<< reports

Section 29: The Billion Dollar Tax Credit for Coalbed Methane

"The Section 29 tax credit for hard-to-recover natural gas is the tax break that won't die -- or at least it's very hard to kill. This primarily is because it has some powerful friends, such as Enron Corp. Chairman Kenneth L. Lay..." From: "Natural gas tax credit prompts intense lobby; Section 29 tax credit" The Oil Daily August 1992

Photo courtesy of Wyoming Outdoor Council

What is the Section 29 Tax Credit?
The Alternative Fuel Production Credit (Section 29 of the Internal Revenue Code) was established by the Windfall Profit Tax of 1980 and designed to encourage the production of domestic energy from certain non-conventional sources. Coalbed methane, which is natural gas produced from coal seams, accounted for most of the major oil and gas companies' production qualifying for Section 29 credits in the 1990s.

The Tax Credit is unnecessary.
Industry representatives and analysts, in published stories over the past year, repeatedly indicate that the Section 29 tax credit is not needed to promote and sustain coalbed methane development. The petroleum industry itself has admitted that the primary driver behind the growth of the industry is that it is a low-risk venture with high drilling success rates. The average reserve finding costs in the coalbed methane fields are far less than conventional onshore drilling.

Coalbed methane is booming, with or without the tax credit.
Today, the Bureau of Land Management is considering proposals to drill 100,000 new coalbed methane wells on federal lands over the next few years. In 1995, the Powder River Basin in Wyoming had 125 coalbed methane wells. To date, it has 6,500, and the federal government is seeking public input on an industry proposal to increase that number to 51,000. Similarly, the number of coalbed methane wells is expected to double in northern New Mexico in the San Juan Basin over the next several years. Colorado, Montana and Alabama are home to extensive coalbed methane operations as well.

Coalbed methane production is destroying ranches, wildlife habitat and squandering scarce water resources.
To capture the natural gas trapped in coal seems, the operator must first pump off the groundwater that holds the methane trapped in the coal. Each well produces an average of 12 gallons of water per minute. This is water that, in many cases, is loaded with salts and toxins, including arsenic. The "produced water," which is often discharged directly onto neighboring land or into streams, destroys vegetation and springs used by livestock, pollutes wildlife habitat, and threatens rural ranching communities. Other deleterious effects include air pollution from the engines that run the water pumps and persistent industrial noise from gas compressors and other machinery.

The Section 29 Tax Credit was brought to you by Kenneth Lay.
In 1992, The Oil Daily reported that one of the strongest proponents lobbying in favor of the original tax credit was Kenneth Lay, of Enron fame. This same story also describes how the gas industry has abused the tax credit through corporate maneuverings that involve questionable partnerships set up to take advantage of the tax credit.

The Senate should end the Section 29 Tax Credit.
The Senate Finance Committee has completed legislation to provide tax incentives for energy production and conservation. Under pressure from industry, some members of the committee moved to extend the Section 29 Tax Credit, which was supposed to expire this year. Section 29 is an unnecessary boondoggle that is bad for the environment, encourages questionable corporate practices and squanders increasingly scarce taxpayer dollars on an already profitable industry.

For More Information Contact:
Cathy Carlson, Center for the Wild West, (303) 449-5792
Matt Hollamby, U.S. PIRG, (202) 546-9707
Gwen Lachelt, Oil and Gas Accountability Project, (970) 259-3353

WASHINGTON -- The Section 29 tax credit for hard-to-recover natural gas is the tax break that won't die -- or at least it's very hard to kill.

This primarily is because it has some powerful friends, such as Enron Corp. Chairman Kenneth L. Lay, Senate Finance Committee Chairman Lloyd Bentsen of Texas, and Senate Minority Leader Robert J. Dole of Kansas.

The IRS Section 29 tax credit for unconventional natural gas drilling is scheduled to expire at the end of this year. But a serious effort is under way by key senators and some major oil and gas companies to save it.

The battle began in earnest when Dole, joined by Sen. John D. "Jay" Rockefeller, D-W.Va., offered an amendment late Wednesday that would renew the Section 29 tax credit as part of the major tax bill currently pending in Congress.

Dole said the tax credit extension will help produce more natural gas and reduce U.S. dependence on foreign oil imports.

"It's good economic policy, good energy policy and good environmental policy," he said in offering his amendment.

It also means more jobs, because almost a fourth of the rigs currently working are looking for Section 29 gas, Dole added.

Pulling the Plug

Because the industry is so depressed, "pulling the plug on Section 29 would be like pulling the ventilator on a patient in intensive care," Dole declared.

Rockefeller added that 80 to 90 percent of the drilling in West Virginia "would stop" if Section 29 is not extended, with a loss of "100,000 jobs" nationwide.

In defense of the tax credit, Rockefeller noted that Section 29 accounts for less than 10 percent of total domestic gas production.

However, critics point out that coalbed methane is the fastest growing source of gas production, and would not be economical without the tax subsidy.

