Natural gas, renewables highlighted at Senate energy tax policy hearing 

During a June 12 Senate Finance Committee hearing, many senators extolled the natural gas revolution unfolding in the U.S. and warned against making changes in energy tax policy that might hamper exploration and production. Senators also discussed whether some form of production tax credit for wind energy should be made permanent.

Sen. Max Baucus, D-Mont., chairman of the committee, said Congress should consider reforming the tax code in ways that diversify the nation’s energy portfolio. He said the tax code is an important driver of U.S. energy policy, with tax incentives providing 85% of the energy sector’s federal support and affecting nuclear power, oil, natural gas, coal, wind, solar and geothermal energy.

Baucus said energy tax incentives need to be improved. “Currently, the type and level of tax incentives varies for different technologies. Some incentives are temporary. Others are permanent. In some cases, there are multiple incentives for the same technology. The result is inefficiency,” he said in opening the hearing.

“Provisions that don’t create jobs or improve our energy policy should expire or be repealed. Right now, we’re providing direct incentives to select technologies and industries. Perhaps we should adopt a more technology-neutral approach and stop playing favorites,” Baucus said. “That way, we can still help new energy technologies develop, but let the market decide which ones stick. Tax reform is an opportunity for the energy sector to make real progress.”

However, Sen. Orrin Hatch, R-Utah, ranking member of the committee, questioned whether energy policy should play a role in the nation’s tax code. “Energy policy has been creeping into the tax code at an exponential rate,” he said.

Hatch noted that Baucus himself has compared the U.S. tax code to the Hydra, the hundred-headed creature of Greek mythology. “Each time you cut off one head, two more grow back. I believe this analogy is particularly apt with respect to energy tax provisions,” the Utah lawmaker said.

Resources for the Future President Philip Sharp called the growth in natural gas production a significant development for the U.S., but he warned senators that developing new shale gas must be done responsibly. He noted that in the past decade, a “raft of new technologies” has entered the marketplace in every sector of energy production, distribution and use.

Sharp foresees modest growth in CO2 emissions

Sharp also noted that U.S. carbon dioxide emissions are in decline not only because of the economic slowdown but also because of greater energy efficiency and a change in the nation’s fuel mix, especially in the electric generation sector. “The expectation is that our emissions growth ahead will be modest,” he told the committee.

“Perhaps the singular most significant development of the last decade is the new natural gas supply. It has the potential to generate major economic benefits for the nation,” Sharp said. However, he cautioned that natural gas development generates a number of uncertainties and challenges. “Industry and government must work through a number of issues – water, air, methane leakage – to ensure responsible development,” he said.

“The public discussion has been exceedingly stormy, making it difficult for many citizens to sort out the real risks from imaginary ones. At RFF, we are currently conducting a widespread survey of knowledgeable people inside and outside of industry to ascertain how experts assess the relative risks of various stages of development and production of shale gas,” Sharp told the committee. “How fast this major new resource will develop is not altogether clear, nor is what kind of price volatility to expect, given the limited experience with developing and marketing this resource.”

Sharp said the U.S. already is seeing “shrinkage in shale gas production as the excess supply has driven down gas prices and drillers have focused on more lucrative tight oil and gas wells with associated liquids.”

The new gas supply is creating major adjustments in planning and investment for virtually all other major fuel sources, Sharp noted. “The near-term impact of lower natural gas supplies has been to change the way electric utilities are using their current generating capacity – using more gas and less coal. In the longer run, the supply picture is changing the calculations used by utility companies and state regulators to assess new facilities and the various trade-offs among coal, nuclear, renewables, and natural gas.”

To the extent that natural gas replaces coal in U.S. electric generation, “it is clearly beneficial with regard to carbon dioxide emissions,” Sharp said. “To the extent it replaces nuclear or renewable sources, it is likely to increase, rather than decrease, the carbon intensity of our energy mix. It also has the potential to work well with renewables, helping solve the intermittency problem of wind and solar.”

E&P exec urges Senate to keep tax provisions

Continental Resources Inc. Chairman and CEO Harold Hamm said any reform of U.S. tax policy must maintain tax provisions for independent oil and gas producers, including intangible drilling costs, or IDCs, and percentage depletion. Hamm is serving as energy adviser for Mitt Romney’s presidential campaign.

Noting that the U.S. now counts natural gas reserves in centuries, Hamm reminded the committee that the development of horizontal drilling took a great deal of trial and error. “Without the current capital provisions in place, we would not have been able to fail over and over again, which is what it took to advance the technology needed to produce the [Bakken Play of North Dakota and Montana] and numerous other resource plays across America,” he said. It is this technology that allows producers to “drill two miles down, turn right, go another two miles and hit a target the size of a lapel pin … that has unlocked the resources that make energy independence a reality,” he added.

The paradigm shift in U.S. oil and gas exploration depends on substantial amounts of capital, Hamm told the senators. “The tax provisions that let us keep our own money to reinvest in drilling are crucial to keep this energy revival going.”

More than 18,000 independent producers drill 95% of U.S. oil and natural gas wells and account for 67% of U.S. production, Hamm said. “IDCs permit companies to deduct the entire cost of drilling a well during the first year rather than spreading it out over a period of years. This is only available on wells drilled in the United States,” he added.

Sen. Kent Conrad, D-N.D., heaped praise on Hamm for what he has done for the country and for the state of North Dakota.

“We have seen a dramatic reduction in our dependence on foreign energy. … And again I thank Mr. Hamm. Thank you for making the investment. Thank you for taking the risk. Thank you for having faith that what you and your people saw as an opportunity was worth pursuing because you’ve helped turn around our domestic production in a very dramatic way,” Conrad said.

Noting that he recently visited several wells being drilled in North Dakota, Conrad said he found that they were being drilled in a professional, environmentally sound way. “It’s being carefully done. It’s being professionally done. It’s being done in an environmentally sensitive way. It’s being done with extraordinary technology.”

Bingaman suggests making renewable tax incentives permanent

Sen. Jeff Bingaman, D-N.M., who chairs the Senate Energy and Natural Resources Committee, also commended Hamm and others in the oil and gas industry who have increased U.S. energy production.

However, Bingaman noted that by and large, energy tax incentives adopted before 1974, including tax policies for the oil and gas industry, are permanent, whereas those that were adopted after 1974 are very limited in time and keep expiring. “Those that relate to renewable energy have expired and come back, and we put them in place again and then we let them expire again. … It seems to me it would make good sense to put them all on an equal playing field in terms of their permanence.”

Referring to wind energy, Bingaman said that “if the production tax credit, or some lesser version of the production tax credit ought to be a part of our tax code, then we ought to put it in place and leave it there for a while, just as the intangible drilling cost provisions relating to oil and gas production are a permanent part of the tax code.”

Sen. Ron Wyden, D-Ore., agreed with Bingaman’s perspective. “Natural gas is a huge, strategic American advantage. … And we ought to be talking about renewables,” including hydropower and geothermal resources, he said.

“[W]e can’t have a double standard on tax breaks. We can’t have a double standard on energy breaks. And today the oil and gas production side gets a permanent tax break while renewable energy gets a temporary tax break and often those expire. So we’re going to have to get rid of the double standard,” Wyden said.

However, Sharp told the committee that he is skeptical about the U.S. capacity to achieve a level playing field in energy production. While contending that the production tax credit was “extremely important” during the infancy of the nation’s wind industry, he questioned whether the subsidy should continue in the future. “I don’t think it deserves a permanent, long-term guarantee that every kilowatt-hour gets subsidized. In fact, that just means we’re subsidizing energy consumption, which in the long run is not the smartest policy,” he said.