US Congress pushes through sweeping energy bill

April 14, 2003
The US Congress earlier this month 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.

The US Congress earlier this month 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.

At presstime last week, House Majority Leader Tom DeLay (R-Tex.) wanted floor debate on his chamber's proposal to begin as early as Apr. 10. The Senate timetable is slower; the Energy and Natural Resources Committee mark up starts mid-April with possible floor debate in June.

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, a House committee marked up an $18 billion proposal that more closely follows a pending $16 billion Senate plan approved by the Senate Finance Committee Apr. 2.

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 Alaska and the Senate.

However, industry and congressional sources said they expect Congress to approve an Alaskan gas line plan that includes both production incentives and a loan guarantee program.

"The chances are excellent a final energy bill will include this," said an Interstate Natural Gas Association of America spokesman Apr. 9.

The pending Senate version includes both. It avoids a price floor that several members—particularly from oil producing states in the Lower 48—opposed last year.

The measure now includes 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. The Senate plan also directs the US government to guarantee as much as $18 billion of the total capital cost of the project. In a related measure, the Senate bill allows 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 accelerate the rate natural gas pipelines can be depreciated.

Production incentives

Most pending tax measures are similar to 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 "nonconventional" 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 Section 29 wells drilled in 1980-92 would be eligible for 4 years additional credit. Production over 200 Mcfd is not eligible. The Senate bill also modifies Section 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 fuel 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 Apr. 2 marked up its own portion of the energy bill that emphasizes new drilling on potentially petroleum-rich public lands, including a small portion of the Arctic National Wildlife Refuge.

Like last year, the bill largely gives the Secretary of Interior the discretion to expand royalty relief for marginal oil and gas production during periods of low commodity prices. The bill also reinforces the Department of the Interior'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 as much as 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 ultradeep well of at least 20,000 ft and expands the 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 at the committee mark-up Apr. 2. "This amendment goes beyond what (Interior Sec. Gale Norton) said she needs."

But Tauzin, a powerful member of the Republican leadership who heads the Energy and Commerce Committee (ECC), said the measure "builds on the MMS announcement," and does not "slam it down her throat," as opponents on the panel charged. Tauzin also was behind a proposal that expands the size of the US Strategic Petroleum Reserve to 1 billion bbl from its current 700 million bbl capacity.

The Senate Energy Committee passed a royalty amendment similar to Tauzin's, sponsored by Sen. Mary Landrieu (D-La.).

Another item of interest to industry is a provision in both House and Senate bills that amends the Energy Policy and Conservation Act so future DOI assessment studies include resources and not just reserves. Congress also wants federal land managers to detail impediments to developments such as 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.

ANWR debate

As expected, the Resources 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 say any energy bill that contains ANWR leasing will fail.

ANWR was not the only piece of the House Resources plan House Democrats scorned. Ranking Member Rahall focused on the various royalty relief provisions that he calls "misguided relief" for 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 ECC marked up energy legislation under its jurisdiction. The committee included a proposal to retool the reformulated gasoline (RFG) 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.

A pending Senate measure passed by the Environment and Public Works Committee also updates RFG rules by phasing down MTBE, removes an oxygenate requirement, and protects fuel ethanol market share through a renewable fuels standard, including a credit trading program. There is only liability protection for ethanol and ETBE in the Senate version, although MTBE protection may be added later, congressional sources said.

Oil companies want an RFG plan similar to last year's Senate proposal to become law; otherwise, individual state efforts to ban MTBE may create a "proliferation of boutique fuels," American Petroleum Institute Pres. Red Cavaney told reporters Apr. 3.

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.