Congressional committees push through sweeping energy package

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Apr. 4 -- The US Congress this week moved on several fronts to bring together a sweeping energy bill that Republican leaders say President George W. Bush may sign before the summer driving season ends.

House Majority Leader Tom DeLay (R-Tex.) wants floor debate on his chamber's proposal next week, possibly Apr. 10. The Senate timetable is slower; the Energy and Natural Resources Committee mark up starts next week with possible floor debate in May. The Senate Finance Committee completed consideration of tax-related measures to the bill on Wednesday.

Most of the pending proposals are similar in scope to legislation considered last year. Perhaps the largest difference is reflected in the House's pending energy tax plan. Last year, the House Ways and Means Committee proposed energy tax incentives that totaled $36 billion over a 10-year period. This time around, the committee marked up an $18 billion proposal that more closely follows a pending $16 billion Senate plan.

Alaska gas line
A key difference between the House and Senate energy tax proposals is over fiscal sweeteners for a proposed $20 billion Alaskan natural gas export line to the Lower 48. The House does not offer any incentives, although lawmakers want to mandate a "southern" construction route favored by the state of Alaska and the Senate.

The most recent tax plan supported by producers is a so-called "hybrid" plan adopted by the Senate Finance Committee earlier this week. It avoids a price floor that several members, particularly from oil producing states in the Lower 48, opposed last year.

Instead, BP PLC and ConocoPhillips support a production tax credit that provides as much as a 52¢/MMbtu credit for Alaska gas transported to market. The credit phases out as the price at the wellhead rises above 83¢/MMbtu. The credit is not available if the price at the wellhead rises above $1.35/MMbtu, indexed for inflation.

Next week the Senate may also consider a related plan for the US government to guarantee up to 80% of the total capital cost of the project. BP and ConocoPhillips argue that the risk of default is low, and there is precedent for policymakers. Loan guarantees previously have been used in Canada and to support troubled industries.

In a related measure, the Senate bill would allow pipeline owners to accelerate depreciation of the asset to 7 years instead of 15 years.

White House consideration
The White House budget request before Congress calls for about $9 billion in energy tax breaks, mostly related to energy efficiency although the Bush administration previously favored extending some marginal well credits, now due to expire Dec. 31. These include temporary suspensions of a rule that limits percentage depletion deductions to 65% of income. A related planned suspension of the 100% net-income limitation for marginal wells also expires this year. Both the House and Senate want to extend that plan through 2006.

Pending House and Senate bills include other domestic production provisions not endorsed by the White House. Projected costs for the production proposals are $6-7 billion over 10 years. Both bills also seek to encourage more energy infrastructure; both would accelerate natural gas pipeline depreciation.

Production incentives
Most pending tax measures related to production are similar to items considered under last year's energy bill. The House bill includes a phased-in marginal well production credit of up to $3/bbl if oil prices fall below $18/bbl and 50¢/Mcf if gas prices drop below $2/Mcf. The maximum production on which a credit could be claimed would be 1,095 boe/year. A Senate provision is similar.

Geological and geophysical costs incurred in connection with oil and gas exploration are amortized over 2 years under both the House and Senate plans. Delay rental payments are amortized over 2 years.

Both bills give producers a credit for producing "non-conventional" fuels for 3 years. The House bill says qualifying fuels are oil from shale or tar sands and gas from geopressured brine, Devonian shale, coal seams, or a "tight formation." Credits are $3/bbl in 2003 and indexed for inflation starting in 2004. Existing Sec. 29 wells drilled in 1980-92 would be eligible for 4 years additional credit. Production over 200 Mcf/d is not eligible. The Senate bill also modifies Sec. 29 and includes a coalbed methane study.

The House bill allows for "business energy credits" to be applied against the alternative minimum tax; repeals the AMT preference for intangible drilling costs for 3 years; and allows enhanced oil recovery credits to be taken against AMT for 3 years.

In a related measure, both the House and Senate provide relief to small refiners facing tougher highway sulfur rules. The measures allow for expensing of up to 75% of the capital costs associated with the rule and provides a 5¢/gal production credit.

Other production incentives
Similar to last year, another portion of the House bill seeks to expand royalty holidays in the Gulf of Mexico. The House Resources Committee on Wednesday marked up its own portion of the energy bill that emphasizes new drilling on petroleum-rich public lands, including a small portion of the Arctic National Wildlife Refuge.

