Texas Oil and Gas Attorney Blog

Texas oil and gas attorneys are watching with trepidation as Obama seeks to cripple domestic mineral production with his ill-conceived policies. In our previous post, we discussed the Obama administration’s push to eliminate some of the tax subsidies that oil and gas producers in the United States currently enjoy. One of the subsidies that will be cut — if the President’s Fiscal Year 2012 Budget is approved — is percentage depletion for oil and gas wells, or the “oil depletion allowance” as Speaker Boehner recently called it. According to an article on Texas Insider, the Office of Management and Budget (OMB) estimates that repealing percentage depletion would generate 607 million dollars in 2012, and 11.2 billion dollars over the next decade, in additional tax revenue. While that extra income would surely help the federal government’s bottom line, it is not a smart policy due to the adverse affects it will have on oil and gas exploration and ultimately, retail gas prices. Before we can address these potential effects, however, it is helpful to have an understanding of what the “oil depletion allowance” is.

Depletion allowances let the owner of an asset account for the portion of that product as it is used up. Depletion allowances are similar to depreciation in that they provide cost recovery for capital investments — it is a tax structure to ensure that the financial burden of using resources is not borne by businesses in a lump sum. There are two types of depletion allowances available to oil and gas producers: cost depletion and percentage depletion. Cost depletion allows a taxpayer to recover the actual capital investment through the period of income production of the oil and/or gas reserves, and the cumulative amount recovered through cost depletion cannot exceed the taxpayer’s original capital investment. The other form of depletion is percentage depletion, which allows oil and gas producers and mineral rights owners to recover a portion of the mineral that is used up, or depleted, at a rate of fifteen percent of the average daily gross income from their operation each year. Unlike cost depletion, cumulative depletion deductions under the percentage model can be greater than the original capital investment made to exploit those resources.

The White House’s 2012 budget seeks to eliminate percentage depletion for oil and gas wells, leaving only cost depletion as a means for recovering such capital investment costs for the domestic independent oil and gas industry. The effects of such a change would be substantial. According to the Independent Petroleum Association of America (IPAA), removing percentage depletion as an option for small oil producers would force these companies to reduce their drilling budgets anywhere from twenty to thirty-five percent. The IPAA goes on to say that the independent oil industry accounts for almost four million jobs in the United States, and that the elimination of percentage depletion will increase taxes and result in fewer employment opportunities for Americans. Furthermore, the IPAA asserts that the elimination of percentage depletion will increase our nation’s dependence on foreign oil and result in less governmental revenue going forward.

Texas oil and gas attorneys are watching the recent series of drilling moratoriums by the federal government with great interest. In a recent blog post, I discussed the legal background behind the first deepwater drilling moratorium and the litigation that followed.Because a federal judge ruled that the first deepwater drilling moratorium should be set aside as “arbitrary and capricious” under the Administrative Procedure Act (“APA”), the U S Department of the Interior (“DOI”) was left with a choice: either lift the deepwater drilling moratorium completely, or try to instate a new moratorium that might pass APA muster.

In an unsurprising move, the DOI issued a second deepwater drilling moratorium. The second moratorium banned exactly the same activities as the first moratorium, although it used slightly different grounds to do so. While the first moratorium banned activities occurring at depths greater than 500 feet, the second moratorium restrained all rigs that use subsea blowout preventers or surface blowout preventers on a floating facility. In reality, the second moratorium restrained precisely the same rigs as the first moratorium. The DOI defended their second attempt by explaining that, although the second moratorium was similar in effect to the first moratorium, the second moratorium did address the technical concerns highlighted in the District Court’s first order.

In November 2010, the DOI lifted the second moratorium. However, despite the fact that the moratorium was lifted, the DOI was slow to issue new permits for activities covered by the two moratoriums.

As a Texas oil and gas attorney, I have followed with great interest the actions of the US Department of Interior (DOI) to finally lift the post-BP Oil Spill moratorium on deepwater drilling. It has been a long and legally complex road, but finally the DOI has taken the initial steps necessary to end the moratorium and re-start deepwater drilling in the Gulf of Mexico. So far, three deepwater drilling projects have been approved. A project sponsored by a Texas corporation, ATP Oil & Gas, was one of the lucky three.

