A picture of Senator James M. Inhofe
James I.
Republican OK

About Sen. James
  • Oil and Gas Industry

    by Senator James M. Inhofe

    Posted on 2013-03-06

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    INHOFE. Madam President, since being elected, President Obama has been talking about the virtues of our Nation's potential to achieve domestic energy independence. In his State of the Union Message just a short time ago he said: ``After years of talking about it, we are finally poised to control our own energy future.'' This is something I have been saying now for years. We already have control over our energy future. The problem is we have an administration that has not allowed us to exploit our own capabilities in terms of developing the natural resources we have. In fact, we are the only country in the world that doesn't develop its own resources.



    In fact, in each of the President's budgets he has proposed to kill certain tax provisions specific to the oil and gas industry. Even though he says these are subsidies for the oil and gas industry, that is not the case.

    I would like to mention these because no one ever talks about the fact that he has specific provisions in his own budget. I will mention just three of them.

    Intangible drilling costs--called IDCs. This is a provision that simply allows producers to deduct from their revenue the cost of drilling. You pay taxes on net revenue. So this is net of the expenses it takes to develop the revenue. Every business is allowed to deduct ordinary and necessary business expenses, and IDCs are exactly that for the oil and gas industry.

    In other words, the cost of drilling should be deducted because a lot of times they drill and don't produce anything. So this is something everyone else has and we should be having also in the oil industry. If the President gets rid of these, the tax increase would be $13.9 billion over the 10-year period we have been talking about. This is interesting because that is not a tax that would be paid by them. It would go into the increased cost of energy. But we stopped that. We stopped that provision from becoming a reality, even though it was in the President's budget.

    The second is called percentage depletion. Percentage depletion is simply a way the Tax Code has allowed oil and gas producers to account for the reduction in the value of their reserves. Let's say they are fortunate and they produced oil that is going to be income that will go to them. As that is depleted, the value of that has been depleted also.

    Percentage depletion has been on the books as long as we have had the industry. If the President were successful in doing away with the percentage depletion, that would mean about an $11.5 billion tax increase on the energy we use in this country.

    The last one I will mention--and there are actually two more--is called section 199. Section 199 is the manufacturer's tax deduction. It allows all manufacturers, including farmers, filmmakers, and the rest of them to take a small deduction in their taxes because they create products here in America. The President has always proposed canceling this out but only for the oil and gas industry and not for anybody else. Everybody else would have that same advantage.

    Again, if the President were successful in doing this, it would increase the cost of energy by $11.6 billion over that 10-year period. The President's proposal to increase these taxes would prevent the industry from reaching its true potential, despite the fact of what we have out there and what we could do and how we could get it done today real quickly.

    A recent CRS--Congressional Research Service--report stated that the United States has the largest combined resources in oil, natural gas, and coal of any country in the world. We have more than Saudi Arabia, China, and Canada combined. Yet we are the only Nation, as I said, in the world that doesn't allow ourselves to exploit our own resources.

    Fortunately, oil and gas activities have increased over the past years. As much as the President may want to claim credit for this, he has no standing to do so because, as I mentioned, the tax provisions he has proposed in his budget have been very negative toward oil and gas. Last year we hit a 15-year high in oil production, producing an average of 6.4 million barrels a day, which was 800,000 barrels per day more than in 2011.

    This increase is staggering and it is the result of the amazing advancements in oil and gas production technologies--things such as horizontal drilling and hydraulic fracturing. These are things that have helped us get the oil and gas out of tight formations.

    Nearly all of this increase has occurred on State and private lands. CRS confirmed 1 year ago that ``about 96 percent of the increase [in oil and gas production] since 2007 took place on non-Federal lands.'' That is critical, because as I have said twice already, we are the only country that doesn't develop its own resources. This means that is beyond the reach of the President's hands. In other words, he can't stop the private land production but he can the public land.

    Adding to that--and this was just released yesterday, which is why I wanted to make this point today--the oil production on all Federal lands, including onshore and offshore, declined last year for the second year in a row, falling from 632 million barrels in 2011 to right at 600 million barrels in 2012. So the 800,000 barrels-per-day increase we saw last year took place solely on private lands, none of it on public lands.

