The Inflation Reduction Act, signed into law by Pres. Joe Biden on Aug. 16, 2022, was poorly named; propagandistically, even. Its most ardent proponents are among those who acknowledge that it will do little to reduce inflation in the near term, and even long-term estimates of benefit have time horizons stretching out several years.
The legislation includes a number of provisions that increase the cost of doing business for the oil and gas industry. These include higher royalty payments (16.6% versus 12.5%) for operations on federal lands, increases in Superfund taxes totaling $11.7 billion, and charges for methane emissions from oil and natural gas production and gas transportation and storage expected to total $6.3 billion. Even the new, higher royalty payments, however, remain below those collected by states such as Colorado, North Dakota, and New Mexico, with some Texas leases also lower.
The law also commits the US government to spending $369 billion on a variety of energy-related matters over the next 10 years, including subsidies for wind and solar power generation and the purchase of electric vehicles as well as funding for methane monitoring and carbon capture, use, and storage (CCUS). Industry was expectedly critical of the legislation, the American Petroleum Institute, American Fuel and Petrochemical Manufacturers, and Independent Petroleum Association of America among dozens of organizations that sent a joint letter to congressional leadership.
The groups raised particular objections about a new 15% minimum tax for large corporations, the Superfund taxes, and methane emissions levies; the latter two of which would also be collected over 10 years.
Hidden treasure
The bill, however, also requires the Biden administration to complete four lease sales it was supposed to have held under the previous 5-year lease plan, which expired June 30, 2022; reinstating results of the one that was held and holding the three that simply didn’t occur. It also requires that new onshore oil and gas lease sales be held within 4 months of the Interior Department issuing new onshore wind or solar rights-of-way and that a 60-million acre or larger offshore lease sale occur within the 12 months leading up to a new offshore wind sale.
Another direct benefit is capping environmental reviews for major projects at 2 years (with smaller project reviews to be completed in 1 year or less) and shortening the statute of limitations for legal challenges. The legislation also set aside $700 million to help offset the costs of methane emissions from marginal wells and $850 million to defray expenses incurred while upgrading equipment to bring operations into emissions compliance.
The law’s revisions to 45Q tax credits related to CCUS were even more dramatic; the size of incentives jumping while minimum volumes of CO2-capture needed to participate fell to a fraction of previous requirements. For example, incentives for general CO2 utilization increased to $60/ton from $35/ton, while those for permanent storage of CO2 collected via direct-air capture rose to $180/ton from $50/ton. Volume thresholds for powerplants fell to 18.8 thousand tons/year (ktpy) from 500 ktpy and for direct-air capture to 1 ktpy from 100 ktpy.
The federal government subsidizes both sides of the energy industry—fossil fuels and their alternatives—in a situation that is unlikely to change any time soon. Given this circumstance, and the fact that many of the listed incentives center around areas such as CCUS that industry has already decided to pursue, the best course of action is for the industry to utilize the subsidies in combination with now-healthy balance sheets to more easily develop new streams of revenue.
In light of the skill with which the industry has used (and retained) subsidies related to traditional operations, it’s likely only a matter of time before this next wave of government intervention is viewed as an invaluable security blanket as well.
