API: Tax and Regulatory Policy Key to Evolution of Shale Revolution

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The U.S. Oil & Gas Industry has come a long way in a short time. Looking forward, the industry could go even further and faster if the federal government collaborates more effectively with it. At least that's what Jack Gerard thinks.

Gerard, president and chief executive of the American Petroleum Institute (API) (Washington, D.C.), delivered the organization's "State of American Energy Industry 2013" address this week before several hundred people in Washington, D.C. He extolled the dramatic gains in domestic oil and gas production in recent years, praised the entrepreneurial spirit among companies in that industry, and showcased the economic contributions oil and gas companies have made to the U.S. economy. As much as his industry has done, Gerard was clear that they were ready, willing and able to do even more. But he said the industry can't achieve its potential without better treatment from the federal government.

"The oil and natural gas industry has been a bright spot in the last few years of sluggish economic growth and listless job creation," Gerard said. "And we are ready to do more. We have a vision of our country's future that is built on the incredible potential our industry offers to spur more economic growth and help other industries and America's manufacturing sector recover."

He said Americans "are looking for a new, forward-looking approach that embraces innovation, imagination, consensus, resolve and a focus on things that work." He noted that employment in the oil and gas extraction business is up 6.5% over the last 12 months, according to the U.S. Department of Labor, a bright contrast to the otherwise dreary outlook for employment across the nation.

Gerard emphasized that his industry has made huge investments in America's future. In 2011, oil and gas companies injected $545 billion into the U.S. economy in capital investments, wages, and stock dividends, about which he said: "Think of it: every two years, that's a trillion dollars in economic lift without a single taxpayer dollar spent. And those investments continue each year ... driving job creation and higher economic growth."

Currently, the oil and gas companies "support" 9.2 million jobs, and it could support an additional 1.4 million jobs, about 15%, by 2030, under the right conditions, Gerard told the audience.

The U.S. could be self-sufficient in oil within eight to 12 years, Gerard said. He observed that shale formations in the Western U.S. are estimated to hold more than 800 billion barrels of oil, or nearly three times the proven reserves of Saudi Arabia. But realizing the goal of greater oil self-reliance, or even oil independence, requires "government policies that enable increased domestic energy production and maintain a strong domestic refining sector, rather than discouraging it."

For example, the API chief said that more than 80% of offshore areas are currently unavailable to producers. Increased access to acreage, and not taxes, "is the key to unlocking new revenues for our government. Energy analysts at Wood Mackenzie found that more than $800 billion could be generated through 2030 through access to areas (that are currently) off limits and other pro-development policies."

API "welcomed" President Obama's campaign promises to support oil and natural gas development as part of an "all-of-the-above" energy strategy, Gerard said. "Over the past few months, we've had an increased positive dialogue with the administration." But fulfilling that all-of-the-above strategy requires "regulations that don't add unnecessary layers of compliance burdens on top of existing protections, and ensuring regulations won't compromise our ability to grow the economy and create jobs through domestic energy."

During a question-and-answer session afterward with reporters, Gerard sharpened some of the points in his address. He was particularly critical of some federal tax initiatives that he believes unfairly singled out the Oil & Gas Industry. "Let me just say that, from an industry standpoint, our view is that we should not be singled out as an industry for punitive tax treatment," according to a transcript of the Q&A session provided by API. Gerard added that lawmakers should not "single out one industry to say, 'well, their earnings appear to be high, so let's go take some of that resource.' That shouldn't be the standard" for changing federal tax policy.

Asked about API's legislative and regulatory priorities in 2013, the API chief said the industry's first priority is to "encourage governments and policymakers to do no harm. ... Don't do anything that would discourage that investment and that economic activity." He urged lawmakers and regulators to open up more areas to oil and gas exploration, "where industry would be prepared to invest billions of dollars to hire hundreds of thousands, indeed, millions of people in creating new jobs."

Regarding hydraulic fracturing and horizontal drilling, Gerard said: "The states have already acted. They have moved in, and they regulate those activities. For the feds to overlay a second level that would conflict and perhaps duplicate is not good policy."

Gerard told reporters API has not "seen any justification" for proposals from the U.S. Environmental Protection Agency (EPA) (Washington, D.C.) to regulate hydraulic fracturing. "We're hopeful that cooler heads will prevail, and they'll continue to put them off until there's some justification for them."

Commenting on the impending change in EPA administrators in the second Obama administration, Gerard told reporters, "I wouldn't want to hurt any candidate by endorsing them today." He also said, "What's important is that we get reasoned, thoughtful, scientifically based individuals, particularly in areas such as the EPA."

Like all industries, API will work to protect its members' interests as the Obama administration settles in for a second term and the next session of Congress is seated this month. But outside the Washington beltway, in the nation's largest oil and gas formations, one area in particular--the Eagle Ford Shale in South Texas --is drawing significantly increased investment and attention as its production volumes continue to shoot upward.

According to a recent analysis by Wood Mackenzie (Edinburgh, Scotland), about $28 billion of capital spending will take place this year in the Eagle Ford area. That constitutes about 27% of all domestic oil and gas exploration and production investments in the "Lower 48" states. Between 2012 and 2015, Wood Mackenzie projects capital investments in the Eagle Ford will exceed $116 billion.

The consulting firm said that over the last two years, liquids production, including natural gas liquids, has grown from about 100,000 to 700,000 barrels per day. The Eagle Ford has become one of the top producing shale formations in North America, with average third-quarter 2012 production exceeding 1 million barrels of oil equivalent per day.

"The excitement in the Eagle Ford Shale and value being extracted from the play continues to exceed expectations," said Callan McMahon, Upstream Research Analyst for Wood Mackenzie, in a statement. "The pace of growth in the Eagle Ford Shale shows no sign of slowing down."

Unless Washington enacts tax and regulatory policies that overcome market forces and discourage companies from operating there.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.