Observers question strategy behind raising taxes on oil, gas

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Sept. 29 -- A strategy that diverts federal tax incentives from domestic oil and gas to renewable and alternative energy would quickly increase oil and gas imports, industry observers warned on Sept. 28.

“We need to probe what it actual means to overinvest in oil and gas,” said Lucian (Lou) Pugliaresi, president of Energy Policy Research Foundation Inc. (EPRINC) in reference to recent statements by US President Barack Obama and other administration officials.

“But if you reduce what you invest domestically in oil and gas, you increase imports. There’s no way to get around it,” Pugliaresi told congressional staff members at a Capitol Hill briefing that EPRINC cosponsored with the University of Texas at Austin’s Center for Energy Economics and the Brookings Institution.

The organizations hosted the briefing at the requests of US Reps. Cynthia M. Lummus (R-Wyo.) and Harry Teague (D-NM), Pugliaresi noted.
He said White House oil and gas tax proposals in its proposed fiscal 2010 budget would adversely affect downstream as well as upstream operations.

One proposal that would keep refiners from the Section 199 tax exemption available to all other US manufacturers would hit a business with a rate of return significantly lower than other industries, he said. Combined with proposed carbon cap-and-trade costs and existing consumption taxes, EPRINC estimates that losing the tax credit could reduce US refining capacity by 2 million b/d over time, Pugliaresi said.

Gas demand growth
Even without a federal greenhouse gas emissions control program, stronger US natural gas demand also is inevitable because low-carbon technologies are immature and their costs and timing of deployment are uncertain, observed Michelle M. Foss, chief economist and head of UT-Austin’s Center for Energy Economics.

“Demand for gas is going to be robust in the future, especially as people explore new ways to use it,” Foss said. “The desire to move away from fuels with higher carbon emissions also is having an impact.”

The oil and gas investment climate is similar to that of the pharmaceutical industry because it requires large sums to be committed with slim chances of success, she pointed out.

“I wouldn’t call it overinvesting,” Foss said. “More people simply need to understand how much money needs to be spent before that first barrel of oil or first cubic foot of gas is produced. Even with all the technology that’s available, there’s still a substantial risk.”

Development of hydraulic fracturing to recover gas from shale formations has improved the domestic resource outlook significantly, Foss said. It also has made water management a key issue in several potential production areas, she pointed out.

“There’s a lot of communication across the producing community, state regulatory offices, and the National Energy Technology Laboratory to see what happens in each shale formation,” Foss said. “But every formation is different. Parts of each formation are different too.”

The overall goal is to use fewer rigs to produce more gas, she explained. “It’s extremely exciting, but it’s extremely challenging too. We need to consider what the best regulatory environment will be,” she said.

Incentives needed
Smaller independent producers would be hit hardest without exemptions for intangible drilling costs, tertiary injectant expenses, enhanced oil recovery costs, and costs for marginally producing wells, several speakers said. They said that these producers, who are not big enough to go to private capital markets for money, must rely on cash flow to stay in business, and that cash flow has fallen with oil and gas prices recently.

Upstream independents who use commodity hedges to keep cash flow steadier also would suffer if proposals to require all over-the-counter transactions to go through regulated exchanges become law, according to Lee O. Fuller, vice-president of government relations at the Independent Petroleum Association of America.

“Using the OTC markets lets them use their reserves as collateral,” Fuller explained. “Forcing them onto regulated exchanges requiring cash collateral and daily clearing could lead to more volatile prices because most independent producers could no longer afford to hedge 2 or 3 years of production as they do now.”

“Small producers also can’t survive without government-supported research at universities like ours,” said Van Romero, vice-president of research and development at the New Mexico Institute of Mining and Technology in Socorro, NM.

Romero noted that since the US Department of Energy’s fossil fuel research budget has been eliminated, the only federal money available for oil and gas research and development is $35.9 million that the Energy Policy Act of 2005 authorized for unconventional onshore and ultra-deepwater research.

“This is no giveaway to Big Oil as I’ve heard some people call it,” Romero said. “It’s directed money, not an appropriation, which supports education of the future oil and gas workforce as well as future technologies’ R&D.”

Contact Nick Snow at nicks@pennwell.com.

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