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West Virginia Governor Offers Co-Tenancy as Trading Chip for Higher Natural Gas Tax

West Virginia’s Republican Gov. Jim Justice has thrown a wrench into the natural gas industry’s crusade to help producers develop larger tracts of land, suggesting co-tenancy legislation considered close to passage should be tossed in favor of a broader deal that might be brokered in a special session.

In an unusual move, Justice wants to tie the co-tenancy legislation to what’s become a political maelstrom, posting on Twitter that the gas industry is willing to trade passage of co-tenancy and joint development for an increased severance tax to raise revenue to meet public school employees demands for better pay and benefits.

Thousands of teachers began striking last week to protest a 4% pay raise over three years that was signed by Justice last week. Teachers unions have said the raise won’t defer increasing healthcare costs and problems with the state’s Public Employees Insurance Agency (PEIA). The unions were reportedly scheduled to meet with Justice on Tuesday afternoon.

“The gas companies want two things from you -- co-tenancy and joint development,” Justice posted Monday. “I say to them, I won’t be a proponent of co-tenancy or joint development to help you without raising your severance tax. You know what they said? ‘We’re OK with that.’”

The messages came as Justice called for a special session on oil and gas during a series of public appearances on Monday. “Then you have an income source for PEIA, if it can be done,” he tweeted. 

Anne Blankenship, executive director of the West Virginia Oil and Natural Gas Association (WVONGA), an advocate of co-tenancy legislation, told NGI’s Shale Daily in a brief telephone interview Tuesday that her organization has no interest in any trade that would result in a higher severance tax. Producers in the state now pay a 5% tax on the value of gas.

HB 4268 passed the House along party lines earlier this month. The bill was before the state Senate Judiciary Committee on Tuesday. The legislation is the latest effort to enact a bill to help gas producers develop more of their assets in the state and, in particular, block more acreage for longer laterals. Forced pooling has repeatedly failed because of concerns over property rights, and the industry dropped efforts last year to work on co-tenancy and joint development proposals.

Joint development would have allowed unconventional drilling to occur on land with older leases without modifying them. However, Blankenship has said the industry dropped the proposal from this year’s bill because it was too controversial. HB 4268 would require a producer to obtain consent from 75% of the mineral rights owners of a single tract of land.

Tom Huber, president of the West Virginia Royalty Owners Association, said while “it’s really kind of inappropriate to weigh in like this at this time,” he thinks Justice’s proposal won’t jeopardize the legislation, which the organization and others support. He believes the bill could pass the Senate by the end of the week.

“I think the ball will be in the governor’s court when the legislation lands on his desk and whether he’s going to veto good policy that’s brought all of the stakeholders together in agreement,” he said during an interview.

Huber also believes that Pittsburgh-based EQT Corp., the nation’s largest gas producer, has played an outsized role in influencing the governor. He said EQT board member Bray Cary, a volunteer adviser to Justice, has the governor’s ear and said the company has pushed for joint development unlike other producers or industry advocates.

“You have one oil and gas company in the state of West Virginia who, in a kind of petulant fit, is demanding what they call joint development, which none of the other companies support, which none of the landowners support, which none of the mineral owners support, and you’re holding teacher pay and teacher insurance hostage using the governor’s office in order to get what we call in the state forced pooling,” Huber said.

“I’m not suggesting anything. I am saying EQT is exerting a great deal of pressure on the governor’s office,” he said.

EQT said co-tenancy and joint development are still crucial to moving energy development forward in West Virginia, but they are not as important to the company as they have been in the past.

“Given the more favorable legislative climate in Pennsylvania and Ohio, EQT’s 2018 drilling program plans to drill 168 wells in these two states -- a sharp contrast to the planned 28 wells in West Virginia,” spokeswoman Natalie Cox said. “Without the necessary updating and clarification of West Virginia’s existing law, this trend will likely continue far into the future.”

After more than 100 years of oil and gas development in the state, it’s common for producers to encounter severed mineral estates that have been divided among various family members over the years who may be difficult to track down. West Virginia is also the only major oil and gas producing state that still allows a minority interest owner to prevent other interest owners from allowing drilling, according to WVONGA.

Currently, the legal recourse available in the state could result in a partition action and a public sale that favors producers, which have the means to buy property, Huber said.

“This is a much better way in our view of dealing with co-tenant disputes about how to use the property, and it offers a lot of protection for the nonconsenting co-tenants and the unknown and unlocatable co-tenants,” he added. “It also protects the surface owners. We think it’s a win-win-win all the way around.”

Both Republicans and Democrats called out Justice on Tuesday, reminding him that an omnibus gas bill including joint development and increases in severance taxes has already been discussed during the regular session, which ends March 10, with little support to pass the legislature.

“Now, the governor has decided to interject this unrelated dispute into the current discussion regarding teacher pay and benefits and PEIA in an apparent attempt to convince our teachers and public employees to support such a plan,” Republican House Speaker Tim Armstead said.

The quest for co-tenancy and similar legislation over the years has been a balancing act. Last year SB 576 passed the Senate, but the clock ran out on the bill after it got stuck in the House Energy Committee. House lawmakers in 2015 couldn’t agree on several amendments to a forced pooling bill, which resulted in a rare 49-49 tie that defeated it. 

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