Over the course of the next decade, a state revenue official says West Virginia will see a drastic transition in severance tax revenues from coal to natural gas.
“Long term, we see the trends flattening out with the coal decrease being offset by natural gas increases,” said Deputy Revenue Secretary Mark Muchow. “But that assumes we’re getting back to a more normal price with natural gas.”
Natural gas has taken a tumble with widespread expansion in the shale gas drilling in the last two years. The cheaper market for natural gas has also been driving many power companies away from West Virginia steam coal.
“In the next four years about 8.5% of all coal fired capacity in the United States is expected to retire. Most of it is centered around West Virginia and surrounding states,” Muchow told lawmakers Monday.
“It’s important to note about 80% of our coal production, ultimately, is exported to other states and other countries.”
The news comes as no great surprise as coal demand has dropped off in the last year. However, Muchow says the blow from a decrease in coal demand has been buffered some by an increase in demand for steam coal overseas.
“Demand for steam coal is rising in Europe,” Muchow explained. “Especially after the tsunami in Japan. Everybody got scared of nuclear power and there’s an increased demand for steam coal.”
Muchow says the overseas markets are a big part of future projections for West Virginia coal. However, China and other emerging nations have seen their economies slow and it’s lessened the demand for metallurgical coal for steel making.
As the transition is made from coal to natural gas, the state’s severance tax collections will be shifting as well. Muchow points out for every 10% reduction in coal there needs to be a 60% increase in output from gas to stay the same. Muchow says he isn’t sure that will immediately be the case.
“By 2020, coal production in West Virginia will be down by at least a third from where it was just a couple of years ago,” Muchow explained. “Natural gas severance tax collections will claim a greater share of total severance tax collections over time, but the overall severance tax we collect I expect will be flat.”
He spoke to a group of lawmakers at the State Capitol on Monday.