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Will gas replace declining coal revenues?

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State officials were presented with a question in the face of declining coal revenues: Will the state's relatively new star extraction, natural gas, be able to replace coal's place in the state coffers?

Mark Muchow, deputy cabinet secretary at the West Virginia Department of Revenue, discussed severance tax revenues with lawmakers in Charleston on the opening day of November interim meetings on Nov. 26.

Coal severance tax collections are up, but production is down. The opposite is happening in natural gas, severance collections are down even though production has increased.

"We set an all-time record in fiscal year 2012 with the regular severance tax on coal," Muchow said. "The increase on coal severance tax was solely driven by price."

The price factor is also what's behind severance tax trends in the gas industry. The abundance of shale gas has driven the price down while coal's average price in Central Appalachia has more than doubled in recent years.

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

Severance tax collections in 2011, Muchow said, were down 36 percent.

Prices of natural gas are predicted to increase while production is to continue to increase as well. If this holds true, severance tax collections from the state's gas fields, particularly the Marcellus Shale, could become a significant portion of the state's revenue.

The decline in severance tax collections has not been unexpected. State officials and lawmakers have long been warned of declining production of Central Appalachian coal. The decline, however, might be happening faster than expected.

Muchow said the six-year forecast drafted last year for severance tax collections showed a decrease in severance tax occurring before bottoming out in 2014.

"When the forecast comes out for next fiscal year, I can tell you, there will be revisions," Muchow said. "The revisions will be downward for '13, '14, and maybe '15. This is the short-term. Long-term we see the trends again flattening out a bit with the coal decrease being offset by natural gas a little bit."

Currently the majority of the state's gross domestic product is based in coal. Putting that in perspective, Muchow said the state would need to nearly double its manufacturing sector to completely displace coal's effect.

Ramping up natural gas production may increase revenues, but it will take significant amounts to overcome the losses of the coal industry.

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

Coal's decline, he said, may be slowed by increasing exports – a trend already under way in the state. However, those markets will not likely be enough to replace faltering domestic demand brought on by environmental regulations and cheaper available alternatives.