House Panels OKs ANWR, Offshore Royalty Relief and Tax Package

Four House committees passed major energy bills last week that, among other things, would open the door to drilling in the Arctic National Wildlife Refuge (ANWR), provide producers $8 billion in tax breaks and incentives, and suspend royalties on oil and natural gas production in deep waters of the Gulf of Mexico up to certain limits. The measures are expected to rendezvous in late July in a comprehensive piece of legislation to be voted on by the full House.

Significantly, one of the panels, House Energy and Commerce, adopted a measure that would bar construction of a long-line Alaskan pipeline along the proposed northern route, which would run from Prudhoe Bay to the MacKenzie Delta in Canada to pipeline interconnects near Edmonton, AB, and down to the Lower 48 states. Proponents contend that at an estimated cost of $5.1 billion, this would be the least expensive and most environmentally sound route for the pipeline.

The House Resource Committee kicked off the activity last Tuesday when its Republican majority fended off two attempts by Democratic members to eliminate from energy legislation a controversial provision to open the coastal region of ANWR to oil and gas drilling. The bill, which passed by 30 to 19, also came under attack for the estimated $7.4 billion in royalty relief it would provide to producers to encourage deep-water drilling (200 meters and above) in the Gulf of Mexico. Two Democratic members voted with Republicans.

The legislation, H.R. 2436, has been forwarded to the House Energy and Commerce Committee for action before going to the House floor. ANWR, the most controversial section of the bill, is expected to make it to the floor for a vote, but its fate there is uncertain. "We don't have a nose count" on ANWR, said a spokeswoman for the Resource Committee.

The House Science energy legislation accented deep-water drilling in the Gulf as well. It proposes to set aside $900 million between fiscal years 2002-2009 for the Department of Energy (DOE) to research new technologies to explore the ultra-deep waters of the Gulf. "This crash R&D program will make it possible to bring extrordinarily large volumes of natural gas onshore for delivery to gas-deprived markets throughout the U.S.," said Rep. Ralph Hall of Texas, sponsor of the measure and ranking Democrat on the committee.

A key piece of tax legislation benefiting independent natural gas and oil producers moved through the House Ways and Means Committee late Wednesday (on a 24-17 vote). "This is very much what we've been advocating over the past several months. It gets to the heart of the capital formation issues," said Lee Fuller, government relations director of the Independent Petroleum Association of America (IPAA). The measure would aid marginal wells, extend depletion allowance provisions and allow faster recovery of capital for new development by allowing expensing of some of the costs.

By 50-5, House Energy and Commerce last Thursday voted out a sweeping energy conservation package that would reduce light-truck fuel consumption by five billion gallons over six years; provide incentives for cleaner energy sources and alternative-fueled vehicles; promotes clean-coal technologies; streamline regulation of nuclear and hydroelectric power and reformulated gasoline; increase funding for low-income energy consumers; and sets stricter standards for energy use in federal buildings.

Tucked away in that bill was an amendment, sponsored by Chairman W.J. "Billy" Tauzin (R-AK) at the request of Rep. Don Young of Alaska, that would foreclose construction of a Prudhoe Bay-to-MacKenzie Delta pipeline to deliver North Slope natural gas. By doing so, the bill in effect tilts the scales in favor of an alternative proposal that calls for the pipeline to be built through the state of Alaska along the Alaska Highway. This option is heavily favored by lawmakers and officials from Alaska because it would be an economic boon to the state.

This "late-night maneuver" by Energy and Commerce attempts to "close down the most viable opportunity for an Alaskan pipeline," said Forrest Hoglund, chairman and CEO of Arctic Resources Co., which was formed to oversee the development of an Alaskan pipeline. The committee's action is a "political play and not based on reason," he noted, adding that building the pipeline along the alternative route would cost twice as much --- $12.5 billion.

The biggest hot potato that the House committees dealt with last week undoubtedly was ANWR. The Democrat minority on the House Resources Committee had attempted to substitute the pro-ANWR Republican energy measure, The Energy Security Act, with their own anti-ANWR bill, but were shot down by a vote of 29 to 20.

The measure was sponsored by Rep. Nick J. Rahall II of West Virginia, the ranking Democrat on the panel. As an alternative to drilling in the Arctic refuge, the Democrats favored expanded drilling in already-developed fields on the North Slope, which they estimate could result in 35 Tcf for delivery to the Lower 48 states.

