West Virginia = Almost Heaven?

The “never-met-a-tax-I-didn’t-like” Pennsylvania Budget and Policy Center claims that West Virginia has a booming natural gas drilling industry, despite a natural gas severance tax. This “fact” is extremely misleading. Their central thesis is that West Virginia has more Marcellus Shale wells, per a report  in 2009.

This misses the mark on so many levels. For starters, West Virginia — even with a severance tax — has a lower overall tax burden than Pennsylvania. PA is the 11th highest taxed state in the nation, West Virginia is 29th. West Virginia also has a more productive shale play.

More importantly, Marcellus Shale drilling is booming in Pennsylvania, while growth has stagnated in West Virginia.

As noted in the Marcellus Shale study by Penn State scholars:

Natural gas prices began to increase in 2000 after 20 years in the doldrums; Pennsylvania drilling increased much more than West Virginia, presumably due to business climate, since West Virginia actually has more productive oil and gas properties and as much or more producing area. In 2005, there was another departure between drilling levels in Pennsylvania and West Virginia, this one possibly due to West Virginia increasing the severance tax. As Figure 20 illustrates, drilling activity in Pennsylvania exploded after 2000 while the gains in West Virginia were modest.

Drilling data backs up this finding (free registration required). Whether looking at active rigs, drilling permits, or well starts, the drilling activity in Pennsylvania has dwarfed West Virginia in 2009 and 2010 — typically by a 4 to 1 ratio.

West Virginia has a long history of drilling, but recent trends have made Pennsylvania a more popular place to drill. PA is now the number two state in the number of gas producing wells. Major companies are still working in the Mountain State, but they are putting far more resources into Pennsylvania recently, even pulling drilling crews from West Virginia to drill in the Keystone State.

As noted in the August newsletter from the Penn State Cooperative Extension’s Marcellus Education Team:

Marcellus rig counts have risen from an average of just over 30 in the third quarter of 2009 to the 80’s by May and 101 by July 23. The increase is occurring in Pennsylvania while West Virginia remains flat.

Adding to this conclusion is the US Department of the Interior:

Drilling in the Marcellus Shale is in its second year. Companies seem to be focused on Pennsylvania, though drilling is also occurring in West Virginia and Ohio, and New York. Over the past decade, it was common for Pennsylvania to have about 10 active drilling rigs at any point in time drilling conventional oil and gas wells. In the past year, rig count has steadily increased to nearly 40 active rigs. Pennsylvania’s Bureau of Oil and Gas Management reports that 1,516 wells have been drilled to the Marcellus Shale as of November 2009.

There are many factors besides a severance tax that go into company’s decisions about where to drill — but there is little doubt drilling in West Virginia has stagnated, while Pennsylvania has boomed, after West Virginia increased their natural gas severance tax.