Debriefing the 2022 WV Regular Legislative Session – Oil and Gas

By Brian J. Skinner, Esq.

After eight years of efforts to enact legislation addressing unitization or forced pooling of natural gas, the Legislature finally succeeded. Sponsored by Senators Tarr and Nelson, Senate Bill 694 sets out the property rights of surface owners when it comes to the drilling for natural gas by the use of horizontal wells.

The bill establishes application requirements for the combination of the tracts for oil and natural gas drilling by operators of horizontal well units. It requires horizontal well units — consisting of two or more tracts — to get agreements from the mineral rights owners for at least 75% of the net acreage when it comes to interest from the royalties collected.

The bill caps horizontal well units at 640 acres per unit, but a unit cannot contain more than 128 net acres controlled by nonconsenting royalty owners. Nonconsenting royalty owners with valid leases that do not include utilization provisions are allowed either 25% of the weighted average bonuses or 80% of the average royalty rate percentage.

Nonconsenting owners without valid leases can either sell their minerals, participate in the well subject to a 200% payout penalty, or elect to receive royalty payments in three different ways. They could choose to receive 100% of the weighted average bonus received by owners inside the unit within the previous 24 months, the highest royalty rate received by the owners in the unit within 24 months, or mineral owners could be paid through a weighted average sales price or the local monthly index price.

The House of Delegates amended and passed Senate Bill 694 by a 55-44 vote, in which 24 Republican members, including six members of the Northern Panhandle delegation, voted no. The Senate concurred with the House amendments by a vote of 24-8-2.

Senate Bill 650 eliminated the minimum number of royalty owners necessary for an operator owner to rely on the consent of three-fourths of the royalty owners for the right to use or develop oil or natural gas mineral property. Currently, the law requires there to be seven or more.

House Bill 4336 changes the methodology the State Tax Commissioner utilizes for oil and gas property tax valuation. Specifically, the legislation requires the Commissioner to develop a valuation approach for properties producing oil, natural gas, natural gas liquids, or any combination thereof, at their fair market value determined through the process of applying a yield-capitalization model to net proceeds.

The bill specifies that net proceeds will be determined based on the actual gross receipts on a sales volume basis determined from the actual price received by the taxpayers as reported on the taxpayer’s return, less royalty interest receipts, and less actual annual operating costs.

For all assessments made on or after July 1, 2022, the valuation of property producing oil, natural gas, natural gas liquids, or any combination will be calculated using a yield-capitalization model composed of a working-interest model and a royalty-interest model. The summation of the working-interest model and the royalty-interest model represents the fair market value of the property.

For all assessments made on or after July 1, 2022, the Commissioner must annualize gross receipts and actual annual operating expenses before calculating the working-interest model and the royalty-interest model for wells that produced for less than 12 months during the first calendar year of production or during the first calendar year of production after being shut in during the previous calendar year. Companies may provide additional actual gross receipts and actual operating expense information that will be supplemented or used in lieu of the Commissioner’s annualization calculations.

For assessments made on or after July 1, 2024, but not before, the Commissioner may not include a minimum valuation for any calculation related to determining the value of any well.

For assessments made prior to July 1, 2024, no minimum valuation shall exceed the values of $0.30 per MCF of natural gas, $10.00 per barrel of oil, or $0.30 per unit of natural gas liquids as established in a notice to taxpayers from the State Tax Department dated December 22, 2021.

Finally, the bill provides a safe-harbor provision for marginal well costs, limitations on calculations by the Tax Commissioner, annualized gross receipts and operating expenses before calculation of the models, limitations on minimum well valuations, an effective date for all assessments made on or after July 1, 2022, and a sunset date of July 1, 2025.

House Bill 4491 designates the state Department of Environmental Protection (DEP) responsible for setting rules for developing and approving underground carbon dioxide storage facilities.

The bill makes it illegal to operate a carbon dioxide-storage site without a permit to drill injection wells and sequester carbon dioxide at a specified site.

The bill authorizes the DEP to issue a permit only if it determines that:

• The storage facility is suitable and feasible for carbon-dioxide injection and sequestration;
• The storage operator has made a good-faith effort to obtain the consent of all persons who own the storage reservoir’s pore space or the cavity or void, whether naturally or artificially created, in a subsurface stratum also known as container space or storage right;
• The storage operator has obtained the written consent of persons who own at least 75% of the storage reservoir’s pore space and have at least begun the process to obtain the remaining interests through the Commission;
• The proposed storage facility will not adversely affect surface waters or formations containing freshwater;
• The storage facility will not unduly endanger human health or the environment;
• Adequate horizontal and vertical boundaries of the storage reservoir are defined, including buffer areas, to ensure the storage facility is operated safely and prudently;
• The storage operator will establish monitoring facilities and protocols to assess the location and migration of carbon dioxide injected for storage and to ensure compliance with all permits, statutory, and administrative requirements;
• All nonconsenting pore space owners are or will be justly and reasonably compensated in accordance with the rules and procedures set forth in or promulgated under this article by the Secretary and the Commission; and
• The storage facility is in the public interest.

The bill requires public notice and at least 30 days for public comment. The DEP must hold a public hearing whenever there is a significant degree of public interest in issues relevant to the draft permit or at the agency’s discretion if a hearing may assist in clarifying one or more issues involved in the permit decision.

