CHARLESTON, W.Va. -- Natural gas drilling in the Marcellus Shale formation in West Virginia has increased in recent years, but isn't keeping pace with production in Pennsylvania, according to an industry report released Wednesday.

The possible reason: West Virginia has a severance tax on natural gas extraction while Pennsylvania does not.

"The regulatory and tax environment continues to be a challenge for Marcellus producers in West Virginia," said Timothy Considine, who wrote the report for the American Petroleum Institute. "The tax differences [between West Virginia and Pennsylvania] are a factor contributing to this."

Between 2005 and 2007, natural gas companies drilled 181 wells in West Virginia, while producers in Pennsylvania drilled 155 wells.

In 2008, 364 wells were drilled in the Marcellus in Pennsylvania, and 297 in West Virginia.

Last year, drilling in Pennsylvania took off, with 710 wells. West Virginia's Marcellus drilling also increased, but at a slower rate with 411 wells.

"Drilling has actually been slowing down in West Virginia, and it's rising in New York," Considine said in a conference call with reporters Wednesday. "There's more of a tax burden on drilling in West Virginia. Regulation is also part of the story."

However, Considine's report -- called "The Economic Impacts of the Marcellus Shale: Implications for New York, Pennsylvania and West Virginia" -- also notes that West Virginia's mountainous terrain makes it difficult and more costly to build pipelines that transport natural gas.

"Given the relative high costs of building pipeline infrastructure in Appalachia, if you impose additional taxes, you're going to encourage drillers to go elsewhere," Considine said.

West Virginia's severance tax on Marcellus drilling generated $24.1 million in state and local taxes last year, according to the report.

Marcellus production also created about 8,400 jobs in West Virginia last year while the total economic impact of Marcellus production was $939 million.

"My recommendation is to let this industry get established and let it grow," Considine said. "The way to expand the tax base is to have more drilling."   

The report was designed to promote drilling in the vast Marcellus formation that stretches from southern West Virginia through Pennsylvania and upstate New York. The gas reserves are worth at least $2 trillion to the industry and billions in potential tax revenues to states, Considine concluded.

"This is an economic opportunity that has not happened to that part of the world [Appalachia] in a long period of time," said Considine, who works for Natural Resources Economics Inc. in Wyoming. "This is an area that desperately needs it."

Considine's report comes as the U.S. Environmental Protection Agency prepares for hearings in Canonsburg, Pa., today and Aug. 12 in Binghamton, N.Y., on issues related to hydraulic fracturing or "fracking," a drilling process now exempt from federal regulations. The oil and gas industry opposes having the process governed by the Safe Drinking Water Act and regulated by the U.S. Environmental Protection Agency.

American Petroleum Institute officials said Wednesday that faulty well construction is causing the problem, and the organization is working with drillers to fix it.

 Considine's study found that natural gas development stimulates the economy through business-to-business spending and royalty payments to landowners. Marcellus production includes exploration, drilling, laying pipeline and building gas-processing plants.

"Maintaining production growth is like running on a treadmill," Considine said. "Slow down drilling and production quickly slips back. If governments pursue policies that encourage the development of natural gas, the ultimate benefits to the economy, the tax base and society would be significant."

An American Petroleum Institute spokesman declined to say how much the group paid Considine for the study.

A similar study by Considine and two other researchers about the potential economic impact of Marcellus Shale production generated controversy in Pennsylvania last month.

Pennsylvania lawmakers are weighing a proposal to impose a severance tax on natural gas production. The study was funded by a pro-industry group -- the Marcellus Shale Coalition -- that opposes the tax. Pennsylvania legislators expect to vote on the proposed severance tax by Oct. 1.

Reach Eric Eyre at erice...@wvgazette.com or 304-348-4869.