    During this boom time we are having right now, on that which the President has control over--the Federal lands--we have actually had a reduction. This makes sense, given what we know about oil and gas permitting on Federal lands. It still take 300 days to get a permit to drill.

    This is something you can't talk about too much because they would always say: In a certain case, you need to do it faster. In my State of Oklahoma, you can get it done in hours. In North Dakota, you can get permitting done in an average of about 10 days. But no, it is 300 days on Federal lands.

    I have a friend named Harold Hamm. He is arguably the most successful independent producer in America today. He is from Enid, OK. He does most of his production in North Dakota right now. I saw just a moment [[Page S1148]] ago the Senator from North Dakota, and he can be very proud of the fact that in North Dakota Harold Hamm has one huge problem: He can't find people to work. They have full employment up there. This is what the potential is for this entire country.

    This chart shows all the potential, and I call to the Chair's attention this Northeastern part of the United States--Pennsylvania and New York. It didn't use to be the case that they had all that potential, but they do now, and it is spread evenly throughout the country with all the great new discoveries that are out there.

    Anyway, one of the arguments the President has had when I have said over and over again for the last 4 years that we need to open our public lands for drilling, and if we were able to do that, good things would happen in terms of the market, the price of gas at the pump, is that if we do that--if we allow the drilling for gas and oil on public lands--it would be 10 years before we would feel that at the pump--10 years.

    So I called Harold Hamm. He is a guy who I think everyone would agree could be considered the most knowledgeable person in this area, about 6 months ago I called him and said to him: I am going to be on a national TV show--I should tell you what it is, but I will not--and the President has been saying it will take 10 years before that oil will reach the pumps and so I would like to ask you a question. I said: When you answer, I am going to use your name live on national TV tonight, so make sure you are accurate. So I asked him: If you had a rig set up in New Mexico and you were able to lift the restrictions we have on public lands, how long would it take that oil and gas to hit the market? He said, without hesitating, 70 days. I said: Be sure you are right. I am going to use your name, and he proceeded to tell me what would happen each day for the first barrel of oil to actually reach the pumps and have an effect.

    Anyway, no one has argued with that yet because it is pretty well documented. So by the time you have one Federal drilling permit completed, Harold Hamm could have four separate wells up and running, providing more jobs and cheaper gasoline for all Americans.

    Fortunately, the President does not control the permitting process on State and private lands, and because of this the industry has had the opportunity to unlock tremendous natural gas resources. Not 5 years ago, many believed the United States faced a significant shortage of natural gas. Wellhead prices at that time were trading as high as $11 per thousand cubic feet--$11 per thousand cubic feet--and investors were racing to build liquefied natural gas import facilities. We were going to import liquefied natural gas. As you know, natural gas has to be liquefied to have some bulk before you are able to trade it internationally. Anyway, they were racing to try to get this done so we would be able to import from foreign countries to meet U.S. demand with foreign supplies.

    The shale gas revolution changed all this. Our expected natural gas reserves are well over 2 quadrillion cubic feet, which is enough gas to supply our domestic needs in the United States for 90 years. That is right here in this country. Many industry observers believe this estimate is discounted to the Nation's true potential. This dramatic shift in natural gas markets has pushed prices down to below $4 per thousand cubic feet, putting the United States in a unique position to bolster both wealth creation and our foreign policy might by beginning natural gas exports. So we would be going from importing liquefied natural gas to exporting natural gas.

    Right now there are currently 15 permits to export LNG pending before Secretary Chu at the Department of Energy. The Natural Gas Act requires the Department to ``issue such [a permit] upon application, unless . . . it will not be consistent with the public interest.'' What could be inconsistent with this for the public interest? This would be cheaper gas for us and give us total independence in a matter of weeks.

    Congress, when it wrote the Natural Gas Act, understood that the export of American products is good for the Nation. It supports domestic industry, creates jobs, and transfers wealth from overseas back to the United States. It is all good for us.

    A recent report commissioned by DOE to assist it in making its determination agreed with this. They stated: . . . across the scenarios [examined by the study], the U.S. economic welfare consistently increases as the volume of natural gas exports increases.

    So that is the opportunity that is out there.