By 30 to 19, the Republicans also fended off an attempt by Rep. Edward Markey (D-MA) to deep-six the section of their bill that would open up ANWR. He called for the committee to preserve current law, which he said prohibited exploration in the refuge. Markey argued that the United States would save more in energy by raising the fuel economy standards than it would by extracting oil from ANWR.

Committee Vice Chairman Don Young of Alaska quickly shot back that there wasn't any existing law on the books that precludes drilling in ANWR. "We left the 1002 [coastal region] open for drilling by an act of this committee," he said.

Rahall called the Republican energy bill a "grab bag of goodies" for big oil and natural gas because it declares a multi-billion dollar royalty holiday for producers "at the taxpayers' expense." In proposing this, the Republican legislation went beyond what the Bush administration called for in its national energy policy, he said. This is "really a trick-or-treat time," with royalty giveaways for the industry, Rahall charged.

The "message" of the recent votes by the full House to defer Lease Sale 181 in the eastern Gulf of Mexico and bar drilling on federal lands that have been declared national monuments "has been lost" on the Republican members of the House Resources panel, he said (See NGI, June 25).

The Republicans were equally as vociferous in their criticism of the Democratic energy alternative. The Rahall proposal would do nothing to add to supply and encourage production, said Hansen, but opening ANWR and reviewing energy inventories on federal lands were steps in the right direction.

"We need to open ANWR to responsible and sound exploration. We need to provide... incentives for companies to explore [in the] Gulf of Mexico, where we have successfully and responsibly explored for decades," the chairman said. "We need to take a close look at our federal lands and see where our energy supplies are stored and how they might be extracted in a safe manner. The Rahall amendment accomplishes none of these needs. In fact, it is more the same policy [that] we've seen for the past eight years."

Hansen further charged that the Rahall measure would have delayed construction of a long-line natural gas pipeline from Alaska to the Lower 48 states. Rep. W.J. "Billy" Tauzin (R-LA) claimed it also would have dictated the chosen route for the gas pipeline, "regardless of what's right environmentally."

In addition to ANWR and deep-water royalty relief, the Resources Committee bill calls for the National Academy of Sciences to analyze the oil and gas resources in the Gulf, and seeks expedited reviews for onshore leasing, an expansion of royalty-in-kind programs, and royalty relief for stripper oil and gas wells (see NGI, July 16).

The Ways and Means Committee bill's tax package was a shot in the arm to independent producers. Overall, the measure would cost $33.5 billion, including the $8 billion in tax incentives for producers, as well as numerous incentives for alternative energy, conservation through energy efficiency, and clean coal technology.

The tax legislation from the Ways and Means Committee, which is going to join the other measures on the floor, proposes tax credits for marginal natural gas wells which kick in when average gas prices fall below $2.00/Mcf, increasing to a maximum of $0.50 when the price hits $1.67. For oil, the credits start at $18/bbl and reaches a maximum of $3.00 when the oil marker price falls to $15/bbl. The bill also would extend until 2006 certain provisions allowing a greater depletion allowance and spreading of losses over five years. These provisions help "create a tax credit safety net," said IPAA's Fuller. They're not much help now when the industry is booming, but "they would have helped small marginal well producers stay in business during the downturn in 1997 and 1998."

Measures to allow expensing of delay rental payments, and geological and geophysical costs, would serve to help jump-start new projects, by allowing producers to recover development costs on finding new reserves faster. The legislation also addresses problems with the Alternative Minimum Tax for enhanced oil recovery and intangible drilling costs. "The package touches on all different components of the business that would restrict capital. It would allow more producers to stay in the industry during the lean times, and provide them with more capital to put back in the ground," Fuller said.

Moreover, the Ways and Means bill would shorten the expensing of natural gas gathering lines to seven years and distribution lines to 10 years.

While the Republican-led U.S. House seems determined to pass energy legislation before the traditional August recess, the Democratic-led Senate is not expected to act until the recess ends. The Senate Finance Committee is considering a companion tax incentive package. IPAA's Fuller speculated that most of the floor debate will be about ANWR and measures addressing the California crisis.

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