What happened? Just a few weeks ago MDN told you that the West Virginia legislature had passed a bill with bipartisan support (and support from both the drilling industry and surface owners) that would redirect monies from low-producing oil and gas wells to fund a program to plug old abandoned wells (see WV Legislative Session Closes w/Several Pro-Drilling Bills Passed). WV Gov. Jim Justice vetoed the bill last week.

House Bill (HB) 2673 would give a severance tax break to low-producing wells. Gas wells that produce less than 60,000 cubic feet per day, and oil wells that produce less than 10 barrels per day, would be exempt from paying WV’s 5% severance tax. In place of the severance tax is a new 2.5% fee on the value of product sold. That fee will go into an Oil and Gas Abandoned Well Plugging Fund. So, low-producers get a 2.5% tax break, and the money that’s raised from them will go to a fund to plug old wells. A win/win for everyone. And everyone liked it.

Then Gov. Justice came along last week and vetoed the bill, meaning old wells will continue to go unplugged–a potential danger and harming the precious environment. What possessed Justice to veto it?

Here’s the veto letter Justice sent to the legislature:

HB2673-vetoltr

…

Why did Justice veto? We have a theory. But before we share our theory, an excellent post from our friends at Energy in Depth, outlining the wide support for this bill:

West Virginia Governor Jim Justice vetoed legislation this week that would have provided needed funding to the West Virginia Department of Environmental Protection for plugging the state’s more than 4,000 orphaned and abandoned oil and natural gas wells.

While Gov. Justice acknowledged the revenue that would have been generated by HB 2673 – up to $4 million annually – is “a goal that needs to be pursued and achieved,” he ultimately vetoed the legislation saying, “this needed funding should come from general revenues.” Most legislation to address this growing issue failed this session, despite WVDEP currently receiving only enough money appropriated from new well permit fees to plug around 10 wells per year.

HB 2673 would have increased the severance tax exemption on the state’s struggling low-producing wells. The severance tax normally paid on the production from these wells, would have been reduced by 50 percent with the collection of the now 2.5 percent severance tax going to a special account managed by the West Virginia Department of Revenue and earmarked to the WVDEP for the plugging of an estimated 60 or more orphaned and abandoned wells yearly.

HB 2673 had strong bi-partisan support from a wide range of stakeholders.

The bill passed through the West Virginia legislature with widespread bipartisan support: the Senate passed HB 2673 by a vote of 33 to 1 and the House passed it 89-11, and in large part because of the wide range of diverse stakeholders that supported the measure. As Senate Energy Committee Chair Randy Smith said, the bill was a shining example of effective collaboration between the industry, landowners and the environmental community:

“I want to tell all the stakeholders how much we appreciate your work on these bills.”

The bill had support from the WVDEP, surface owners organization, the West Virginia Farm Bureau, the environmental community and the oil and gas industry:

• West Virginia Environmental Council –
  

  “It will be good if the Legislature passes other bills like HB 2779 and HB 2673, that will generate money to plug a few orphaned wells, perhaps 60 a year.” (February 15, 2019)

• David McMahon, West Virginia Surface Owners Rights Organization –
  

  “The Legislature must find the money to plug the 4,000 existing orphaned wells…It’s one of the most widespread environmental and personal property issues the state faces.” (February 24, 2019)

• Charlie Burd, executive director of the Independent Oil and Gas Association of West Virginia –
  

  “This legislation would have provided much needed funding to address the issue related to orphaned and abandoned wells that have no responsible owner. It would have been a win for the state, a win for the many family owned small producers who own and operate low producing wells who have been struggling to stay in business and a win for the environmental community.”

HB 2673 would have decreased emissions and potential groundwater issues.

In West Virginia there are estimated to be more than 4,000 wells that are considered to be orphaned and abandoned. These wells could have been drilled and developed as far back as the mid- to late-1800s and often ownership or even the location of the wells is undocumented.

It’s an issue that across the country, the oil and natural gas industry has worked collaboratively with regulators and other stakeholders to find realistic solutions to address, as was the case with HB 2673. In many states, fees or taxes from the industry provide the funding to properly plug the wells.

One potential concern with these “abandoned” wells is that some have been found to be leaking methane into the air. Regardless of how widespread this issue actually is in West Virginia, it’s one that all stakeholders – landowners, regulators, environmental groups and the oil and gas industry – agree needs to receive better funding, and that’s why so many diverse parties supported HB 2673.

The bill proposed to increase the oil and natural gas production threshold that would qualify a producer to pay a severance tax on a well. This would have meant that low-producing wells that may soon need to be properly plugged and abandoned because of current cost impediments, including the severance tax and low commodity price of natural gas, would instead pay a lesser fee on production specifically designated for WVDEP’s well plugging initiative.

