The Good, The Bad and The Ugly: Inflation Reduction Act
The Inflation Reduction Act that was dropped much to the surprise of just about everybody on Wednesday night is a mixed bag when it comes to provisions that could impact U.S. oil and natural gas development.
At a time when record inflation is being largely driven by high energy prices and American consumers are paying higher prices on everything from gasoline to groceries, the Biden administration has called repeatedly for increased production and assured that “there is nothing standing in the way of domestic oil production.”
And while there are some provisions in the Inflation Reduction Act that would help increase domestic production in the long-term, there are many others that could impede investment and ultimately decrease U.S. supplies of oil and natural gas.
As Independent Petroleum Association of America Chairman and Texland Petroleum President Jim Wilkes explained in October 2021 when many of these provisions were first being considered in Build Back Better:
“The proposals put forward in reconciliation – from changes in tax policy to the proposed establishment of new and unprecedented fees on industry at every level, and threats to cease federal lands production, would have a dramatic impact on IPAA members. All the things being considered would result in higher gasoline prices and higher heating costs for communities across the United States.”
With many of the same provisions still included, these statements still largely hold true. Let’s take a closer look at some of the good, the bad and the ugly within the proposed act:
The Good: Offshore Lease Sales Are Back On The Table.
The Department of Interior recently announced that it will not hold the three remaining sales required under the now-expired Outer Continental Shelf five-year plan for 2017 to 2022. But that decision would be reversed should the Inflation Reduction Act be passed.
Sec. 50264 (p. 641) requires that Cook Inlet Sale 258 and Gulf of Mexico Sale 259 be held by December 31 of this year and that Gulf of Mexico Sale 261 be held by September 30, 2023.
It also goes one step further. In November 2021, Interior held a record-breaking offshore sale (Gulf of Mexico Sale 257) that was later vacated following a lawsuit from several environmental groups claiming Interior did not consider the environmental impacts of the sale. To date, the Biden administration has not appealed this court decision.
If the Act is passed, it would require Interior to accept the highest value bids on each tract and issue the leases from Sale 257.
The Bad: Investing In Resource Development On Federal Lands and Waters Will Be A Lot More Expensive.
While holding the cancelled offshore lease sales could generate significant revenue for the U.S. Treasury and the coastal states where they will take place, as well as increase the amount of oil and natural gas currently produced offshore, the Act also includes provisions that would make investing in these tracts less attractive.
If passed, Sec. 50261 (p. 632) would increase the royalty rate for offshore production from 12.5 percent to between 16.67 percent and 18.5 percent. That’s a 33 to 50 percent increased royalty rate.
For onshore oil and natural gas development on federal lands, the added costs are much more extensive. Sec. 50262 would update the Mineral Leasing Act:
- Increase the royalty rate from 12.5 percent to 16.67 percent – a 33 percent increase, but less than the royalty rate for the June 2022 lease sales which was set at 18.5 percent.
- Increase the minimum bid amount for acreage from $2 per acre to $10 per acre. This provision also increases the time period for payments from two years to 10 years.
- Increase the rental rate from $1.50 per acre to $3 per acre. This amount will last for two years after the lease begins and then increase to $5 per acre for six years and at least $15 per acre for each year after that.
- Add an expression of interest fee of $5 per acre nominated. This amount is to be increased at a minimum of every four years.
- Increase the bonding requirement from $10,000-25,000 per well to a minimum of $150,000 per lease. If an operator would like to bond all leases in a state the amount would be $500,000 and for all of the leases nationwide it would be $2,000,000.
In addition to these increased costs, Sec. 52063 (p.640) would expand the royalties paid for both onshore and offshore production to encompass all methane produced, consumed or lost, rather than just what is produced.
The Ugly: Consumers Will Foot The Bill For A New Tax On Natural Gas.
There is also a provision that would impact all U.S. oil and natural gas production and the transportation and exportation of natural gas – regardless of whether that takes place on private or federal property.
Previously referred to as a “methane fee” in earlier versions of the reconciliation package – and realistically a national tax on American consumers – Sec. 60113 (p.678) would impose a “waste emissions charge” for facilities reporting more than 25,000 metric tons of CO2 equivalent greenhouse gas emissions annually.
This tax would be assessed on the production and gathering of oil and natural gas, and on the transmission, storage and exporting of natural gas using an initial cost factor of $900 for 2024 emissions, $1,200 for 2025 and $1,500 for 2026 and each year after.
This could have significantly drive-up costs for consumers who are already paying increasingly high energy costs. As IPAA’s Jeff Eshelman previously explained, “this tax could increase U.S. consumer natural gas bills by 17 percent on average or more than $100 per year for an average American family, according to one estimate in a letter to House and Senate leadership signed by IPAA, the American Gas Association, the Interstate Natural Gas Association of America and several other state and natural gas supply chain trade associations.” AGA’s Kristen Granier said in October 2021:
“By AGA’s estimates, the tax will increase natural gas bills at a minimum of 12 percent per American family per year. While this might not seem like a lot to most, this is the difference between buying groceries and paying to heat your home this winter.” (emphasis added)
And those were estimates for this past winter prior to inflation hitting record levels in 2022.
While there are some exciting provisions included in the Inflation Reduction Act, as has become a key theme this year, it’s yet another example of the mixed messages coming from Congress and the Biden administration when it comes to domestic energy production. As Wilkes said in October 2021:
“All of the feeling it’s created makes you doubt whether you really want to invest in this business in the long-run in the United States of America. That’s really kind of the bottom line. When you have uncertainty in tax policy, regulatory policy, access to federal lands and just an all out assault from the regulatory agencies on our industry, it creates doubt. And anytime you do that, it’s going to make people pull back from investing. That’s just natural.
“So I’ve talked to many different independents, small independents, and they wonder, ‘What kind of future do we have?’”