Like last year, the bill largely gives the Sec. of the Interior the discretion to expand royalty relief for marginal oil and gas production during periods of low commodity prices. The bill also reinforces the DOI's existing authority to provide royalty relief for frontier areas off Alaska and in the deepwater gulf. An amendment offered by Rep. Billy Tauzin (R-La.) expands a Minerals Management Service proposal to extend royalty relief to deep natural gas wells on the shelf (OGJ Online, Mar. 26, 2003). Under the MMS plan, lessees would be eligible for royalty relief on existing leases if they are willing to drill for new and deeper prospects more than 15,000 ft below sea level. MMS estimates undiscovered gas resources of up to 20 tcf may underlie this "frontier" area. About 2,400 existing leases are expected to qualify for royalty relief under the proposed rule, MMS said.

But the Tauzin plan expands the MMS "dry hole" incentive to two unsuccessful wells from one drilled to at least 18,000 ft on a tract that subsequently produces natural gas from a successful deep well. Tauzin's measure also calls for royalty relief for 35 bcf of gas produced from any "ultra" deep well of at least 20,000 ft. and expands the eligible volumes eligible for royalty relief in lower water depths.

Critics of the plan, including most of the Resources Committee Democrats, said that DOI does not want to expand what is already a generous royalty relief proposal for deep wells in shallow waters. "I'm flabbergasted," said Rep. Nick Rahall (D-W.Va) when the amendment was introduced Wednesday at the committee markup. "This amendment goes beyond what [Sec. Gale Norton] said she needs."

But Tauzin, a powerful member of the Republican leadership who heads the Energy and Commerce committee, said the measure "builds on the MMS announcement," and does not "slam it down her throat," as opponents on the panel charged.

Another item of interest to industry is a provision that amends the Energy Policy and Conservation Act so future DOI assessment studies include resources and not just reserves. It also extends the focus of the studies so regulators detail impediments to developments that include postlease restrictions such as permit delays. The bill also requires DOI and the Department of Energy to inventory resources on the Outer Continental Shelf, including methane hydrate potential.

A related provision directs DOI to improve its oil and gas leasing management and "provide timely action on permits." The Bush administration also is directed to study the idea of having an ombudsman office to facilitate energy project permitting among different government agencies. And the Resources plan allows companies to be reimbursed for environmental compliance through royalty reductions.

ANWR debate
As expected, the committee approved leasing a small portion of the coastal plain in the Arctic National Wildlife Refuge.

"With our troops engaged in Iraq, doesn't it make sense for us to adopt some sensible policies here at home that will boost our energy security?" said Resources Committee Chairman Richard Pombo (R-Calif.) before the ANWR vote.

The Senate last month rejected an ANWR leasing plan, and Senate Republican leaders say they do not expect to include it in their own energy plan. Senate Democrats meanwhile threatened that any energy bill that contains ANWR leasing will fail this session.

ANWR was not the only piece of the House Resources plan House Democrats scorned. Ranking Member Rahall's opening statement focused on the various royalty relief provisions that he called "misguided relief" for the oil industry.

"It is not for consumers, but for multinational corporations drilling for oil and gas in the federal Gulf of Mexico waters by granting them a taxpayer-subsidized royalty holiday. They get to drill and the taxpayer foots the bill by foregoing royalty payments; an unwarranted drilling incentive at a time of high energy prices, a staggering budget deficit, and the yet unknown full cost of conducting war in Iraq," he said.

A failed Democratic alternative to the Resources package called for encouraging the Alaska gas export line ""rather than exploiting environmentally sensitive areas" such as ANWR and encouraging renewable energy on federal lands.

Energy and Commerce
In a related action, the House Energy and Commerce Committee marked up energy legislation under its jurisdiction. The committee included a proposal to retool the reformulated gasoline program to address states' water contamination concerns connected with the clean fuel additive methyl tertiary butyl ether. Similar to last year, the bill includes a provision to create a 5 billion gal fuel ethanol market by 2015. It does not phase down MTBE but offers merchant producers incentives to switch production to other clean fuel additives. It also gives MTBE the same product liability protection afforded to ethanol and ethyl tertiary butyl ether in last year's Senate bill.

The previous Senate bill updated RFG rules by phasing down MTBE, removing an oxygenate requirement, and protecting fuel ethanol market share through a renewable fuels standard that included a credit trading program.

Oil companies are eager to see an RFG plan that is similar to last year's Senate proposal become law; otherwise individual state efforts to ban MTBE may create a "proliferation of boutique fuels" American Petroleum Institute President Red Cavaney told reporters Thursday.

Cavaney predicted that the chances Congress will pass the measure this year are "very good" even though the House's MTBE liability language is opposed by the same environmental groups that supported last year's Senate proposal.

In other action, the committee expanded the size of the US Strategic Petroleum Reserve to 1 billion bbl from its current 700 million bbl capacity.

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