In my next two blog posts, I’ll discuss the legal background behind the two deepwater drilling moratoriums issued by the Obama administration, the litigation challenging those moratoriums, and the current state of deepwater drilling operations.

Immediately after the BP oil spill disaster, the DOI issued a “Moratorium Notice to Lessees and Operators,” which: 1) directed oil and gas lessees and operators to cease drilling new deepwater wells; 2) prohibited the

As a Texas oil and gas attorney, I am keenly interested in the political climate in which the oil and gas industry operates. Politics has a lot to do with how much oil and gas this country produces. For example, in the White House’s proposed Budget for the Department of Energy in fiscal year 2012, Barack Obama set forth a budget that “eliminates inefficient fossil fuel subsidies.” The administration did so as a part of its ongoing plan to shift the nations energy policy toward investments in “clean energy sources” like photovoltaics and wind power generation. This issue is one that has gained even greater notoriety when Republican House Speaker John Boehner recently informed ABC News that he was open to eliminate one of these tax breaks — the “ oil depletion allowance” — for large oil companies as a measure to help maintain the fiscal health of the government. He went on to state that he was open to evaluating the President’s proposed subsidy cuts as well. In response, the President wrote a letter to Speaker Boehner and other Congressional leaders asking them to support the elimination of the oil and gas industry tax subsidies.In the aforementioned interview, Speaker Boehner stated that small and independant oil producers in the United States need the “oil depletion allowance.” Representative Boehner went on to say that smaller oil firms need those subsidies to continue the current rate of exploration for new sources of petroleum reserves within U.S. borders. A later statement issued by his office stated that Boehner wishes to increase the amount of energy produced in the country to free the country from the market vagaries of oil sourced abroad, and that the President’s proposed plan would boost gas prices higher. Should the budget be approved unamended by Congress, around 4 billion dollars worth of subsidies and tax breaks will disappear, and the ramifications of such a move could have an adverse effect on our recovering economy.

Boehner’s statements to ABC illustrate the importance of evaluating all sides to this issue, and highlight the fact that the domestic oil industry is not solely comprised of billion dollar corporations. In fact, according to the Independent Petroleum Association of America (IPAA), small scale oil producers do the majority of oil exploration in the United States. Such organizations employ only twelve individuals on average, but they drill ninety-five percent of new oil wells, and produce two-thirds of our nation’s domestic oil and natural gas. In our next post, we will examine the existing “oil depletion allowance,” the proposed budget’s tax subsidy cuts, and the effect such changes could have on independent oil producers in the US.

As a Texas oil and gas attorney, I have authored a series of articles on this site concerning the pros and cons of alternative energy. As I prepared to return to the topic, I began to ponder a more general question. When we use the phrase “alternative energy” or “alternative fuels,” what exactly do we mean? Any lawyer will tell you that words have very precise meanings: when you are using a word, it is very important that you are clear what you mean when you use that word. Let us avoid the error of the Cheshire Cat in Alice in Wonderland, who made words mean anything he chose! Therefore, in writing about alternative energy, I have to ask two important questions: first, an alternative to what? And secondly, what alternative?

The dictionary defines alternative in one usage as “different from the usual or conventional.” So when we speak of alternative energy, we are talking about sources of energy different from the usual or conventional sources. But “usual or conventional sources” can mean different things.Alternative energy is often spoken of in relation to oil. With every spike in the price of oil and the resulting rise in the price of gasoline, the usual cries are heard: we are too dependent on imported oil, our economy is too vulnerable to increases in energy costs as a result of that dependence, and for our own economic and national security we need to reduce that dependence. The natural choice, at least in the near future, would be to develop our own domestic sources of oil. That choice, however, has been to date choked off because of environmental concerns: exploration in the Alaskan National Wildlife Refuge was rejected by Congress, and the moratorium on new oil exploration in the Gulf imposed by the Obama administration after the Deepwater Horizon spill are the two most prominent examples of the roadblocks placed by environmentalists and their allies in Washington. So, it would seem that, for some, alternative energy does not mean using alternative sources for the current dominant energy source of oil.

