Water and Fracking: The Opportunities, Challenges and Risks in West Virginia

We have all heard about the positive economic effects of the shale oil revolution in the United States. According to IHS Research, the unconventional oil and gas industry supported 2.1 million jobs in 2012. IHS expects that number will grow to 3.9 million jobs by 2025. And if you have gone to the gas pumps recently, we have unconventional drilling to thank partly for the lower gas prices. AAA reports that the national average gas price has fallen to $3.186 a gallon this week from $3.342 at the same time a year ago. But does the rising economic tide raise all boats in the country equally?

The answer unfortunately is no. While natural gas extraction occurs in many parts of the country, not every area of the country has seen equal economic advantages from gas extraction. The different economic situations that regions with natural gas extraction experience also affect the policy decisions states make in regulating the industry. Since fracking and water policies are inextricably linked, there are a few states making disparate policy decisions based on their economic conditions. In this piece, I will look at the opportunities and risks that potential new fracking contracts bring to the State of West Virginia.

West Virginia: Fracking along the Ohio River

In contrast to North Dakota, Texas and Colorado where fracking has brought an economic boom, West Virginia faces a much more tenuous economic future. Coal mining was historically an important economic driver for the state. However, both economic and political changes are hurting this important industry for the state. According to research from the Center for American Progress, a combination of factors is hurting coal as a cost-effective fuel source. First, the US EPA and many other nations around the globe have mandated regulations to reduce greenhouse gas emissions from fossil fuels. Coal burns much less cleanly than natural gas, and the regulations have significantly curtailed coal deliveries to power plants that used to rely on the fuel source. Also, the prevalence of new natural gas resources in the United States (mostly from unconventional sources) puts even further pressure on coal prices. The abundance of natural gas has dropped the price of both oil and natural gas in the United States, and many coal mines cannot deliver coal profitably. Unfortunately, these market forces cause some negative economic impacts to West Virginia.

West Virginia is feeling the pinch of reduced coal output and prices in two places: in jobs and the state’s budget. The West Virginia Center for Budget and Policy points out that the state has lost 5,000 coal mining jobs since 2011. In September of this year, two mining companies with mines in the state laid off almost 400 workers and temporarily shuttered two mines due to adverse market conditions. The state budget is also hurting from the cutbacks. The Inter Mountain reports that Governor Earl Ray Tomblin had to use $100 million in reserves to balance the budget last year, and he is looking to use $100 million this year from the Rainy Day Fund to balance the budget. In a challenging fiscal environment, West Virginia is looking for any creative way to bring in new revenue. One of his proposed solutions? Allowing fracking under the Ohio River.

Although fracking’s prevalence across the United States contributed to the fiscal issues West Virginia faces, Governor Tomblin also views the technique as a way for him to balance the budget. In late September, state officials opened bids to allow drilling companies to extract natural gas under the Ohio River, which serves as a natural border with the State of Ohio. So far, a few companies have already expressed interest. Triad Hunter offered the State $17.8 million up-front for a five-year lease plus 18% of the revenues from the extracted gas. Noble Energy, Gastar Exploration and Statoil also submitted bids with 20% royalty rates. West Virginia officials will announce the bid winners later in October. However, not everyone is happy with the state’s decision to proceed on allowing fracking in the state.

The new drilling contracts are a boon to state officials at a time where they desperately need new revenue sources. State Commerce Secretary Keith Burdette said, “It creates what could be a substantial revenue stream at a time when budgets are very tight.” State officials must continue to provide services that citizens deem necessary despite the economic downturn that the coal industry faces. But they must weigh the economic gains the state will make with the potential risks of water and environmental contamination that the process of fracking brings with it.

Specifically, environmental groups are concerned of the hazards that fracking could bring to such an important watershed. The new drilling sites would allow drilling to occur directly under the Ohio River. Millions of people rely on the Ohio River for drinking water, and it is the largest tributary to the Mississippi River. Drilling proponents argue that when done properly, the process of fracking creates little risk of environmental contamination. Further, they argue that state environmental regulators will have to grant permits before any drilling can take place. But other groups are not convinced that state environmental regulators are serious about enforcing regulations.

Recent chemical spills in the state point to the dangers of allowing extractions near such an important water source. In January 2014, the Centers for Disease Control stopped municipal water deliveries to nearly 300,000 people after Freedom Industries spilled close to 10,000 gallons of hazardous materials into the Elk River. The Elk River provides water to about 300,000 customers in the Charleston area. Environmental groups argue that this example shows the lax standards of the West Virginia environmental regulators. Further, they argue that the state should not risk further contamination on fracking that has a less than perfect safety record.

Going forward, West Virginia officials will have to weigh these concerns from both sides. The issue is a delicate one for the governor to balance. On the one hand, he must provide services to the communities in West Virginia, particularly in areas that have seen job cuts due to the slowdown in coal mining. He must also be mindful of the risks to water contamination that drilling directly under the Ohio River brings. It will be interesting to see how this debate resolves.

What Can Other Western States Learn from West Virginia’s Experience?

I believe that there are a few things that other western states with fracking operations can learn from the debate in West Virginia over fracking. First, for those states that have a budget windfall from natural gas royalties, it is always important to plan for a rainy day. According to the Prairie Business Journal, the North Dakota Resources Trust Fund (the fund which collects the royalties from natural gas and oil extraction) carried a balance of $486 million as of July 1st, 2014. While North Dakota is currently sitting in a great financial position, it is hard to tell what the future will bring. Coal production was an important economic driver for West Virginia and other Appalachian states for years. It is incredibly important to plan reserves in case of a rainy day.

Further, states should try to find a balance between the environmental concerns groups raise over water contamination and the positive economic benefits that the jobs and cheap energy bring areas with natural gas drilling. Environmental protection and gas drilling do not have to be adversarial. A few recent studies show that proper drilling and water disposal techniques can mitigate many of the contamination risks inherent to fracking. In September, scientists from Duke and Stanford released a report on their tests of water quality from 130 wells in the Barnett Shale in Texas and the Marcellus Shale in Pennsylvania. The study found that faulty well casings designed to protect the groundwater during the drilling process caused some of the methane found in the tap water. However, the methane also could come from other areas where fracking was not taking place.

In the end, drilling companies must be held accountable to put safeguards in place and drill wells properly so that contamination does not take place. We must also hold our elected officials accountable to enforce these rules on the drilling companies. However, we should not simply abandon the positive economic effects that natural gas drilling brings our nation. With proper oversight and techniques, the process of natural gas drilling can achieve both economic development and environmental protection.

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About Jeff Simonetti

Jeff Simonetti is the Vice President of Public Affairs at the Capitol Core Group and provides project management, business development, and policy/lobbying expertise to a variety of federal, state and local clients. During his tenure at Capitol Core, Jeff has among other projects helped a renewable energy company to secure authorizing resolutions in cities across Southern California. Prior to joining Capitol Core Group, Jeff was a Vice President at the Kosmont Companies, a real estate and economic development consulting firm. At Kosmont, Jeff was the project lead for cities looking to implement financing strategies such as Enhanced Infrastructure Financing Districts (EIFDs) and other post-redevelopment funding mechanisms. He also was the project manager for the Economic Development element of the Fontana General Plan Update. Jeff gained significant state and local government affairs experience as the Government Affairs Director at the Building Industry Association (BIA) of Southern California’s Baldy View Chapter. During his tenure at the BIA, he helped to found the annual San Bernardino County Water Conference, an event that gathers over 400 elected officials and business leaders in the region to discuss the pressing water policy issues that affect the community.