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Gas drilling gushes revenue, problems

BUCHANAN COUNTY—Gas drilling has become a $2 billion-a-year industry that has provided much-needed revenue to Southwest Virginia, but it has also brought conflicts and lawsuits.

“It’s a two-edged sword,” said Mike Yates, commissioner of revenue in Dickenson County, the second-largest gas-producing locality in Southwest Virginia. “The gas industry will tell you that it’s probably the salvation of the region, but if you talk to the people, they’ll probably tell you they wish they’d never heard of or seen the gas companies.”

Some residents aren’t fans of the gas industry because state law doesn’t give them any choice in deciding if their properties will be drilled.

The Virginia Gas and Oil Act of 1990 says that if a small percentage of landowners have signed leases in a given area, drillers can get permission from a state board to tap all the nearby acreage, even if landowners don’t want them there.

Even less choice is given to Southwest Virginians. Drillers don’t need any leases to operate in the coal beds. They totally bypass landowners by petitioning the state for permission to drill.

“Really, you don’t have rights,” said Jamie Hale, a Buchanan County resident and lead plaintiff in a class-action lawsuit over drilling royalties. “It’s a mockery of justice. I hope, where you all are closer to Washington, that it don’t turn into a mess for you all, but I’m afraid it will.”

Hale’s story will be featured Monday, along with a look at a state escrow account that has almost $29 million in unpaid royalties. The money is just sitting there, waiting for the rightful owners to be located—or determined in court cases.

Legal clashes with residents aren’t the only proceedings involving gas companies in Southwest Virginia.

Buchanan and Dickenson, the two biggest gas-producing counties, have been embroiled in lawsuits with the two biggest gas-producing companies for five to 10 years.

The parties have disputed how the companies calculate the 3 percent severance tax they pay counties as well as the property assessments of gas wells and the machinery that comes with them.

The disputes prompted Bill Keene, treasurer and finance director of Buchanan County, to say that gas companies pay significant taxes, but also bring significant problems.

“The more money they make, the more they want,” Keene said. “You gotta watch ’em, they have some good lawyers, I’ll tell you that.”

Greg Kozera, president of the Virginia Oil and Gas Association, acknowledged that the disputes have been a “sore point” with the counties.

He said taxing gas-producing machinery isn’t as straightforward as taxing someone’s house and that formulas tend to differ from one county to the next.

He’s hoping the industry can work with counties to come up with consistent standards.

But, he said, counties can’t expect to make up the revenue they’ve lost from declining coal production by getting “a little more out of the gas companies.”

‘NOT NEW IN VIRGINIA’

Localities in the Fredericksburg area are looking at the ramifications gas drilling could have on this region. A Texas company has leased 84,000 acres in five counties east and south of Fredericksburg for possible drilling.

Environmental groups and local leaders have held informational sessions and town halls to educate residents, especially about the impacts of hydraulic fracturing, or fracking. That’s a process in which water, chemicals and sand are injected into a well under high pressure in an attempt to shake loose trapped gas.

When residents here raised concerns about water contamination or damage to the landscape, Southwest Virginia has come up because it’s the only area in the state where drilling is taking place.

The Free Lance–Star recently sent a photographer and reporter there. Officials from the Virginia Department of Mines, Minerals and Energy and CONSOL Energy, the biggest gas producer in Southwest Virginia, arranged a tour.

“Drilling is not new in Virginia,” said Cathy St. Clair, public affairs director for CONSOL, which operates in Southwest Virginia under a subsidiary named CNX Gas. “It’s been here for quite a while, and it’s tried, tested and true. We are definitely not the new kid on the block.”

Shore Exploration and Production Corp. is the Dallas-based company that has leased land for possible drilling in the Fredericksburg region. The acreage, in what is known as the Taylorsville basin, covers five counties: Caroline, Essex, King George, King and Queen and Westmoreland.

Shore and officials with DMME, the agency that regulates gas drilling, point out that 9,421 wells have been drilled in Southwest Virginia. Drillers have been fracking for more than 50 years without a single incidence of groundwater contamination, DMME reports.

Those familiar with the region say there’s been no record of water problems because wells already were contaminated by the earlier extraction of coal.

“Most of those counties down there are all on public water supply because their wells are completely polluted and shot,” said Peter Glubiak, a King William County lawyer who has represented localities and individuals in Southwest Virginia. “How much of that was coal mining and how much of that was gas, we’ll never know.”

The coal industry has spent $46.4 million to bring municipal water to 8,625 homes in Southwest Virginia, where wells were ruined.

LOW TAX RATES

Shore officials also have encouraged a look at Southwest Virginia to see the positive impact the gas industry has had.

If drilling is approved in the Taylorsville basin, they say localities could see the same benefits as Southwest Virginians, including royalties for landowners, revenue for localities and jobs for all.

“In Southwest Virginia [localities], sometimes as much as 50 percent of their budget is composed of money from the gas industry,” Ed DeJarnette, chairman of Shore’s board, told a King George County audience in April.

