Mr President: Since being reelected, President Obama has been talking about the virtues of our nation’s potential to achieve domestic energy independence. At the State of the Union last month, he said “after years of talking about it, we are finally poised to control our own energy future.”
This is something that I’ve been saying for years. We already have complete control of our energy future, but the federal government and this President are doing all they can to stop us from getting there.
In fact, in each of the President’s budgets, he has proposed to kill tax provisions specific to the oil and gas industry. And even though he says these provisions are subsidies, they are truly nothing more than tax accounting provisions that are available to every industry across the economy.
The first he’s trying to get rid of is intangible drilling costs (IDCs). This provision simply allows producers to deduct from their revenue the cost of drilling a well when calculating their net income. Every business is allowed to deduct ordinary and necessary business expenses – and IDC’s are exactly that for the oil and gas industry. If he gets rid of this it’s a tax increase of $13.9 billion over ten years.
The second is percentage depletion. Percentage depletion is simply a way that the tax code has allowed oil and gas producers to account for the reduction in the value of their reserves as they are extracted. When an oil or gas discovery is made, that reserve is an asset on a
firm’s balance sheet. As the producer extracts oil and gas from the reserve, they sell it and earn revenue, but they are simultaneously reducing the value of their asset. They need a way to account for that, and percentage depletion is what has been done since the dawn of the industry. This tax hike amounts to $11.5 billion over ten years.
The last is the Section 199 Manufacturer’s tax deduction. It allows all manufacturers – including farmers and film producers – to take a small deduction in their taxes because they create products here in America. But the president has always proposed to cancel this out, but only for
the oil and gas industry, at a cost of $11.6 billion over ten years. The President’s proposal to increase these taxes will prevent the industry from reaching its true potential, despite the fact that oil and gas remain one of the great growth stories of the next decade. We have the opportunity to achieve domestic independence now...we have the reserves; we just need to be able to get to them.
A recent CRS report stated that the United States has the largest combined resources of oil, natural gas, and coal in the world. We have more than Saudi Arabia, China, and Canada combined.
Yet we are the only nation in the world that actually prevents our resources from being developed. Fortunately, oil and gas activities have increased over the past few years, but as much as the President may want to claim credit for this, he has no standing to do so.
Last year we hit a 15-year high in oil production, producing an average of 6.4 million barrels per day, which was 800,000 bpd more than in 2011. This increase is staggering, and it the result of amazing advancements in oil and gas production technologies, namely horizontal drilling and hydraulic fracturing.
These advancements have made resources available in tight formations that no one ever thought we’d be able to get to with any commercial viability. And nearly all of this increase has occurred on state and private lands. CRS confirmed a year ago that “about 96%” or essentially all “of the increase [in oil and gas production] since 2007 took place on non-federal lands.” That means that it’s beyond the reach of the President’s hands.
Adding to that, it was just released yesterday that oil production on all federal lands, including onshore and offshore, declined last year, the second year in a row, falling from 632 million barrels in 2011 to right at 600 million barrels in 2012. So the 800,000 bpd increase we saw last year took place solely on private lands. Federal lands actually reduced the increase.
And this makes sense given what we know about oil and gas permitting on federal lands. It can still take 300 days to get a permit to drill on federal lands. In North Dakota it takes about ten days. In Oklahoma, it can be done online in a matter of hours. The impact of significant delays like this cannot be understated. One of my good friends, Harold Hamm, is responsible for bringing development to the Bakken in North Dakota, and when I asked him how long it would take to get oil from out of the ground and through the refining process, he didn’t even flinch: 70 days. And he had it all documented. No one’s arguing with him.
So by the time you have one federal drilling permit completed, Harold Hamm could have four separate wells up and running, providing more jobs and cheaper gasoline for all Americans. Fortunately, the President does not control the permitting process on state and private lands. And because of this, industry has had the opportunity to unlock tremendous natural gas resources.
Not five years ago many believed that the United States faced a significant shortage of natural gas. Wellhead gas prices were then trading as high as $11 per thousand cubic feet, and investors were racing to build Liquefied Natural Gas (LNG) import facilities to help meet U.S. demand with foreign supplies.
The shale gas revolution has changed all of this. Now, our expected natural gas reserves are well over 2 quadrillion cubic feet, which is enough gas to supply our domestic needs for 90 years. And many industry observers believe this estimate is discounted to the nation’s true potential.