    Some in this body have raised concerns about allowing liquefied natural gas exports to move forward. They are concerned mainly that production would not be able to keep up with the rising consumption and exports and that the follow-on effects will be harmful to domestic industries. I can appreciate where these Members are coming from, but I want to point out something that many may be overlooking.

    The Energy Information Agency, the EIA, releases an annual outlook for U.S. energy markets. In their most recent one, which came out just a few weeks ago, they estimated that between now and 2040, production of natural gas would increase by 40 percent, which will more than offset the expected 20 percent increase in consumption. So our consumption is going to increase. People say: How can we ever become independent. Our production will increase at twice the consumption level.

    Today, natural gas is trading near an all-time low, and because of this many producers have completely abandoned new natural gas production projects. In 2008, when natural gas was trading at nearly $11 per thousand cubic feet, there were over 1,600 active drilling rigs. Today, that figure is down to 428. That is a 73-percent reduction. The rigs are still out there. They are still set up. They are just not operating. Overnight, you can have them operating again.

    The industry is not moving forward with projects because it does not have the demand and certainty it needs to do so. Without demand certainty, it is impossible to accurately forecast whether the massive investments required to develop a project can be recouped. This stalls both job and wealth creation, keeping our unemployment rates and deficits higher than they should be.

    Today the natural gas market is in a demand-limited scenario, and it will remain there for the foreseeable future. Supply is truly so abundant and readily available that as soon as more demand comes online producers are able to tap reserves and meet the market's needs.

    The consulting firm Deloitte agrees. In its report, it stated ``producers can develop more reserves in anticipation of demand growth.'' They added that future LNG exports will have limited disruptions to natural gas markets because they ``will likely be backed by long-term supply contracts, as well as long-term contracts with buyers. There will be ample notice and time in advance of the exports to make supplies available.'' This should be of great encouragement to domestic energy consumers. In fact, the NERA Consulting Report concluded that across the board, industries would not be hurt by LNG exports, stating that ``no sector analyzed . . . would experience reductions in employment more rapid than normal turnover.'' The petrochemical industry is one that has been vocal in opposition to LNG exports, but the leftwing think tank, the Brookings Institute, stated in its LNG report that ``exports can be seen as providing a benefit to the petrochemical industry'' because it is primarily a user of natural gas liquids and not the dry liquids used to make LNG.

    I can appreciate the fact that many people are worried about the cost of energy going up in this country. I am too. But those who are concerned that exports will be the cause of this have misplaced concerns. Rather, they should be focusing their attention on the cumulative effect of adverse government policies negatively affecting energy sources. Government regulations, largely those coming out of the EPA, are perhaps the greatest threat to this Nation achieving domestic energy independence. We have gone from 1,600 rigs out there that were operating down to 428 rigs.

    Further, when considering the potential benefits of LNG exports, we can't dismiss the impact trade has had on [[Page S1149]] other sectors of our economy. Agriculture is a prime example. The Federal Government works diligently to open and maintain international market access for U.S. agricultural producers. This was highlighted very recently by the announcement that Japan would ease its restrictions on U.S beef imports. Certainly, this is meaningful to my State and the States of others who are in this Chamber right now. This has been a major goal of the current and previous administrations for years, and Japan's decision was hailed by the administration and many Members of Congress on both sides of the aisle. Everyone knows it is a great deal because when you sell products abroad, you both generate wealth at home and expand the size of the market, thereby increasing opportunities for expansion.

    The Federal Government should adopt the same perspective with LNG exports. LNG exports will create jobs across the country, bring more wealth to our Nation from abroad, and grow our economy--all at the same time. Meanwhile, we will be providing needed fuel for our allies-- Japan, Korea, NATO, and Thailand--who will consequently be able to reduce their reliance on the Middle East.

    So it is something that is good for everybody. It is good for our country; it is good for our economy. And all you have to do is, if you want to see that, look up to North Dakota. As I mentioned, a great independent producer, Harold Hamm from Oklahoma, is up there right now, and his biggest problem is they are fully employed.

    We have a similar situation in my State of Oklahoma. We have expanded our production to the point where we are not feeling some of the grief you hear in the discussions from the other people on this floor. So I would encourage us to look at this export to keep this market, to get those other 1,600 wells working. This is something that can certainly happen.

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