Follow me on Twitter: @JohnHQuigley

Friday, May 25, 2012

Eleven degrees

The International Energy Agency reports that because global carbon dioxide emissions rose by 3.2 percent to a record high last year, we are heading to a devastatingly warmer world – 11 degrees Fahrenheit warmer by the end of this century.

The consequences of this magnitude of warming are almost unimaginable.  The threat cannot be plainer. Nor can the need for urgent action. 

Part of the immediate solution was contained in the IEA report.  Carbon emissions fell in the US – more than in any other nation in the world during the last 5 years. Why?  Shale gas. We must use it to drive a low carbon economy now, and lead the way globally.  That requires getting tougher regulations in place now.  It also demands that the industry (which will obviously benefit from such a shift) must immediately raise its level of environmental performance and transparency and not wait for the rules to be enacted. And I believe that we must deploy carbon capture and storage technology for all fossil fuel-fired electricity now.

Our children and grandchildren will not forgive us if we fail.

It's summertime, and the taxation is easy

What could be more stimulating that a pre-Memorial Day weekend blog on taxation of the oil and gas industry?

Probably anything.  

But my friend Jan Jarrett’s blog post today on energy subsidies moved me to – forgive the pun – drill into the subject a little deeper. Here – mercifully, in brief - is what I found.

The Congressional Research Service helpfully describes the generous federal tax subsidies to oil and gas production in a straightforward way. The subsidies include:

  • Intangible Drilling and Development Costs (IDC) – drillers can deduct from taxable income 100 percent of any cost incurred that has no salvage value and is necessary for the drilling of wells or the preparation of wells for production.  That includes, for example, surveying, ground clearing, and draining; wages, repairs, supplies, drilling mud, chemicals, and cement; and the cost of fracking a well. Intangible expenditures of drilling are usually about 65 to 80% of the cost of a well.
  • Percentage Depletion –in the tax code since 1926, percentage depletion is the practice of deducting from an oil company’s gross income a percentage value, currently 15 percent, of the total value of the oil deposit that was extracted in the tax year.
  • Geological and Geophysical (G&G) Amortization – G&G costs are written off over seven years.
  • Marginal Well Tax Credit – Enacted in 2004 to create a safety net for marginal wells during periods of low prices; it has not been necessary, for obvious reasons.
  • Enhanced Oil Recovery (EOR) Tax Credit – a 15% credit – a direct reduction of tax liability - on costs of using oil production using technologies that increase oil production from older wells.
  • Manufacturing Tax Deduction –enacted in 2004 to encourage the development of American jobs, the gas industry can write off six percent of payroll costs subject to a cap.
  • Passive Loss Exception for Working Interests in Oil and Gas Properties – I won’t even attempt to describe it.

These federal tax provisions were estimated in 2009 to be worth $30 billion annually to the industry.

But wait, as the TV infomercial pitchman says, there’s more.

  • Tangible Drilling Cost Tax Deduction - The costs of equipment are considered Tangible Drilling Costs and are 100 percent tax deductible.
  • Lease Costs - Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and lease operating costs are also 100% tax deductible.
  • Tertiary injection expenses, including the injectant cost, are also 100% tax deductible.

So much for that brief tour of Federal tax subsidies. What about state-level taxation in Pennsylvania?  Natural gas drillers in Pennsylvania pay very little in state and local taxes, despite industry claims to the contrary.  And 2012’s Act 13 imposed an effective tax rate of about 1.5% - one of the lowest rates in the nation - among many egregious flaws.

The industry, of course, insists that these subsidies are necessary to support investment and produce domestic energy.  Why a fraction of such subsidies for renewable energy are not necessary - or downright un-American, as is frequently argued - is less clear.   

Monday, May 21, 2012

Energy Dimensions publishes my CCS blog

Energy Dimensions has published my recent blog:  CCS for All Fossil Fueled Electricity Now.

Will money talk on responsible shale gas production?

Fifty five major investment organizations and institutional investors with nearly $1 trillion in assets under management have united to support “best practices” for the fracking of shale gas.  These investors are seeking action from the industry due to the persistent, increasing level of uncertainty about fracking, such as spreading moratoria and bans, inconsistent practices regarding chemical disclosure and risk management among companies, and growing shareholder unrest at a reported 16 companies in the last two years.

In December 2011, the Investor Environmental Health Network and Interfaith Center on Corporate Responsibility published Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations.  The well-thought-out report presents 12 core goals for shale gas companies and supporting practices and indicators:

·         Manage risks transparently and at board level;
·         Reduce surface footprint;
·         Assure well integrity;
·         Reduce and disclose all toxic chemicals;
·         Protect water quality by rigorous monitoring;
·         Minimize fresh water use;
·         Prevent contamination from waste water;
·         Minimize and disclose air emissions;
·         Prevent contamination from solid waste and sludge residuals;
·         Assure best in class contractor performance;
·         Secure community consent; and
·         Disclose fines, penalties and litigation.

Smart companies are already going beyond Federal and state regulations in certain areas of their operations - the guide cites practices that are being used by 17 companies.  But shareholders are demanding more industry leadership.  Still, these excellent voluntary guidelines are not a substitute for strong regulations that apply to all oil and gas companies.