This dramatic shift in natural gas markets has pushed prices down to below $4 per thousand cubic feet, putting the United States in a unique position to bolster both wealth creation and our foreign policy might by beginning natural gas exports. Right now, there are currently fifteen permits to export LNG pending before Secretary Chu at the Department of Energy. The Natural Gas Act requires the Department to “issue such [a permit] upon application, unless…it will not be consistent with the public interest.”
Congress, when it wrote the Natural Gas Act, understood that the export of American products is good for the nation. It supports domestic industries, creates jobs, and transfers wealth from overseas back to the United States.
A recent report commissioned by DOE to assist it in making its determination agreed with this, stating that “across the scenarios [examined by the study], the U.S. economic welfare consistently increases as the volume of natural gas exports increases.”
Some in this body have raised concerns about allowing LNG exports to move forward. They are concerned mainly that production will not be able to keep up with rising consumption and exports, and that the follow on effects will be harmful to domestic industries. I can appreciate where these members are coming from, but I want to point out something that many may be overlookin
The Energy Information Administration releases an annual outlook of U.S. Energy markets. In their most recent one, which came out just a several weeks ago, they estimated that between now and 2040, production of natural gas would increase by 40%, which will more than offset the expected 20% increase in consumption.
Today, natural gas is trading near all time lows, and because of this many producers have completely abandoned new natural gas production projects. In 2008, when natural gas was trading near $11 per thousand cubic feet, there were over 1,600 active drilling rigs. Today there are only 428, a decline of 73%. Industry is not moving forward with projects because it does not have the demand certainty it needs to do so. Without demand certainty, it is impossible to accurately forecast whether the massive investments required to develop a project can be recouped. This stalls both job and wealth creation, keeping our unemployment rates and deficits higher than they should be.
But today the natural gas market is in a “demand limited” scenario, and it will remain there for the foreseeable future. Supply is truly so abundant and readily available, that as soon as more demand comes online, producers are able to tap reserves and meet the market’s needs. The consulting firm Deloitte agrees. In its LNG report, it stated that “producers can develop more reserves in anticipation of demand growth.” They added that future LNG exports will have limited disruptions to natural gas markets because they “will likely be backed by long-term supply contracts, as well as long-term contracts with buyers. There will be ample notice and time in advance of the exports to make supplies available.”
This should be of great encouragement to domestic energy consumers. In fact, the NERA Consulting Report concluded that across the board, industries would not be hurt by LNG exports, stating that “no sector analyzed…would experience reductions in employment more rapid than normal turnover.”
The petrochemical industry is one that has been vocal in its opposition to LNG exports, but the left wing think-tank, the Brookings Institute stated in its LNG report that “exports can be seen as providing a benefit to the petrochemical industry,” because it is primarily a user of natural gas liquids, and not the dry liquids used to make LNG.
I can appreciate the fact that many people are worried about the cost of energy going up in this country. I am, too. But those who are concerned that exports will be the cause of this have misplaced concerns. Rather, they should be focusing their attention on the cumulative effect of adverse government policies negatively affecting energy sources. Government regulations, largely those coming out of the EPA, are perhaps the greatest threat to this nation achieving domestic energy independence.
Further, when considering the potential benefits of LNG exports we cannot dismiss the impact trade has had on other sectors of our economy. Agriculture is a prime example. The federal government works diligently to open and maintain international market access for U.S. agriculture
producers. This was highlighted very recently by the announcement that Japan would ease its restrictions on U.S. beef imports. This has been a major goal of the current and previous administration for years, and Japan’s decision was hailed by the administration and many members of Congress on both sides of the aisle. Everyone knows it’s a great deal because when you sell products abroad, you both generate wealth at home and expand the size of the market, thereby increasing opportunities for expansion.
The federal government should adopt the same perspective with LNG exports. LNG exports will create jobs across the country, bring wealth to our nation from abroad, and grow our economy – all at the same time. Meanwhile, we’ll be providing needed fuel to our allies like Japan, Korea, NATO, and Thailand, who will consequently be able to reduce their reliance on Middle Eastern supplies.
The President and the Department of Energy have a great opportunity to make a big impact with a simple decision that’s already been approved by the law. I urge the President to act quickly to approve the pending LNG export permits so that we can begin to take advantage of what it means to be energy independent.