West Virginia Gov. Jim Justice delivered his first state-of-the-state address late Wednesday, and the Democrat voiced strong support for Appalachian shale producers, saying a tiered severance tax should be established and the industry should be helped, not hindered by the state.
“Natural gas just fell out of the sky on us, didn’t it? We need to do everything we can to exploit that to make it even better, and better, and better,” he told the state legislature. Justice delivered a unique address in which he had no prepared text or teleprompters and helped get his message across with a whiteboard and marker.
The state faces a nearly $500 million budget deficit in the 2017-2018 year and up to a $700 million shortfall in the next.
Unlike governors in Ohio and Pennsylvania, though, Justice said both coal and gas producers need to pay less when times are bad and more when they’re good. “I truly believe we ought to tier our severance tax on coal and gas,” he said. “You know, it’s just this simple.” Producers currently pay a 5% severance tax on oil, natural gas and coal production. A tiered system would scale that rate up and down, depending on prices.
Severance tax collections in the state have declined with lower commodity prices in recent years, partly contributing to the Mountain State’s budget woes. A bill last year that would have lowered the coal and gas severance tax by 40% by 2019 failed to pass the Republican-controlled legislature. Former Democratic Gov. Earl Ray Tomblin signed a bill in 2016 that eliminated the volumetric fees that both industries paid in addition to the severance tax.
Justice also discussed his support for legislation the industry will push for this year that would make it easier to extract natural gas on larger units. The industry has seen forced pooling legislation fail five times in the last seven years. Under current law, forced pooling is allowed in the state for deep wells below the Marcellus, such as the Utica, as well as shallow secondary oil recovery and coalbed methane wells, but not those targeting other shallow formations, such as the Marcellus.
Pooling allows an operator to gather landowners into a unit in which they share royalties and production costs, making it easier to block up acreage positions for today’s far-reaching laterals. Dozens of states have similar laws. But over the years, lawmakers have rejected the legislation over concerns about property rights.
“You know, there’s issues within natural gas. I think it’s called joint development, or lease integration, that they really want,” Justice said of the industry. “And I can’t possibly within me see why not. What’s wrong with that? Why not? We can help that industry.”
The West Virginia Oil and Natural Gas Association has announced its intention to pursue co-tenancy and joint development this legislative session. Under co-tenancy, a producer would need a simple majority agreement from mineral rights owners to access natural gas on adjoining properties rather than the current 100% that’s required. Joint development would modify an existing law so gas from nearby properties where mineral rights owners have already agreed to drilling can be accessed.
Justice also said he’d like to see less red tape from the West Virginia Department of Environmental Protection, which regulates the oil and gas industry. “We’re not going to break the law,” he said. “We’re not going to do anything to damage the environment…But we are not going to just say no.”
A billionaire and unconventional Democrat, who has been registered with both major parties over the years, Justice defeated Republican Senate President Bill Cole by roughly seven points in November. He’s owned Appalachian coal mines, a luxury golf resort and other businesses in the state. He did not support Hillary Clinton in the general election and at times aligned with President Trump.
To fill the budget gap, Justice proposed $450 million in temporary tax increases, mostly by raising the sales tax and establishing a gross receipts tax on businesses. He would also cut state spending by $26.6 million. The administration, sensing Republican pushback, also released an alternative budget plan to cut spending by $450 million.
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