IOGA hopes bills will be passed in 2018

CHARLESTON — Oil and natural gas development — upstream at the wells, downstream at the hoped-for manufacturing plants and everything in between — is seen by many as a key to the state’s economic future.

And the Independent Oil and Gas Association of West Virginia (IOGA) hopes to see a couple pieces of legislation passed during the 2018 session to help development roll along.

IOGA President Marc Monteleone, Vice President Brett Loflin and Executive Director Charlie Burd talked with The Dominion Post on Monday about their goals.

“The oil and natural gas industry is hope for West Virginia,” Monteleone said.

One bill on their radar deals with cotenancy, where more than one person owns a single mineral tract. Oftentimes, they said, a tract may have hundreds of owners as it’s passed on to multiple heirs generation after generation.

State law requires 100 percent agreement to lease a tract, but many owners may not be locatable, they said. In other cases, a small minority, even a single person, may block development for the rest. In a classic 1928 West Virginia case, Law v Heck Oil, the owner of a 1/768th share blocked development for the rest.

Cotenancy laws and their cousin, joint development — also called lease integration or pooling — are termed mineral efficiency or lease efficiency laws.

“We’re one of the last three or four states that have nothing,” Loflin said. “Our surrounding states have things in place. It just makes things more difficult.”

Last year, a bill containing both, SB 576, passed the Senate after many amendments but died in the House. This year, they said, they’re not interested in pooling, just cotenancy. Only a few companies stand to benefit from pooling, while many see operations blocked by cotenancy challenges.

The way companies deal with cotenancy issues now is through partition suits, where the parties go to court, the judge puts the property up for auction and now ex-mineral owners lose their rights.

“We feel like cotenancy is way more fair,” Loflin said. “At least with cotenancy, the nonconsenting owners, we’re paying them a royalty, we’re paying them a lease payment, and they get to keep the rights to their interest.”

Acquiring leases, they said, is key to another issue: longer laterals for the horizontal wells. Most of the drilling expense is at the front end, so longer laterals add little extra expense and increase efficiency and return on investment.

Our neighbors and rivals in the Marcellus and Utica shale plays, Pennsylvania and Ohio, both have lease efficiency laws that allow for longer laterals — averaging 8,000 to 12,000 feet where West Virginia averages about 6,500 — which gives them the edge for companies that want to invest in drilling, they said.

Longer laterals also produce more severance taxes and decrease the number of well pads needed to produce the gas, they said.

As reported many times, opposition to pooling is chiefly what killed last year’s bill. So this year, IOGA and other industry groups have been talking with the various stakeholders just about cotenancy.

“The concept of cotenancy seems to have some broad support to get put in place,” Monteleone said.

Tax legislation

The other legislation IOGA has in view deals with taxes: property and severance.

For property taxes, they explained, the value is now calculated based on expenses as a percentage of production. But with today’s historically low prices, expenses can outstrip production driving the tax figure artificially high. They’d like to see a revised formula to determine value.

Another property tax problem is appeals when an operator disagrees with the valuation. Current law creates a vicious circle. The state determines the value, they said, but a county board of equalization handles appeals. So the county board sends the operator back to the state, which says it’s a county issue.

That sends the appeal to circuit court with a new array of evidentiary challenges.

“So it’s a mess,” Monteleone said. They’d like to see a true appeals process enacted.

The severance tax potion deals with “marginal wells” or “stripper wells,” which are old vertical wells operated by many small, mom-and-pop companies and producing small amounts of gas for local communities.

There are about 1,600 bonded operators in the state, but less than a dozen deal with the horizontal shale wells. Those few produce about 90 percent of the state’s gas, while the mom-and-pops cranks out about 10 percent.

The severance tax for these companies is so high if they can’t turn a profit. Some are laying workers off. And as these old wells run dry, the small companies have no incentive to drill new wells, which endangers the gas supply for their customers.

It’s not possible to pipe in gas from the modern horizontal wells, they said. The old infrastructure couldn’t handle the vastly higher pressures.

Also, they said, the state actually spends more collecting the tax from these operations than it makes off them.

So IOGA is hoping for legislation to raise the severance tax exemption for these wells. “It’s a constant challenge. What we’re trying to do is make sure the small guys at least survive,” Monteleone said.

Time for hope

Turning to the topic of hope, they talked about downstream manufacturing job, gas-fired power plants and the China Energy deal that promises to invest more than $83 billion in the state.

“The great long-term comes from the downstream manufacturing,” Monteleone said. Drilling produces jobs. Pipelines produce jobs. Construction produces jobs. But they all move on when the project is done.

During the next 10 years, the vast majority of power plants built will be gas fired, they said.

“We’d like to be there to supply that gas for the power plants.”

One obstacle to development isn’t on their legislative agenda, but it’s also on their radar, and on the radar of the state Commerce Department, officials there said.

That’s the rising cost of electricity. At one time, Monteleone said, we had about the third-lowest rates in the country. Now we’re in the mid-20s and rising. That deters manufacturers looking for affordable rates.

“None of this stuff we’re talking about happens if we let the electricity price get out of control,” he said.

This article was authored by David Beard for The Dominion Post.