Southwest Virginia officials said otherwise.

“It’s never been that high,” said Keene, Buchanan’s finance director.

But along with revenue from the oil industry, money from gas has helped Buchanan keep a real estate tax rate of 43 cents per $100 of assessed value.

That’s lower than anywhere in the Fredericksburg region. Rates range from 48 cents in Westmoreland County to $1.01 in Stafford County.

With more than 3,500 wells, Buchanan leads the region—and state—in gas production.

From July 2013 through June 2014, Buchanan received $6.8 million in taxes from gas alone. That doesn’t include the millions of dollars in taxes on wells and machinery associated with them. Keene said it would take a month to add up those totals.

While the industry brings jobs in the early stages, they are typically not permanent ones, said Doug Mullins, commissioner of revenue in Wise County.

“Once that natural gas well is drilled, fracked and put online, there’s not a lot of employment associated with that,” Mullins said. “That is what it is.”

Yates said the most jobs come during the first stage of drilling, when workers fill restaurants and motels, and companies hire truck drivers to haul chemicals and sand.

“Luck Stone would love it for three or four years until the drilling campaign stops,” Yates said of the Fredericksburg-area quarries that could provide materials to well sites. “Then, it’s an exodus. These people leave by the hundreds and hundreds. However many you have there are gone.”

Industry officials point to figures from the American Petroleum Institute, which say the oil and natural gas industry together provide 141,600 jobs in Virginia.

The average industry salary, except for gas-station workers, was $57,549 in 2012.

That was $6,162 higher than the average salary in the state, across all industries and sectors.

Also in 2012, the oil and gas industry contributed $12.5 billion to the state’s economy—nearly 3 percent of the state’s gross domestic product.

COAL HAS BEEN KING

County officials all credit the gas companies for the tax revenue they generate.

But in the next breath, they point out that gas doesn’t come close to coal financially—or in the hearts and minds of residents, Mullins said.

Residents never got royalties from coal because the rights to the mineral were sold to coal companies in the 19th century.

But they did get jobs, and counties got even more revenue.

In Wise County, before coal production declined a few years ago, coal production generated an average of $1 million a month in taxes.

By comparison, gas produces between $80,000 and $100,000 a month for Wise, Mullins said.

Yates said it’s harder to get information about gas-company operations. He worked in the coal industry almost 40 years and managed properties for a company that also had gas holdings.

St. Clair, CNX’s public affairs director, said her company tries to “iron out any differences prior to those escalating to court action.”

But when disputes cannot be resolved, she said gas companies have to protect their rights.

“I think it is fair to say the counties have done the same,” St. Clair added.

Mullins, the revenue commissioner in Wise, was of a different opinion. He said lawsuits seem to typify the culture of the gas industry and an attitude markedly different from coal companies, which wanted to resolve problems with localities quickly outside of a courtroom.

“With natural gas, we’ve just never been able to have that success,” Mullins said.

INFOBOX: NATURAL GAS DRILLING IN VIRGINIA’S COAL FIELDS

Methane, or natural gas, in the coal fields of Southwest Virginia used to be called the miner’s curse. It chokes out the oxygen in the air and causes suffocation and is ignited easily.

Miners in Great Britain often took canaries into the mines with them. If the birds keeled over, workers knew the methane levels were too high.

In the past, Southwest Virginia companies drilled holes to ventilate mines, and the natural gas simply went up into the air.

“People said there’s got to be a better way to do this, and the coal-bed methane industry was born around 1992,” said Cathy St. Clair, public affairs director for CONSOL Energy.

CONSOL is based in Pittsburgh and operates as CNX Gas in Southwest Virginia. It is the biggest of about 20 companies that drill for natural gas in the coal fields. They include the counties of Buchanan, Dickenson, Lee, Russell, Scott, Tazewell and Wise.

Southwest Virginia has an estimated 5.7 trillion cubic feet of gas, according to a 2011 report by the Virginia Department of Mines, Minerals and Energy.

By comparison, the Taylorsville basin east and south of Fredericksburg has an estimated 1.06 trillion cubic feet of gas.

The big daddy of them all is the Marcellus shale region in Pennsylvania, New York and West Virginia. It has an estimated 410 trillion cubic feet of natural gas.

SIDEBAR: COMPANIES, COUNTIES SPAR OVER TAX BILLS

Here’s a look at the lawsuits involving the two biggest gas-producing counties in Southwest Virginia.

CNX Gas, a subsidiary of CONSOL Energy, was involved in a five-year legal battle with Buchanan County over how the company calculated what it paid in taxes.

When the county sued, saying the gas company deducted too many costs from its income before paying its 3 percent severance tax, the company countered and said the county wasn’t factoring depreciation values into its assessments.

The two settled in December 2012, according to a story in the Bristol Herald Courier. The gas company agreed to pay the county $15 million in back taxes over a six-year period. The amount “should have been more like $90 million,” said Bill Keene, treasurer and finance director of Buchanan County.