In addition to developing new sources of oil, alternative energy can mean expanding the use of existing sources of energy. Three such sources are coal, natural gas, and nuclear power. Each has their advocates. Coal is still plentiful in the United States, and efforts are underway to develop clean coal technology designed to reduce emissions claimed to contribute to man-made global warming. Natural gas is also plentiful, given current estimates of reserves, and it is also the cleanest burning of the fossil fuels with almost no greenhouse gas emissions compared to coal or oil. Finally, in spite of safety concerns over the last several decades, nuclear energy has gained it’s advocates as the energy source least likely to contribute to global warming. All three sources are proven technologies and have the production and delivery infrastructure in place to reduce oil’s percentage of America’s energy production. But none of them are particularly popular among environmentalists who advocate the reduction of greenhouse gas emissions; coal and natural gas are still fossil fuels that are non-renewable and are claimed to exact a toll on the environment in their production and use. As far as nuclear energy-well, the vast majority of environmentalists have nothing good to say, pointing to issues involving waste disposal and fears of some catastrophic Chernobyl-type disaster. These, then, are not the alternatives that advocates of alternative energy intend when they speak of alternative energy.

As a Texas oil and gas attorney, I am deeply concerned at the constant beating the oil and gas industry takes from Obama and his administration. Obama paints oil and gas companies as Machiavellian monoliths, with their CEO’s sitting around in tails and top hats like the millionaire in the Monopoly game. I can’t recall a president as antagonistic to the industry since Jimmy Carter’s ill-informed and destructive policies resulted in a great deal of oil production being driven from the United States. However, Obama may surpass Carter in his destructiveness. This is the behavior of a misguided idealogue and a demagogue, especially because the announced basis for these policies is so inaccurate. Obama’s speeches appear calculated to generate some kind of “us against them” mentality. But it is not a case of “us against them”. We are them. Most of our oil and gas comes from smaller, independent producers, not the big companies. This assault will cost us jobs and energy at a time when both are in short supply.

The latest assault on the oil and gas industry is Obama’s announcement that he wants to end “oil and gas subsidies”. I think this is Obama-speak for eliminating the depletion allowance. However, Obama does not apply the same view towards all the other subsidies the federal government hands out. For example, most informed people are aware that the real estate debaucle and resultant depression of the last few years is a direct result of the goal of Democrats to buy votes by making sure everybody bought a house, whether they could afford it or not. This policy was expressed in the insistence of a Democratic Congress that Fannie Mae and Freddie Mac lower their standards in loan qualification (if they are breathing and have a copy of their last utility bill, they qualify), and in the easy money policy of the Federal Reserve. We all know how that turned out. Incredibly, both those policies are still in place. Not only are these policies still in place, but now we have other federal programs to bail out the people who could not afford their mortgage in the first place. This is insanity!

I ran across a quote by Glenn Reynolds recently, that put it far better than I could. Professor Reynolds is a law professor at the University of Tennessee. His blog, Instapundit, is the source of many thoughtful comments. Here is a quote from his blog regarding subsidies:

Like many Texas oil and gas attorneys, I am keenly interested in the struggle unfolding between the EPA, Congress and the State of Texas. In a previous blog post, I discussed the EPA‘s recent efforts to regulate greenhouse gasses across the nation. Today, I’ll describe the State of Texas‘ and the US Congress’ responses to the EPA’s new greenhouse gas rules.

The EPA’s greenhouse gas regulations require the states to implement a federally mandated greenhouse gas permitting system. Under EPA greenhouse gas regulations, new, large power plants that are already required to obtain pollution permits must also obtain a greenhouse gas permit. The permit would require those new power plants to implement the newer technologies available to control carbon dioxide emissions.

Most states agreed to implement the EPA’s new greenhouse gas plan. Texas and Wyoming, on the other hand, filed legal challenges to the program.

Texas Governor Rick Perry publicly refused to go along with the EPA. Governor Perry’s spokeswoman called the EPA’s plans “misguided,” “unnecessary,” and “burdensome,” and said that the the permitting system threatens “hundreds of thousands of Texas jobs” and imposes “increased living costs on Texas families.”

