The US Congress has shown it can act constructively on energy when not asked to address every challenge at once. In 1995 it stimulated the country's most important exploration and development play in many years by providing graduated royalty relief for production from federal leases in deep water. Last month it passed pipeline safety legislation.
But Congress has trouble with comprehensive energy legislation (OGJ, Nov. 25, 2002, p. 17). The subject is too big, too complex, and too political. What begins as a legislative quest for energy policy inevitably becomes a food fight among pressure groups and commercial interests. It happened again in the 107th Congress.
So, if not in pursuit of energy policy, when does Congress act constructively on energy? History is clear about the answer: in response to specific and immediate problems.
Specific problem
Such a problem exists now. It gives the 108th Congress the focus it needs to finish business left behind by its predecessor. And it gives the industry the persuasive lever it needs to summon Congress to action. The problem is supply of natural gas.
In the annual outlook it will publish in January, the US Energy Information Administration predicts US gas consumption will increase at an average rate of 1.8%/year, to 34.9 tcf in 2025 from 22.7 tcf in 2001. It lowered its expectation for consumption in 2020 by 1.6 tcf from last year's forecast to 32.1 tcf—still a huge challenge. "A major consideration for energy markets through 2025," EIA says, "will be the availability of adequate natural gas supplies at competitive prices to meet growth in demand."
The difficulty is not imminent exhaustion of the natural gas resource. It's that the work needed to produce that much gas and move it to market isn't being done.
Drilling is barely sufficient in producing areas of the US or Canada to meet current demand and offset depletion. Pipelines aren't in place to handle production from remote areas such as Alaska's North Slope and Canada's Mackenzie Delta. Permitting remains ponderous for pipelines anywhere and for construction of other gas-supply infrastructure, such as import terminals for liquefied natural gas.
Congress can help in many ways. The best way is to encourage domestic production.
Lawmakers must encourage leasing of and streamline permitting on high-potential federal land in the US West, off the East and West coasts, and in the eastern Gulf of Mexico. Reluctance to allow drilling and production on federal acreage comes from overblown environmental concern. The industry continuously proves its ability to work safely. A country with a growing need for natural gas can't afford to leave gas potential untested and underdeveloped.
Congress also should encourage drilling by adjusting taxation to help producers raise capital and sustain operations in a climate of price volatility. It should make the following changes, long sought by the Independent Petroleum Association of America and other groups:
Allow current-year expensing of geological and geophysical costs and of delay rental payments.
Provide a tax credit for marginal wells that phases in as oil and gas prices fall to levels that threaten production.
Eliminate the net income limitation on percentage depletion for marginal wells.
Eliminate the 65% net taxable income limit on percentage depletion.
Change parts of the alternative minimum tax that discourage drilling and production.
These changes wouldn't amount to major giveaways by taxpayers. They'd be sensible investments by the country in future supplies of oil and—especially—natural gas.
Encouraging work
Congress also should encourage construction of pipelines and other essential infrastructure. It can do so without resorting to the price subsidies and protections against competition that helped make the Senate energy bill unpalatable this year. Assistance with permitting and financing—such as loan guarantees and accelerated depreciation—can be starting points. In fact, any demonstration of congressional intent to let crucial work proceed would lift the confidence of investors.
Nature offers natural gas in splendid abundance. The US needs the energy. The only question about availability is work performed now and in the future. The level of that activity depends heavily on what Congress does—and how quickly it acts.
