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It’s easy today to get caught up in all the complexities about oil and gas operations with the terms “energy transition” and “decarbonization” permeating the news. Amid all of that discussion, we can’t lose sight of the fundamental public policy-related factors that make oil and gas operations viable. Fiscal terms, license to operate, a stable legal framework and access to investment capital have all been critical to the success of oil and gas operations in the U.S. In fact, our hydrocarbon laws and stable regulatory and investment climate have been the No. 1 reason the U.S. has led the world in the shale revolution.
So what is currently happening in U.S. public policy that is impacting these basic fundamental factors? First, let’s look at fiscal terms. The budget reconciliation package that is moving through Congress has a number of damaging provisions to the U.S. oil and gas industry. It eliminates several long-held cost recovery deductions and expensing allowance that have been part of the federal tax code for generations as means to encourage U.S. oil and gas production. They include the EOR credit, marginal well credit, expensing of intangible drilling costs, percentage depletion allowance for oil and gas wells, two-year amortization of geological and geophysical expenses, and capital gains treatment for certain royalties.
These deductions and allowances are similar to those used in other forms of manufacturing and resource development and are fundamental to the fiscal foundation of the U.S. oil and gas industry. Removing them will make the U.S. industry less competitive.
According to House Ways and Means Committee ranking member Kevin Brady (R-TX), these actions would constitute $145 billion in tax hikes on everyone within the industry.
Another blow to fiscal terms that would make the U.S. less competitive globally could come in the form of increases to royalty rates for oil and gas production on federal lands and waters to 20%—currently range from 12.5% to 18.75%—and raising rental fees and bonus bids as well. This move would come at a time in which activity has diminished on federal lands and waters due to a deteriorating regulatory environment and high operating costs.
Watch Jack Belcher in the latest installment of Energy Policy Watch, a partnership between Hart Energy and Cornerstone.
On top of all of this is the proposal for a methane fee. Allegedly it is a tax on methane emissions but is actually applied to all producers in a region.
Traditionally, U.S. policies on license to operate have given our industry a competitive advantage. However, recent actions and proposed changes to our energy and regulatory policies are eroding this competitive advantage.
Nowhere has obtaining and maintaining a license to operate become more difficult than on federal lands and waters. An indefinite “pause” on new offshore leasing has seemingly ended with a court order, but future stringent lease terms (including higher royalties) and stipulations promise to make future lease sales less attractive.
A programmatic environmental impact statement analyzing broad impacts of oil and gas leasing on climate change will take years to complete and will be a de facto moratorium on future leasing activities.
As the Biden administration drags its feet on federal leasing, keep a close eye out for impacts on private lands production through climate-related regulation. Notably, the changing makeup of the Federal Energy Regulatory Commission, with a majority of commissions to be appointed by Democrats, is also likely to impact pipeline permitting with a climate test being applied there as well.
Our stable hydrocarbon laws, with the rule of capture and private ownership of minerals, has always made the U.S. the best place globally to develop oil and gas. That too, however, is potentially threatened as government policies take aim at oil and gas activities. Nothing has been more telling than President Biden’s unsuccessful plea to OPEC to send more barrels to the U.S., while placing more areas off limits in the U.S. and shutting down the Keystone Pipeline.
Lastly, the flight of capital away from the oil and gas sector continues to negatively impact investment and project development. While much of this is due to investor sentiment, the White House has contributed to the problem through an executive order directing funding away from fossil energy projects.
Ironically, this and the other actions discussed above will actually thwart efforts to lower carbon emissions because it will discourage production of energy produced with leading technologies and under strong regulatory safeguards here in the U.S. including natural gas, as well as the construction of LNG export, transport and regasification infrastructure that would displace coal-fired generation in the developing world. Simply put, a strong and competitive U.S. oil and gas industry is a necessity. Failure to maintain that competitiveness will harm our security, economy and environment alike.
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