The development of the Marcellus shale gas play in West Virginia could significantly impact West Virginia's economy, according to a new report by the West Virginia College of Business and Economics (BBER).
West Virginia's natural gas industry accounted for over $12 billion in business volume and created over 24,400 jobs in 2009, 30 percent of which was in the state's mining industry, which includes coal, oil and gas extraction. "Out of this total, our study estimates that the Marcellus shale play accounted for the creation of 7,600 jobs and $2.35 billion in business volume, making it a significant contributor to the economic health of our state," said Dr. Tom S. Witt, BBER director and co-author of the study.
Witt noted that nearly 20,000 jobs could be created by 2015 if drilling grows by 20 percent each year. However, the Marcellus play's potential contribution to the state will only be possible "with well informed public policy related to the taxation, regulation and the environmental impact affecting the industry in our state," said Corky DeMarco, executive director of the West Virginia Oil and Natural Gas Association, which commissioned the report.
The bulk of the jobs created directly and indirectly from Marcellus shale development are in the mining sector, but other sectors of the state's economy experienced significant job creation as well, including construction, transportation and warehousing. In addition to jobs, which also helped boost the industry's wage level, shale drilling operations have increased the amount of state tax collections received from the industry.
While natural gas has been an essential resource for West Virginia, with gas used to light homes and streets since the 1860s, drilling and development operation in the Marcellus shale play has been an important component of West Virginia's gas industry since 2002.
Permits for Marcellus shale wells in West Virginia have been on the rise, from one permit issued in 2002 by the West Virginia Department of Environmental Protection to over 800 permits by 2008. West Virginia led the pack in relation to other Marcellus shale development states in terms of permits issued from 2002 to 2008. However, lower gas prices and the economic recession resulted in 500 permits being issued in 2009, a 54 percent decline from the previous year.
The study authors note that the estimated economic impact of Marcellus shale on West Virginia is conservative as estimates of the economic benefits of royalty payments, bonuses to landowners, exploration of the Marcellus shale, pipeline and transportation of gas extracted from the Marcellus shale, gas processing and severance taxes paid to the state were not included in the economic impact estimates due to data limitations.
"The economic impact of these aspects of the Marcellus shale development on the state's economy could be substantial, especially if the level of growth in the Marcellus shale drilling and development from 2010 to 2015 is high," the report said.
"Future development of the Marcellus shale in the state is dependent on changes to federal and state policies as well as changes to tax and environmental policies in other Marcellus shale states. The level of development is also dependent on the market price of natural gas."
The Tax Foundation reports that West Virginia ranked 29th in terms of overall state and local tax burden in the U.S., meaning the state's general tax policy climate is relatively more conducive to gas industry operability than other states with significant Marcellus shale deposits. When taking into account the corporate tax burden, the individual income tax burden, sales taxes, unemployment insurance taxes, and property taxes, West Virginia ranks 37th in the Tax Foundation's overall State Business Tax Climate Index for fiscal year 2010.
Challenges faced by Marcellus shale operators in the state include the five percent severance tax on the gross value of gas production, which could impact the level of profitability of drilling and development operations in the Marcellus shale region, according to the study.
While gas is relatively more efficient and clean burning than other fossil fuels, there are still environmental concerns regarding its extraction, production and distribution. The gas industry faces potential environmental regulation by state and federal departments of environmental protection as well as other entities that have the authority to influence how firms can engage in drilling and development operations in the Marcellus shale play.
Water management also is a critical aspect of gas production in West Virginia as hydraulic fracturing requires a high amount of surface and ground water utilization. Gas producers also face possible new federal legislation that would limit the extent of greenhouse gas emissions. "While the incidence of such regulation would likely fall on coal and oil producers that emit relatively greater amounts of carbon dioxide and other greenhouse gases, the fact that gas is largely comprised of methane has important implications for regulatory incidence," the report said.
Other potential issues include the increase of traffic on West Virginia's roads and need to train skilled workers locally for work in drilling, development and production operations.
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