The EPA caught wind of Perry’s refusal and took matters into their own hands. Because it was clear that Texas would not implement the new greenhouse gas rules, the EPA decided to take over Texas’ greenhouse gas permit program. So, new power plants that are required to get a greenhouse gas permit under the EPA’s greenhouse rules would need to get that permit directly from the EPA, rather than the State of Texas.
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Much to the chagrin of many Texans, the US Environmental Protection Agency (EPA) recently decided to regulate greenhouse gasses around the nation. This decision was a long time in the making and has important implications for the State of Texas and the whole nation. In this blog post, I’ll describe the legal backdrop of greenhouse gas regulation, and I’ll summarize the EPA’s proposed plans to tackle greenhouse gasses.

Greenhouse gasses are heat trapping gasses that some scientists believe cause global warming. Carbon dioxide is one of the most abundant greenhouse gasses, and some climate change experts believe that the compound’s increased presence in the Earth’s atmosphere causes global climate change. The compound is created naturally through human and animal respiration, and it is also a natural by-product of combustion. When humans burn things, like coal, oil or natural gas, carbon dioxide is released into the atmosphere. It is not yet definitely proven, in my mind, that man-made carbon dioxide has any appreciable impact on the earth’s temperature.

In the 2007 US Supreme Court case Massachusetts vs. EPA, the Court held that the EPA is required to study greenhouse gas emissions and determine whether greenhouse gas regulation is appropriate under the Clean Air Act (CAA).

The Supreme Court held that CAA section 202(a)(1) applies to greenhouse gasses, in addition to more traditional pollutants. The Court cited Section 202(a)(1) which requires the EPA Administrator to set emission standards for “any air pollutant” . . . “which in his judgment cause[s], or contribute[s] to, air pollution which may reasonably be anticipated to endanger public health or welfare.” While the Supreme Court did not hold that the EPA must regulate greenhouse gasses, it did require the EPA Administrator to take the first step and determine whether or not greenhouse gasses are reasonably anticipated to endanger public welfare.

In 2009, the EPA Administrator made two important findings. The Administrator found that current and projected concentrations of six key, well-mixed greenhouse gasses 1) contribute to man-made global warming, and 2) threaten the public health and welfare of current generations. Remember that under Massachusetts v. EPA‘s interpretation of the CAA, the EPA must regulate air all pollutants that are reasonably anticipated to endanger public health or welfare. Once the EPA determined that greenhouse gasses lead to global warming, the EPA was poised to set emissions standards for greenhouse gasses, as required by Massachusetts v. EPA‘s interpretation of the CAA.
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This week we continue our examination of ethanol as an alternative energy source. As a Texas oil and gas attorney, I am particularly interested in the impact that a shift from fossil fuels to alternatives would have on our economy and on our society. It is an unavoidable fact that we are a fossil fuel-based society; any shift from fossil fuels to alternative energy sources will have costs associated with them. While we don’t know what all those costs will be, our experience with ethanol shows that the costs-at least in the early stages of development-can at best limit, and at worst outweigh, any benefits gained from the use of alternative fuels.

What are some of the costs of using ethanol as an alternative energy source? After looking at the issue, I believe there are three primary costs:

• The cost to us as taxpayers • The cost to us as consumers • The cost to our environment
These costs are well documented in study after study, but you never hear about them in the media. The media and the public seem to have bought the idea of limitless and cost-free benefits accruing to our society. There are some benefits, as other studies have shown. But if we don’t look at the costs, how can we decide if the benefits are worthwhile?

What are the costs to us as taxpayers? In order to encourage ethanol production, Congress has approved generous subsidies to farmers and refiners. Since 1978, the Volumetric Ethanol Excise Tax Credit (VEETC) has provided refiners with an incentive to blend corn ethanol with gasoline. According to the the Government Accountability Office, in 2008 the government gave a total of $4 billion dollars in subsidies for corn-based ethanol; in 2009 the figure jumped to $6 billion dollars. Ethanol production in that year replaced a mere 2% of the U.S. gasoline supply. The average cost to the taxpayer was the equivalent of $82 a barrel, or $1.95 a gallon on top of the gasoline price. According to the Congressional Budget Office, the cost of replacing one gallon of conventional gasoline was $1.78 per gallon for corn ethanol in 2009. In addition to the tax credit, there is the Renewable Fuels Standard (RFS) which currently requires 36 billion gallons of renewable fuel (primarily ethanol) to be blended with gasoline by 2022 as well as a tariff on the importation of ethanol which functions much the same way a tax would, by increasing the cost of imports to consumers.
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