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Highlights

Legislation would encourage build-out of gathering systems in rural parts of state

Tax relief provided for marginally producing gas wells

Houston — Legislation West Virginia lawmakers passed in their recently concluded legislative session is expected to encourage the construction of distribution pipeline systems in underserved areas of the state, as well as to give a tax break to production from low-producing gas wells.

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Among the bills passed during the session, which closed Saturday, was House Bill 2661, which allows natural gas utilities to provide incentivizes for gas drilling "where dependable, lower-priced supplies of natural gas are not readily available."

The legislation, which awaits the signature of Governor Jim Justice, will help encourage the utilities to build new gas gathering systems in areas of the state "where there haven't been wells drilled in the last several years," Charlie Burd, executive director of the Independent Oil & Gas Association of West Virginia, said Monday in an interview.

HB 2661 was just one of several pieces of legislation that the lawmakers passed, which are expected to help increase the state's output of gas, Burd said.

Gas production in the state has increased rapidly since the middle part of the current decade as producers began to tap into the deep liquids-rich Utica Shale formation, as well as the shallower Marcellus. Production grew from about 2.24 Bcf/d as of January 1, 2014, to about 4.54 Bcf/d currently, according to S&P Global Platts Analytics data.

Production in the state is projected to continue to ramp up over the next five years, topping 7 Bcf/d by 2024, according to Platts Analytics.

Another bill IOGA WV favored for passage was HB 2673, which increases the exemption from severance tax for marginally producing wells. Under current law, only wells producing 5 Mcf/d are exempted from paying the 5% severance tax, based on total production.

HB 2673 raised that level of production eligible for exemption to 60 Mcf/d from 5 Mcf/d. For those affected wells, the severance tax will be replaced by a well plugging 2.5% tax, with funds going to the plugging of abandoned and orphaned wells for which no responsible owner can be found.

MARGINALLY PRODUCING WELLS TARGETED

Burd said the legislation allows producers to pocket the proceeds from an additional 2.5% of their production, which will "incentivize them to keep those wells in production, invest that money back into low-producing wells to benefit the state." The bill is expected to raise from $10 million to $14 million a year for the state's well-plugging fund.

"This will keep wells in production in those areas that are seeing declining production," Burd said. This, in turn, will provide a benefit for gas gathering systems that service rural parts of West Virginia, he said. "Not only does it keep wells in service, it also serves to keep the integrity of pipeline-distribution systems."

Not all of the bills that were championed by the association, which represents oil and gas producers, were successful. Burd said. One major disappointment for the group was the failure of lawmakers to pass HB 2834, which would have changed the rules regarding well spacing to have allowed wells targeting the deep Utica shale to be drilled on the same pad as wells drilled into the shallower Marcellus formation.

Burd said IOGA WV would continue to work in the legislative off season with the West Virginia Conservation Commission to encourage the regulators to schedule public hearings and to develop an emergency rule to affect the desired regulatory change, which would greatly enhance producers' ability to develop the Utica play.

-- Jim Magill, jim.magill@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com