Both parties “gushed goodwill” in statements after the settlement about how fair the agreement was and how glad they were the issue had been resolved, the Bristol newspaper reported.

Wise and Dickenson counties were sued by EQT Production Co. over similar issues. EQT had been the second-largest gas producer in the region, but hasn’t been active recently, according to Virginia Department of Mines, Minerals and Energy officials.

EQT reportedly is being taken over by Range Resources, a Texas-based company.

EQT’s legal fight with Wise has gone on for 10 years. The company disagreed with how the county assessed its property and sought a $5 million tax refund from Wise and $15 million from Dickenson.

The case between EQT and Wise went to trial, a judge ruled in favor of the county’s methodology and in December 2013, the groups signed a memorandum that creates “a five-year cease-fire, if you will,” said Doug Mullins, commissioner of revenue in Wise County.

Dickenson’s case is still pending. Mike Yates, the county’s commissioner of revenue, said the two parties have been able to negotiate on some counts. The remaining conflict deals with the biggest issue: How the gas company computes its severance tax, or the 3 percent it pays the county.

Yates said the gas companies “claim enormous amounts of deductions” from their production before they pay the county its share. But they don’t disclose what any of these deductions are.

Greg Kozera, president of the Virginia Oil and Gas Association, said problems have arisen because each county tends to tax property differently.

In addition, when new commissioners of revenue take office, they may look at formulas differently from their predecessors, Kozera said.

—Cathy Dyson

SIDEBAR:  ‘A LOT OF TECHNOLOGY’ USED IN THE  FRACKING INDUSTRY 

BUCHANAN COUNTY—Almost 2,000 feet below the surface, a series of actions is taking place to loosen natural gas from the rock, and no one would know any of it was happening without looking at a computer screen.

A perforation gun—a long tube pocked cqwith explosives—is sent down the well’s shaft. Operators with CNX Gas, a subsidiary of CONSOL Energy of Pittsburgh, sit in the cab of a diesel truck. They make adjustments to get the gun to the right depth, then push buttons to activate the charges.

On top of the ground, there is no noise or vibrations, no feeling that the earth is about to give way. The only rumbling comes from the diesel generators powering the equipment.

“If you did [hear an explosion], something would be wrong,” said Kevin Elkins, CONSOL’s general manager of Virginia operations.

It’s the same at the next stage, when operators send nitrogen, water and sand down the hole under high pressure.

This is the controversial process of hydraulic fracturing, or fracking, and it doesn’t create any noisy side effects, either.

Only those in the “frack van,” an air-conditioned vehicle about 75 feet from the well, know that fracking is taking place. They watch as a red line on a computer graph climbs, noting the increasing pressure, then levels off. That means the fluids and sand are opening up layers of rock so trapped gas can escape.

“The only way you can see the fracture is digitally,” said Craig Hagy, drill manager.

If he’s not onsite, Hagy can check his smartphone to see if the well—always referred to as “she” or “her”—is doing what she’s supposed to be doing.

“There’s a lot of technology onsite,” Elkins added.

The lack of noise, as well as the number of computer screens that monitor every aspect of operations, was one of several points made during a recent tour of Southwest Virginia drilling sites.

Gary Eide, an inspector with the Virginia Department of Mines, Minerals and Energy, worked with CONSOL to let a Free Lance–Star reporter and photographer see drilling and fracking.

The Southwest Virginia sites seemed much cleaner and better regulated than what a reporter saw in March during a visit to the Marcellus Shale region in West Virginia.

Citizen activists led the tour in West Virginia and highlighted the horror stories fracking has caused there. They showed damage to creek beds and roads, wells where explosions had killed workers and sites where landowners had little control over industry infrastructure built on their property.

In Southwest Virginia, industry officials led the tour of some of their best sites.

They escorted the media from the control room to the “dog house.”

The control room featured four giant TV screens and 10 computers, where operator Jerry Myers watched weather forecasts, monitored methane levels in coal mines and checked the activities at a compressor station, which treats and dries gas before it is shipped to market.

The dog house is a shed set up around the drilling activity, which is the first phase in the production of a well. The “tool pusher,” or head driller, keeps paper records in the dog house on how deep the drilling rig goes.

At the fracking site, contractors and supervisors explained that this particular coal bed was being fractured, one layer at a time. The rock had 17 layers, and each took about 45 minutes to frack.

“It’s a day in the life of a well,” said Cathy St. Clair, CONSOL’s public affairs director. “It takes very little to develop a coal-bed methane well.”

Workers drill to a depth of about 2,000 feet, then frack the rock for a day or two. They get the nitrogen and water to flow back up from the well, install a pipeline to capture the gas and hook up power to keep the gas flowing out of the well and into a pipeline.

The process takes about 88 days from start to finish on each well, but that’s hardly the end of production.

The well will continue to produce for about 60 years, St. Clair said.

Cathy Dyson: 540/374-5425

cdyson@freelancestar.com

 

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