The Inflation Reduction Act Is Headed to The House – Here’s Why It Matters for Oil & Gas
Fri, August 12, 2022
On Sunday, August 7th, the U.S. Senate passed the Inflation Reduction Act, which was introduced by Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY). Now, the bill is set to for the House of Representatives, which will likely vote – and pass – the bill on Friday.
The roughly $700 billion bill is exhaustive in scope, addressing health care and tax issues, but provisions relating to domestic energy production and manufacturing are potentially the most far-reaching, as the package includes $430 billion in new spending to reduce greenhouse gas emissions. Ultimately, the massive bill will have a significant impact on the oil and gas industry – here’s how.
The IRA imposes heavier taxes on oil and gas, driving higher production costs.
In the midst of what could arguably be deemed the largest global energy crisis since the 1970s, the IRA confoundingly imposes a whole slew of new taxes on American oil and gas producers.
For federally leased land, the bill raises the minimum royalty rates for oil and gas production for both onshore and offshore federal leases by four percent (from 12.5% to 16.66%). Moreover, the bill would establish new royalties for natural gas production – whether on federal lands or not - including vented and flared natural gas.
Methane fees are also included in the bill. In an effort to curb emissions, the act would charge oil and natural gas producers $900/ton of released or leaked methane beginning in 2024, and eventually rise incrementally to $1,500/ton in 2026 and beyond.
These methane fees could significantly drive-up energy prices. Sen. James Lankford (R-OK) remarked that a methane fee is “estimated to raise the price of our natural gas to the consumer 17 percent.” He added, “Now, let me remind you, this is the Inflation Reduction Act that will increase the price of our heating, our cooking, our energy production [by] 17 percent.”
The American Petroleum Institute, in a letter co-signed by many other energy trade groups, including the Texas Independent Producers & Royalty Owners Association (TIPRO), wrote: “The IRA imposes an $11.7 billion tax on crude oil and petroleum products. At a time of record-high energy prices, Congress should not add additional costs on American energy companies competing globally.”
The IRA rolled-back a previous ban on offshore leasing.
At the beginning of his administration, President Biden promised to end offshore leasing, and set out to halt the sale of new oil and gas leases.
The bill headed to the House stands in direct contrast to the policies embraced by Biden just a year ago. The IRA will not only open offshore leasing again but mandates it. It requires the U.S. government to hold three more lease sales by the end of 2023 and requires the Biden Administration to conduct a sale of, at minimum, 60 million acres to oil and gas producers if the Administration seeks to issue any offshore wind leases the following year.
The bill earmarks more funding for emissions management technology.
With an ambitious goal of cutting U.S. emissions by 40%, the Inflation Reduction Act passed by the Senate set aside significant funds for technology aimed at reducing greenhouse gas emissions.
The IRA bill created a new tax credit for hydrogen production and establishes further incentives for carbon capture and sequestration projects and research. Specifically, the IRA sets aside $300 million to carry out a carbon sequestration program, and $27 billion in federal investments to support the deployment of low- and zero- emissions technologies.
This carve out in the IRA bodes well for Texas innovators; many Texas oil and gas producers have already stood on the forefront of carbon capture research and development.
In March, Exxon Mobil announced it planned to build the world’s largest carbon capture and storage project at its facility in Baytown, Texas, as part of a cross-industry effort to create a $100 billion carbon capture and storage zone in Houston. Occidental has also announced its intentions to build the world’s largest direct air capture facility in the Permian Basin, with aims to have the project completed by 2024.
For a resilient energy future, the oil and gas industry will need more support.
This comprehensive, multibillion dollar bill does include some wins for America’s energy future – including supporting offshore leasing, carbon capture development, and hydrogen. But it’s simply not enough.
Adam Millsap, a Forbes contributor and professor in economics noted that reforms that accelerated permitting around energy infrastructure were notable missing from the IRA, despite how effective they could be: “Permitting reforms that reduce the amount of red tape energy producers face would lower production costs throughout the economy and ultimately lead to lower consumer prices. Reforms to NEPA, geothermal permitting, and the Nuclear Regulatory Commission that make it easier to build new energy facilities and pipelines would expand the supply of energy.”
While some have lauded the renewed opportunities for federal leasing, these minor wins are offset by the overbearing taxes piled onto energy producers. Senator John Cornyn (TX-R) opposed the Inflation Reduction Act, stating that the bill ultimately “will threaten our economy and our energy security at a vulnerable moment when we're in a recession.”
In summary: the IRA falls short of addressing needed investment in our energy infrastructure, and it imposes harsh new taxes and fees on oil and gas producers at a time where we are demanding record output.
As the House of Representatives heads for a vote this weekend, we encourage lawmakers to take into consideration the unintended implications on American citizens, the incentives for the oil and gas industry to advance the field, and the role these producers play in in reducing energy emissions through voluntary actions, collaboration, investment and innovation.