|
Federal tax credits for gas not new Alaska points to coalbed methane credits as it lobbies for gas line breaks Larry Persily PN Juneau Correspondent
Alaska isn’t the only one lobbying for a natural gas tax credit in the federal energy bill. Lower 48 coalbed methane producers have enjoyed substantial tax credits on a small portion of their production since 1980, and this fall want Congress to extend and greatly expand the program at a potential cost to the treasury of tens of millions of dollars a year.
The tax credits for coalbed methane production expired at the end of 2002, and applied only to wells drilled before the end of 1992. Beneficiaries of the program want Congress to extend the financial incentives through at least 2007 and to expand it to include new wells.
An extension through 2012 would be even better, said an official of the Petroleum Association of Wyoming.
“That extra cushion would help us with our water management issues that tend to cause unforeseen financial problems,” said John Robitailli, vice president of the Wyoming association.
Coalbed methane production peaked last year at about 18 percent of Wyoming’s total gas flow of 4.65 billion cubic feet per day, Robitailli said. “We’re starting to see a decline.” The problem isn’t so much the market price for gas as it is a delay in federal land leases, he explained.
Opponents have battled leases for new wells on federal lands as they fight the industry over how to handle the enormous volumes of water pumped out of the ground to get at the trapped gas. Wyoming group avoids Alaska debate Though other Western state producer groups have spoken against tax credits for Alaska North Slope gas, the Wyoming association has not taken a position on Alaska’s push for federal corporate income tax credits to help spur construction of a gas pipeline from the North Slope to the North America gas grid. “We’ve decided just not to enter into the debate,” Robitailli said.
The nation needs new natural gas production, and wherever it comes from is OK with the association, he said. Wyoming is the second largest gas producer in the nation, though its wells are small by Alaska standards — averaging about 300,000 cubic feet of gas per day for more than 14,000 wells.
Alaska wants to feed the nation’s growing appetite for gas by pumping 4.5 bcf per day from the North Slope, but the cost of the project presents a major risk. The governor, Alaska’s congressional delegation and two of the three major slope producers say the $20 billion pipeline project will remain stuck on the drawing board unless Congress steps up and approves tax credits to protect the producers in case market prices dip too low.
And while it lobbies Congress and the president for its own tax credits, Alaska frequently points to Lower 48 coalbed methane credits as sort of a “me too” answer to critics of the Alaska tax provision.
“The pending energy legislation and existing federal law provide numerous incentives to stimulate energy development in the United States,” John Katz, director of Alaska Gov. Frank Murkowski’s Washington, D.C. office, wrote in a briefing paper on the issue. “In particular, the Section 29 tax credit for shallow natural gas has greatly promoted development.” Coalbed credits since 1980 Section 29 refers to the provision in the Internal Revenue Service code that provides a nonrefundable corporate income tax credit for the production of nonconventional fuels, including methane from coal seams, shale or tight formations, and oil from shale and tar sands.
Congress adopted the credits as part of the Crude Oil Windfall Profit Tax Act of 1980. The gas credits started at 50 cents per thousand cubic feet but an inflation escalator has boosted the credit over the past 23 years to almost $1.10 per thousand cubic feet for 2002. Producers are eligible for the tax credit regardless of the market price for their gas, with no payback provision.
Alaska likes to point to the lack of a price trigger that would shut off the coalbed gas credit as it lobbies Congress for a tax credit for North Slope gas that would include a price point at which the federal price protection would go away.
However, the North Slope tax credit would apply to every Btu of gas coming down the pipeline, while the Section 29 coalbed methane credits that expired at the end of 2002 applied only to a small portion of gas drawn from coal fields in the Lower 48 states.
In Wyoming’s Powder River Basin, for example, there were fewer than 50 producing coalbed methane wells at the end of 1992 — the deadline to qualify for the tax credits. Since then, producers have added more than 10,000 wells that did not qualify for the credits.
Even without the credits for new wells, coalbed methane production has grown substantially in recent years. More than half of new gas production in the 1990s came from coalbed deposits, according to the U.S. Energy Information Administration.
Coalbed gas production totaled 1.3 trillion cubic feet in 1999, about 6.7 percent of total domestic gas production, rising to more than 1.7 tcf in 2002, or 9 percent.