The environmental benefits of such a move would have been two-fold. First, the state would have had the funds necessary to plug roughly 60 or more wells a year, potentially lowering emissions and alleviating the risk of methane emissions.

Second, the bill would have lessened the burden on marginal wells, potentially increasing their cost-effectiveness and in turn allowing them to be in production longer – thus avoiding more wells being added to the states plugged and abandoned list.

HB 2673 would have had increased economic benefits.

The biggest point of contention for the legislation was that it would decrease current severance tax payments to some counties. But here’s the thing: severance taxes paid on high producing shale wells in West Virginia are increasing, while the taxes paid on lower producing conventional wells – the wells that would have been impacted by HB 2673 – are steadily decreasing. More than 92 percent of the state’s natural gas production – and severance tax on this production – now comes from newly drilled “unconventional” or shale wells.

Much of the lost revenue from marginal wells will be made up with shale production as the region continues to drive U.S. natural gas production. If the Appalachian Basin, which includes West Virginia, were a country, it would be the third largest natural gas producing country in the world.

HB 2673 had the potential to keep West Virginia’s lower producing marginal wells producing, and while that may have no longer generated severance tax revenues in some counties, it still would have benefited them.

In West Virginia, lower pressure marginal wells are often tied into local utility distribution networks that provide gas to homes and businesses and these supplies are decreasing each year where new conventional wells have not been drilled for many years due to economics.  Already residents have faced gas shortages and reliability issues in winter, but HB 2673 would have kept lower producing wells in production, thus enhancing these older distribution systems in order to keep homes and residences in gas.

It also would have been a job creator. Currently, the WVDEP has to outsource its efforts to plug wells. If HB 2673 had passed, the state would have had the dedicated funds to hire or contract experienced local oil and natural gas operators to properly plug the state’s abandoned wells.

Conclusion

Governor Justice’s decision to veto House Bill 2673, that had such widespread, bipartisan support on the basis it would significantly and negatively impact the state’s already decreasing severance tax revenue from low producing wells is unfortunate. In the long run HB 2673 had the potential to offer a tangible solution to two issues the state faces, while at the same time creating environmental and economic benefits. (1)

Back to the “why” question. Our theory is this: WV Gov. Jim Justice is in the hip pocket of Big Coal–specifically coal mine owner Robert Murray. Last week Justice held a signing ceremony at a Murray Energy-owned coal mine in Marion County, signing into law a bill reducing the severance tax on steam coal used in power plants from 5% to 3% over the next three fiscal years. But he turned around and vetoed a bill giving a measly 2.5% severance tax break to old/low-producing natural gas (and oil) wells. We think Big Coal pressured Justice, and Justice caved.

Beating the buzzer by several hours, Gov. Jim Justice on Wednesday signed and vetoed the remaining bills passed during the 2019 legislative session.

According to the governor’s website, Justice signed 24 bills Wednesday and vetoed 27 bills before the midnight deadline Wednesday. In total, Justice signed 266 bills and vetoed 29 bills passed by the state Senate and House of Delegates between Jan. 9 and March 9.

During a signing ceremony at a Murray Energy-owned coal mine in Marion County on Wednesday afternoon, Justice signed House Bill 3142, lowering the severance tax rate on steam coal used in power plants from 5 percent to 3 percent over the next three fiscal years. Justice also signed House Bill 3144, which gives tax credits to encourage the reopening or expansion of coal mines, and Senate Bill 635, making changes to laws regulating coal mining.

“This is our moment to put our stake in the ground and say, ‘By God, we’re not going to go quietly into the darkness,’” Justice said. “At the end of the day we want to grow our mining jobs.”

Justice vetoed a bill that would have eliminated the requirement for low-producing wells to pay natural gas and oil severance taxes. House Bill 2673 would have diverted those tax revenues to a fund for plugging abandoned natural gas and oil wells.

“The goal of providing additional needed funding to the Department of Environmental Protection to plug abandoned oil and gas wells and reclaim property disturbed by the plugging is a goal that needs to be pursued and achieved,” Justice said in his veto letter. “However, this needed funding should come from general revenues.” (2)

(1) Energy in Depth (Mar 29, 2019) – West Virginia Governor Vetoes Bill To Plug State’s Orphaned and Abandoned Oil, Natural Gas Wells

(2) Wheeling (WV) Intelligencer/News-Register (Mar 28, 2019) – West Virginia Governor Jim Justice Signs Steam Coal Severance Tax Cut Into Law at Murray Energy Mine