The Dole-Rockefeller amendment would modify the existing tax credit by placing a cap on larger wells, in order to make it more acceptable to the industry.

A 42 MMcf Cap

Production would be capped at 42 million cubic feet per year for all production but tight-formation and synthetic fuels.

For those two categories, the full existing credit would be available for the first 42,000 cubic feet per day.

For any gas production up to 550 million cubic feet, the credit is reduced by 25 percent. No credit would be available in excess of those levels, Dole said.

The wide-ranging tax bill includes various tax extenders, urban aid, tax breaks on savings and home buying and other benefits for middle- and lower-income taxpayers.

The Senate did not finish the tax bill before adjourning Wednesday night for its August recess, so no vote was taken on the Dole-Rockefeller amendment. Debate will begin on the amendment when the Senate returns on Sept. 8.

The House did not include a Section 29 extension in its tax bill.

Who Opposes It

Leading the opposition to the Section 29 extension will be Sen. Bill Bradley, D-N.J., who previously opposed granting alternative minimum tax relief to independent producers in the energy bill.

Bradley requested time to debate the tax extension when the Senate returns, and said he will be joined by Sen. Don Nickles, R-Okla., in working to defeat the tax credit.

Nickles and Bradley are urging their colleagues to oppose "this anti-free market subsidy."

The credit has been too successful, they argue. "Today, however, its greatest effect is to distort gas markets and add to local gluts," Nickles and Bradley said in a letter to other senators.

Broken Promise

The Section 29 credit was supposed to be sacrificed as part of a trade-off to ensure that $1 billion in alternative minimum tax relief for independent oil and gas producers would be included in the comprehensive energy bill.

Bentsen publicly offered the tradeoff during a Senate Finance Committee markup in July of a tax package to the Senate energy bill.

From that point on, most people assumed Section 29 was history. The natural gas industry remains sharply divided over the Section 29 tax credit.

Many small, independent producers believe the tax credit for unconventional natural gas production helps only a few large companies.

Otherwise Uneconomical

They also think that it has contributed to the lowest prices in years by bringing onto the market more and more tight-sands gas and coalbed methane that otherwise would not be economical.

The Section 29 tax credit escalates with inflation and is estimated to be worth 96 cents per Mcf this year for Devonian shale and coalbed methane, and 52 cents per Mcf for tight-sands gas production.

In a market where spot prices suddenly collapsed at the beginning of the year to almost $1 per Mcf, the federal tax credit is a definite boon those few producers who can take advantage of it.

The Section 29 tax credit was enacted in 1980 and was set to expire in 1990, but was extended by Congress for two years.

Under current law, new wells must be drilled by the end of this year to be eligible to use the credit; current production can continue to utilize the credit through 2002.

Boon to Enron

Enron Oil and Gas Co. (EOG) has "benefited significantly" from the tight-sands tax credit, according to the company's own second-quarter earnings statement.

EOG is an independent exploration company, but is 84-percent owned by Enron Corp.

The Section 29 tax credit played an important role in the doubling of EOG's second-quarter earnings to $14.6 million this year from $7.3 million last year.

Based on greater production volume, the credit was worth $6.7 million to EOG in the second quarter, compared with $1 million just one year ago.

EOG currently has sales from tight-sands gas in excess of 215 million cubic feet per day, which was 41 percent of its total domestic sales of 520 MMcf/d in the second quarter.

The company has plans to drill at least 250 net tight-sands wells this year, up from 170 last year.

The Section 29 federal tax credit could generate an after-tax net income contribution of more than $40 million for EOG in 1992, an Enron Corp. spokesman said.

By comparison, the federal tight-sands credit contributed $17 million in after-tax net income in 1991.

Unlikely Partners

The Section 29 tax credit has created some unlikely partners in the oil and gas business, reminiscent of the early '70s when oil prices soared to almost $40 per barrel and every dentist in Texas with spare cash lying around was happily investing in speculative drilling ventures.

Because of the peculiarities of the tax credit, Meridian Oil Inc., one of the largest coalbed methane producers, has worked out a deal with American Telephone & Telegraph to take advantage of the credit.

Meridian, a subsidiary of Burlington Resources, is unable to use the Section 29 tax credit because it falls under the alternative minimum tax. Only companies that earn enough to fall under the regular tax structure can take advantage of the Section 29 tax credit.

So, Meridian basically has sold its wells to AT&T and leases them back. Meridian keeps the gas production, and AT&T can utilize the tax credit on its income tax liability.

Neither company wanted to comment much on the deal.

C.R. Jack, Meridian's senior vice president and chief financial officer, told The Oil Daily that the deal is beneficial for both companies.

There aren't many shelters out there any more for corporations like AT&T with money to invest, Jack said.