Estimates place the nation’s coalbed methane reserves in the hundreds of trillions of cubic feet. Cost of credits could be similar If Congress agrees to extend and expand the credit to all new production at the same $1.10 an mcf that expired last year, the tax break to producers nationwide could exceed $100 million a year if coalbed production continues to grow at around 10 percent a year, with the cost to the treasury to increase every year.
Alaska’s request for tax credits is different. It is lobbying for a tax credit tied to the wellhead value of North Slope gas, with the credit to kick in whenever the value drops below $1.35 an mcf. If, for example, the wellhead value were a dime below the threshold for an entire year, the federal tax credit provision would cost the treasury $165 million.
A congressional conference committee is expected to start work on the energy bill this month.
The House and Senate versions of the energy bill include different provisions to extend and expand the coalbed credits. The House bill would extend the credit on old wells to 2007, and would grant the credits to new wells drilled before 2007. The credits on new wells would end after four years.
The Senate bill would set 2005 as the deadline for new wells to qualify for the credits, though an unsuccessful committee version of the bill contained the same 2007 date as the House.
Coalbed gas would be just a small part of the cost of extending the tax credit program to all unconventional oil and gas. The House-Senate Joint Committee on Taxation estimates a full extension of all existing credits would cost the federal treasury $3 billion from 2004 through 2008. Wyoming senator says Alaska different An opponent of the Alaska gas credits, Wyoming Sen. Craig Thomas, said it’s not really fair to compare Section 29 coalbed methane credits to the North Slope project. Section 29 credits are for oil and gas with unique and unusual production problems. There are no such issues for gas from Alaska, where transportation costs are the big problem, he said.
The Texas Independent Producers and Royalty Owners Association finds fault in the Alaska credits proposal because it would benefit producers in just a single state. Coalbed gas is found across the country, in the Western states of Oklahoma, Colorado, Wyoming, New Mexico, Utah and Montana, to the Midwest in Illinois, and throughout the coal country of Pennsylvania, West Virginia and Kentucky.
The gas is attractive because it is trapped in coal seams at shallow depths, though it is typically found trapped between coal and a layer of water that requires extensive “dewatering” of the reservoir before full gas production.
Though the wells are prolific, companies need to keep drilling large numbers of wells just to maintain production, Robitailli said. Coalbed methane take a long time to come online because of the need to dewater the reservoir, and then the wells decline quickly, usually within five to 10 years, he said. Coalbed opponents criticize cost Although opponents of the coalbed tax credits cite the environmental damage of dewatering the fields, most of their campaign is keyed to the cost to the federal government.
“After more than 20 years of federal breaks, coalbed methane producers are finally off the dole — unless they get their way on pending energy legislation,” said Friends of the Earth in an August report titled Power Politics.
“Despite economics that favor coalbed methane drilling, these wealthy and established companies are pushing for more federal tax breaks,” the report said. “It is clear from the ongoing growth of the coalbed methane industry that tax breaks and other incentives are unnecessary.”
Opposition gets personal, too. The U.S. Public Interest Research Group, created by a coalition of state groups in 1983, is working hard against extension of the coalbed gas credits. It links the credits with former Enron Corp. Chairman Kenneth Lay, certainly an unpopular personality from past abuses by the energy industry. The group says Lay played a key part in congressional action in 1992 to extend the credits, which were set to expire that year.
Some of the strongest opposition comes from Public Citizen, a national consumer advocacy group founded in 1971 by Ralph Nader. “The Section 29 tax credit is absurdly generous,” Public Citizen states in its position paper on the issue.
“During the 1990s, the credit averaged $1.02 per mcf. The wellhead price for gas averaged roughly $3 per mcf over the same period. Equaling one-third the wellhead price, the monetary value of Section 29 credits conceivably could add more to a company’s bottom line than the net revenues from actually selling the gas.”
The large-scale expansion of coalbed methane drilling since 1992, when new wells no longer qualified for the federal aid, is not lost on Public Citizen. “This is arguably the most booming sector of the energy industry,” said Hugh Jackson, policy analyst for the nonprofit organization. “All this credit is is gravy. It’s icing for them.”
Public Citizen has not taken a position on the Alaska gas pipeline tax credits.
| 