Energy Tax Credit Hearings Focus on Domestic Supply

Legislation that would extend the tax credits for coalbed methane and other varieties of natural gas got a thumbs up from a variety of supporters last week, with the House Ways and Means Select Revenue Measures (SRM) subcommittee hearing testimony from both industry and consumer groups in support of the extension and other issues to sustain and improve U.S. energy production.

Two hearings focused on proposals to increase domestic production of traditional and renewable energy resources, easing the distribution of energy resources and conservation measures, and while all those testifying had their own agendas, testimony from many of the invited speakers and legislators focused on providing ways to improve the U.S. energy supply through tax incentives.

The Internal Revenue Code has several incentives for domestic energy production, including the Section 29 credit, created in 1980 to encourage domestic production of unconventional fuels from deposits considered difficult or expensive to produce.

Coalbed methane, tight gas sands, gas produced from Devonian shale and shale and tar sand oil all fall into the tax-credit group, which covers production activities across the country. The credit, equivalent to $0.50 cents/Mcf and $3.00/bbl, is set to expire on Dec. 31, 2002 for all qualifying fuels except biogas and synfuels. (Their credit expires Dec. 31, 2007.)

Extending the legislation has been a bipartisan effort, and for two days, the SRM subcommittee heard from legislators, business and consumer groups on why the Section 29 tax credit should be extended and whether other types of credits and programs should be enacted.

"Section 29 can play a vital role in increasing and stabilizing the domestic supply of natural gas," said Rep. Dennis Moore (D-KS), one of the co-sponsors of the extension. "This comes at a time when our nation is consuming more natural gas than ever before, and it will go a long way toward easing our current energy difficulties."

Noting that studies by the Gas Technology Institute and others report that the credit has been successful in boosting unconventional gas production, Moore said that extending Section 29 to wells drilled through 2010 "could increase U.S. gas supply by approximately 2 Tcf/year, adding a cumulative volume of over 15 Tcf of additional unconventional gas by 2015."

Production from new wells "would also likely extend beyond 2015, and consumers will benefit from both expanded supply and new technological innovations even after the term projected," said Moore. "Producers and investors need stability in order to make the long-term investments necessary to extract and produce gas form difficult sources."

Acknowledging the support of Sen. Frank Murkowski (R-AK), Moore said, "This is an idea with bipartisan backing that will allow domestic gas production to increase and stabilize. It is an idea proven to work, and it needs to be a law."

Rep. Max Sandlin (D-TX) also called for the tax credit renewal. "Try attracting investment when natural gas is $0.98/Mcf, as it was in 1999," he said, "and you begin to understand why dozens of independent oil and gas producers went out of business, curtailing the production of natural gas, an increasingly critical fuel stock for electricity generation. Modifying the federal tax code will allow producers to retain the necessary capital crucial to expanding capacity and spurring production."

Sandlin added that a "basket of targeted tax incentives can help maintain and increase domestic production, deterring wild price swings that hurt American families and produce uncertainty within the industry."

Industry officials testifying Wednesday included Charles N. McFarlane, assistant general tax counsel of Chevron Corp., who spoke on behalf of the American Petroleum Institute, Domestic Petroleum Council and the U.S. Oil and Gas Association.

"Existing tax laws do not begin to address how this nation will encourage the massive capital investment needed to meet this energy demand growth," McFarlane said. "Positive tax changes will help promote the use of new technologies for exploration, development and production, help maintain the economic viability of mature production sites and develop urgently needed new refining capacity."

Statements on the tax credits and other methods to promote production will be taken by the SRM through June 19. To learn more about the hearings or when additional ones will be scheduled, visit the web site at http://waysandmeans.house.gov/srm.htm.

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