skyrocketed from a low of 50 in 2007 to a high of 500 in 2009. In 2010 more than 400 permits were sought in West Virginia.

Business leaders and some elected officials said the boom will continue, but they worry that the state's high tax rate and heavy regulations will decrease investments. West Virginia already has the country's highest severance tax rate, they point out. During the current legislative session, lawmakers said, both chambers' tax committees will examine the state tax rates on business. But legislators warn that they want to avoid the appearance of giving one industry favorable treatment.

"We've got to have a tax structure that applies to all business," Sobonya said. "Any new business taxes must be fair and equitable to all businesses."

A staff member of the Senate Finance Committee said several meetings are scheduled this session to discuss business taxes, including the severance tax, business and occupation and inventory taxes.

An official with Texas-based Range Resources Corp. said the state's severance tax could lead to energy companies looking elsewhere to drill. Range spokesman Matt Pitzarella said some natural gas companies are slashing operations budgets in high-tax states and moving to a low- or no-tax state. He cited a growing number of companies heading for the Eagle Ford Shale in South Texas to drill, partly because that state has placed a moratorium on its severance tax for three Eagle Ford counties.

For Stephen Foster at the Upshur County Economic Development Board the discovery of the Marcellus Shale play has had an "incredible impact" on the county's economy. Currently, 35 wells are being drilled, employing nearly 1,000 people in a county with a population of 20,000. The average wage, he said, is around $50,000-55,000 and includes benefits. Yet, Foster worried about federal and state governments over-regulating the industry. "We need to balance regulation. More regulation doesn't always mean better protection," he said.

The two bills slated for introduction, he said, have very good provisions and are acceptable to business. What worries Foster is the ability of federal and state governments to withdraw permits or hand out large fines for minor infractions. "In this state, businesses need to have long-term knowledge that the rules aren't going to change," he said.

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