16 February 2016

Sidley Shale and Hydraulic Fracturing Report

Vol. 5, No. 7

Topics discussed in this week’s Report include:

  • President’s proposed budget includes new taxes, fewer subsidies.
  • Bureau of Land Management (BLM) announces plan to cancel oil and gas leases in Thompson Divide.
  • Representatives push to end fossil fuel leases on federal lands.
  • Wyoming issues new flaring reporting rules.
  • Pennsylvania House entertains new gas severance tax.
  • As new pipelines come online, Bakken producers shifting from crude-by-rail transport.

Federal

President’s proposed budget includes new taxes, fewer subsidies. The Obama administration’s proposed 2017 budget includes a new tax of $10.25 for each barrel of oil produced and consumed in the United States. Revenues would go toward the Highway Trust Fund and a 10-year, $320 billion fund for clean energy transportation projects. The proposed budget would also eliminate $4.6 billion in oil, gas and coal subsidies while requiring master limited partnerships to be treated like C-corporations, increasing taxes by an estimated $1.4 billion over the next 10 years. Members of Congress in both political parties have been publicly cool to the idea of a new oil tax, while industry groups were highly critical. A recent Congressional Research Service report on the proposal estimated that the tax could raise gas prices by as much as 24 cents per gallon and hinder economic growth, especially in a struggling energy sector that has been shedding jobs.

Bureau of Land Management (BLM) announces plan to cancel oil and gas leases in Thompson Divide. BLM announced that it intends to cancel 25 oil and gas leases located in the White River National Forest. Although BLM’s draft environmental impact statement had recommended cancelling only 18 leases, BLM stated that its preliminary preferred alternative was now to cancel all of the leases. The U.S. Forest Service’s recent oil and gas leasing plan likewise would ban oil and gas drilling in the White River National Forest. Located within Colorado’s Thompson Divide, the leases have been controversial, as local groups and municipalities have opposed these leases since they were first issued during the Bush administration, citing threats to tourism, local agriculture and wildlife. Industry groups criticized BLM’s announcement, stating that the area contains prolific shale gas reserves that can be developed in an environmentally safe manner. BLM is currently reviewing another 40 oil and gas leases in the Forest outside of the Thompson Divide.

Representatives push to end fossil fuel leases on federal lands. A House bill sponsored by 17 representatives would end fossil fuel leasing on federal lands and suspend all offshore oil and gas drilling. Under the bill there would be no new federal leases for oil, gas or coal development, and current nonproducing leases would be canceled. Titling the bill the Keep It in the Ground Act, the sponsors cited the need to reduce greenhouse gas emissions. One of the sponsors, Rep. Jared Huffman (D-CA), stated that despite the recent suspension of federal coal leasing, the administration needs to do more to end the country’s use of fossil fuels, including oil and gas. The bill has a similar counterpart in the Senate – S. 2238, introduced by Jeff Merkley (D-OR) and Bernie Sanders (I-VT).

States

Wyoming issues new flaring reporting rules. The Wyoming Oil & Gas Conservation Commission has approved new rules on flaring from oil production well sites. Under the new rules, companies will be limited to releasing 20,000 cubic feet of gas per day, reduced from the previous limit of 60,000 cubic feet per day. Oil companies will also record the type of gas being vented or flared. The additional reporting has industry support, because producers believe they have been criticized unfairly for methane releases when most of the gas being vented or flared is nitrogen. Environmental groups criticized the new rules for not doing more to limit venting and flaring.

Pennsylvania House entertains new gas severance tax. A Pennsylvania House committee is considering a proposal to impose a new severance tax on gas drilling. A severance tax of 3.5 percent would be in addition to the current impact fee and would raise the total taxes on drilling to approximately 5 percent, the tax level that Governor Tom Wolf (D) had sought but the legislature rejected during the 2015 legislative session. One of the sponsors of the proposed severance tax, Rep. Kate Harper (R), estimated that a 5 percent tax on gas drilling would raise only $200 million to $300 million in additional revenue, not the $1 billion that Governor Wolf had previously claimed. Funds collected through the existing impact fee would continue to benefit environmental and infrastructure projects; the new severance tax revenues would be directed to the Commonwealth’s pension fund for public school teachers. Governor Wolf, despite failing to increase gas drilling taxes to 5 percent last year, released a proposed budget that seeks to impose a total 6.5 percent tax on gas drilling during the 2016 legislative session.

Business

As new pipelines come online, Bakken producers shifting from crude-by-rail transport. Bakken oil producers are now shipping a majority of their crude oil by pipeline as opposed to rail. Over the past four years, without access to sufficient pipeline capacity, railroads were the primary mode of transportation for North Dakota’s Bakken shale play. By the end of 2015, however, slightly more than 50 percent of Bakken crude was being shipped by pipeline. Increased pipeline capacity is providing a lower-cost alternative at a time when oil prices are near $30 per barrel.

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