Despite its significant coalbed methane holdings, Jack said Houston-based Meridian Oil is "fairly neutral" on whether the tax should be renewed. The company has exploited most of the potential from the tax, he said.

from the January 03, 2002 edition - http://www.csmonitor.com/2002/0103/p3s1-usgn.html

OREGON BUTTES, WYO. - Beneath the desolate beauty of Wyoming's Red Desert lie rock-bound resources that could go a long way toward meeting America's burgeoning demand for natural gas.
But the potential energy supplies are also unleashing floodwaters of controversy on the open range.
At issue is a method of releasing methane - a form of natural gas - from coal beds where it is trapped. In the process, vast quantities of water are also extracted, threatening the livelihood of many ranchers.
The battle here has implications that reach far beyond this unusual landscape. It could help determine whether drilling rigs increasingly sprout up in landscapes as diverse as New Mexican mesas, Midwest prairies, and Pennsylvania hills.

"It's going to happen around the world," predicts Walter Merschat, president of Scientific Geochemical Services in Casper, Wyo. "I think any place there's coal, there's a potential for extracting methane."
In fact, while the prospect of drilling for oil in Alaska has become a focal point of debate over President Bush's national energy strategy, his plan also seeks to encourage so-called coal-bed methane drilling in the lower 48 states. This would disturb more acres of land near more people than would drilling in the Arctic National Wildlife Refuge.

Vast trapped resource

With or without encouragement from Washington, experts say the new drilling technique could unlock a vast resource at a time when new US power plants have increasingly relied on natural gas for fuel.
The extraction method, developed since the late 1980s, has boomed in the past few years in northeastern Wyoming's Powder River Basin, where almost 11,000 wells have been drilled during the past two years.
The Red Desert is part of the Green River Basin, a region in southwestern Wyoming that, by itself, may hold enough coal-bed methane to supply the nation with a decade's worth of natural gas - 314 trillion cubic feet.

The US Bureau of Land Management, which owns key mineral rights here, expects the region to become America's major gas-producing region by 2015. The agency plans to permit 4,000 methane wells near Rawlins, on the area's eastern edge.

But critics say the rich energy supplies come at a large cost to the land and many who live on it.
"It's going to be tragic - all the erosion, the weeds, the pipelines," says Bernie Barlow, whose family has raised cattle since 1927 in the steep hills of the Powder River Breaks. Like many ranchers, Ms. Barlow doesn't own the mineral rights underfoot.

Where coal-bed methane is developed, it introduces new miles of roads, wires, and pipelines into an empty landscape. It also generates large amounts of water.

The reason: To get methane out of the coal, drillers first pump out water that is trapped in the rock. This reduces the pressure and allows the gas to percolate out, just as popping the top on a can of soda reduces the pressure and releases the carbonation. A great deal of water in a desert is not necessarily a good thing, since it has to be disposed of and may be high in salts.

Thus, some ranchers such as Barlow face the prospect of having scores of reservoirs built on their land to hold the pumped water. Pennaco Energy, a subsidiary of USX-Marathon Group and one of the busiest drilling companies in Wyoming, wants to use 1,000 of Barlow's 18,000 acres for reservoirs. All the development, she says, will erode fragile soils and cut down on the available feed for her cattle. "In this rough country, it's going to be a catastrophe."

Not all ranchers opposed

Those ranchers who own the gas beneath their land - and thus stand to reap royalties from drilling - tend to be more positive.

"Every time you hear one of those things," said Jack Cooksley, smiling at a diesel-powered machine that compresses gas from 22 wells on his ranch near Ucross, "they're going to talk money."

Gas industry executives, for their part, contend that gas drilling will bolster national energy security.
"The country needs more good, clean energy, and right now," said Terrell Dobkins, Pennaco's vice president for production. "Natural gas is the cleanest option that we have available that's economic. We need to develop more ... where we [Americans] have full control over it."

But the process carries environmental risks. Once the gas is released from the coal bed, it can percolate to the surface rather than be captured by drilling.

In the Durango, Colo., area, several families were moved from their homes after explosive levels of methane accumulated beneath them. Trees and shrubs died. La Plata County tried to control coal-bed methane development by passing regulations to allow the county to determine where wells would be sited. The gas industry sued to overturn the regulations, but they have been largely upheld by courts.

Drilling also could mar landscapes that many people want to protect.

The Red Desert, for example, is the highest desert in North America and home to the largest migratory ungulate herd in the lower 48 states. In the spring and fall, 50,000 pronghorn antelope migrate through this region, traveling as far as 140 miles. Elk come out of the Wind River Range to winter here, and several hundred live - atypically - in the desert itself year-round. It has one of America's healthiest populations of Northern sage grouse.

Yet for all that, "we're fooling ourselves if we think we're going to stop mineral development in southwestern Wyoming," says Dan Heilig, executive director of the Wyoming Outdoor Council. He says environmentalists hope to keep methane drillers out of the most striking and sensitive parts of this landscape.

The House version of the Bush administration's energy bill, passed last summer, would revive an energy tax credit that stimulated early coal-bed methane development, but expired in 1992. Some analysts say methane drilling would boom under the credits, and flourish even without them.