A key factor in major energy companies’ natural gas production growth in the United States during the 1990s were a series of tax credits, which helped move forward coalbed methane (CBM) development among other things, according to a report released Friday by the Energy Information Administration (EIA). The report, “The Majors’ Shift to Natural Gas,” noted that almost half of the major producers reporting to EIA’s financial reporting system (FRS) received tax credits for non-conventional fuel production under Section 29 of the Windfall Profit Tax Act, with most of the credits for CBM.

CBM accounted for 7% of the total U.S. natural gas production in 1999 and represented 57% of the growth in U.S. natural gas production in the 1990s, according to EIA. Majors reporting to the FRS accounted for almost two-thirds of U.S. CBM production in the last decade.

The tax credits, according to EIA, appeared to be a “stimulus to the majors’ U.S. natural gas production.” EIA noted that majors receiving the credits increased domestic gas production by 26% between 1990 and 1999 — the most recent year of FRS data — while other domestic gas production declined by 14%. While production from wells drilled after 1992 was not eligible for Section 29 credits, the majors continued to develop CBM resources, and that growth is continuing. The tax credit is set to expire at the end of 2002.

According to EIA’s report, after 1992, majors receiving the credit drilled about 900 more U.S. gas wells annually than other majors. Also, several majors made “outlays for acquisitions of independent CBM producers” that totaled about $3.4 billion. The EIA report does not list the flurry of acquisitions made in the past year, with several by majors and large independents to corral Rocky Mountains acreage, where a great deal of CBM is located in the United States.

EIA found that the major energy companies’ move toward natural gas production “has been a long-running trend” that started in the mid-1990s, “long before the growth of CBM production.” Beginning in 1986, natural gas grew steadily from 38% of the majors’ combined domestic production to reach 52% in 1999. This trend, said EIA, is a reversal of the majors’ earlier “flight” from natural gas, driven by the profitability of natural gas production relative to the profitability of oil production.

Beginning in the early 1980s, the profitability of natural gas production “generally increased” compared to its oil counterpart, and from 1993 forward, gas production exceeded the profitability of oil production for all but two years. Going forward, EIA’s report noted that several developments could increase the majors’ role in domestic natural gas supply, including the following:

Growth in the majors’ Canadian natural gas production and investments in liquefied natural gas transport and facilities “should increase their volume of natural gas exports to the United States”;

The majors’ continued interest in CBM production should increase their share of total domestic gas production; and

The “prevalence of the majors in Alaska reserve ownership and production will increase their share of U.S. natural gas supply if a pipeline is built to transport natural gas to the Lower 48 states.”

The entire report is available on the EIA web site at www.eia.gov. EIA’s program contact is Jon A. Rasmussen, (202) 586-1449.

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