Storage operators are required to pay a fee on each ton of carbon dioxide injected for storage in an amount set by the DEP in a legislative rule. The amount must be based on the contribution of the storage facility and the source of the carbon dioxide to the energy and agriculture production economy of West Virginia and anticipated expenses associated with the long-term monitoring and management of closed storage facilities. This fee is to be deposited in the Carbon Dioxide Storage Facility Trust Fund created by the legislation.

To expand the state’s all-of-the-above energy portfolio, the Legislature repealed a 1996 law that prohibited the construction of nuclear power plants in the state. The law repealed by Senate Bill 4 was originally enacted as a result of concerns about “an undue hazard to the health, safety, and welfare” to West Virginians and risks associated with the disposal of spent nuclear fuel. The bill was signed by the Governor and will become effective on May 1, 2022.

Although the bipartisan infrastructure bill signed into law last November includes $2.5 billon for nuclear power, there is no current effort to construct a nuclear power plant in the state.

Following the lead of Texas, which last year prohibited government contracts with or pension investments in companies that have shunned fossil-fuel producers, the Legislature enacted Senate Bill 262, which could restrict the state’s work with financial institutions that have limited their business with coal and oil companies.

The bill, which authorizes the State Treasurer to create a list of restricted financial institutions that have been shown to refuse, terminate or limit commercial activity with coal, oil, or natural gas companies without a reasonable business purpose, is largely based on model legislation provided to states through the American Legislative Exchange Council, a corporate-funded lobby that disseminates bills popular among Republicans. The new law, however, does not apply to the operations of the West Virginia Investment Management Board.

Senate Bill 552 includes a comprehensive rewrite of the process for the collection of delinquent real estate taxes.

The bill was touted as being important to move West Virginia forward by getting the property on which taxes are not being paid back on the tax rolls as productive properties.

Currently, tax bills are sent on July 15 every year by each county Sheriff. Taxes for the first half of the year are due in September, and the second-half taxes are due by the following March. If they are not paid by the following April, the lien process begins. In November, sheriffs are authorized to sell the liens on the courthouse steps via public auction. The tax sale is followed by a redemption period during which the property owner, lienholder, or mortgage holder can redeem the lien. If that process doesn’t happen in a timely fashion, the person who purchased the property at the courthouse steps can take possession.

The process is largely preserved throughout the bill, but the sheriffs’ duties will be replaced by the State Auditor, and it gives community members the chance to buy properties with continuous tax issues. Under the bill, Sheriffs will be required to certify to the Auditor which properties are behind on taxes, and the Auditor will conduct the sale.

The sale will have to be in an amount sufficient to pay delinquent taxes, interest, and costs. If no one bids on the property and the Auditor is required to buy the lien, the Auditor will have the authority to sell the property to whomever the Auditor chooses. The same is true if the property has been sold at a tax sale more than once in five years.

The hope is that the bill will encourage businesses coming from outside the state to purchase property for tax breaks.

The “pecking order” of who would get the first chance to bid on the property once it is in the Auditor’s care would be a neighboring homeowner, then the municipality, then the county commission. The West Virginia Land Trust will have the final priority to buy.

The focus of the legislation is the statewide problem of abandoned homes that often become drug houses and fire hazards. West Virginia University has estimated the cost of dilapidated properties to be between $500 million and $600 million statewide.

Finally, Senate Bill 552 requires the DEP, State Fire Marshal, Insurance Commissioner, Auditor, and others to review the needs of county commissions, municipalities, and others and by the end of 2023 present a report on the review and give recommendations on steps needed to meet the needs of the state in removing dilapidated properties. The assessment includes a review of current funding under the Reclamation of Abandoned and Dilapidated Properties Program.

The DEP may develop a program to create prioritized inventories of eligible structures.

In a bill relating to the Public Service Commission’s underground facilities damage prevention and one-call system,  Senate Bill 597 simply modifies what it means to excavate. The bill expands a carve-out for routine maintenance of paved public roads or highways by not limiting the maintenance to that performed by employees of the state, county, or municipal entities or authorities.

In addition to the bills, the Legislature approved DEP-proposed rules in Senate Bill 279. The rules are effective as of February 11, 2022.

Bills that passed the Senate but were not taken up by the House of Delegates include Senate Bill 415, which capped severance tax collections in general revenue at a specified percentage, and Senate Bill 480, which would have authorized an annual $100 fee for each well that is not plugged and that produces 10,000 cubic feet of gas per day or more as reported to the State Tax Commissioner in the previous reporting year.

Bills that passed the House but were not passed by the Senate include House Bill 2598, which modifies an exception to the definition of an aboveground storage tank by removing a location requirement for small devices having a capacity of 210 barrels or less; House Bill 3122, which establishes the operation of regional water, wastewater, and stormwater authorities; House Bill 4470, relating to the consumers’ sales and service tax and a use-tax exemption for certain goods to be incorporated into a qualified, new, or expanded warehouse or distribution facility; and House Bill 4657, which creates the Critical Mineral Investment Tax Credit Act of 2022.

 

Brian J. Skinner is the former counsel to the West Virginia House of Delegates Judiciary Committee and counsel to the West Virginia Senate Minority Caucus. He was also general counsel to the West Virginia State Health Officer and Commissioner for the Bureau for Public Health. He has almost two-decades of experience as a strategic advisor and chief legal counsel to both executive and legislative branch public officials.