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State’s economy expected to struggle in switch to gas

West Virginia's economy will likely struggle through 2015 due to an energy transition away from coal toward cheaper natural gas, state Deputy Revenue Secretary Mark Muchow told lawmakers Monday.

Muchow briefed a finance subcommittee about projected trends in state severance tax collections during interim meetings at the Capitol.

With coal production down 10 percent this year and expected to decline further, state budget officials are looking toward growth in the natural gas sector to make up for coal's decline.

Muchow said the state economy as a whole could hit a rough patch during the transition from one resource to another.

"The state economy is likely to struggle significantly between 2012 and 2015 due to these changes in the energy sector," he said. "All of this leading to lower severance tax collections."

State severance tax collections, which helped buoy the state budget during the recent recession, are already down $45.6 million this fiscal year.

"The decrease in severance taxes is greater than we projected," Muchow said. "And it's occurring in both coal severance and natural gas taxes."

Coal severance tax collections are down 22 percent compared to last year. Natural gas collections are down 36 percent.

Muchow said weak global economic growth, decreased domestic coal demand and low natural gas prices are all contributing to the decline.

While natural gas production is up about 25 percent this year, the price has dropped from around $4 per million BTUs in 2011 to around $2 today.

The natural gas severance tax is calculated from the sale price. Lower prices mean lower tax revenue.

"Even though natural gas production is increasing, the decrease in price is more than offsetting the actual production," Muchow said.

Officials expect prices will rebound by 2014.

Muchow said a rebound and continued increases in natural gas production would be key in helping to offset a predicted decline in state coal production.

Muchow said the U.S. Energy Information Administration projects 8.5 percent of U.S. coal-fired power plant capacity is expected to retire by 2016.

"The decrease in coal-fired capacity will have a negative impact on West Virginia in the future," Muchow said. "By 2020, coal production in West Virginia will be down by . . . a third compared to where it was about three years ago."

Since coal makes up about 85 percent of the state's mining economy, Muchow said the gains in natural gas production will have to far outpace the loss of coal production in order to maintain severance tax collections.

"For every 10 percent decrease in coal, you need a 60 percent increase in natural gas in order to offset that and keep your output about the same," Muchow said.

The state brought in nearly $468 million in severance taxes from coal, natural gas and other industries during the last fiscal year. About $58 million came from the natural gas sector, while $410 million came from coal and timber.

Officials project severance tax collections will fall slightly in the 2013 and 2014 fiscal years, before rebounding back to 2012 levels by 2015 due to increased natural gas tax collections.

By 2017, natural gas is expected to make up a nearly $130 million share of state severance taxes, while coal and other industries will make up a $347 million share.

"Long term, we see the trends again flattening out a bit, with the coal increases balanced out by natural gas," Muchow said. "That assumes some recovery in natural gas prices."

Contact writer Jared Hunt at jared.hunt@dailymail.com or 304-348-5148.

 


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