Bill marks inflection point for oil
Industry faces heightened uncertainty as lawmakers seek to speed energy transition
WASHINGTON — The future of oil and natural gas demand in the United States faces increasing uncertainty following the passage of a historic climate and spending bill in the U.S. Senate Sunday, as Democrats look to expedite the nation’s transition to clean energy.
For close to a century oil has reigned as the United States’ dominant source of energy. Cars and trucks on American roads burn hundreds of millions of gallons of petroleumbased fuel each day. But with close to $370 billion in federal funding to expand tax credits for electric vehicles, along with wind and solar power, oil and gas fields in Texas and around the country will face increasing competition as energy providers in the years ahead.
The legislation, which is expected to pass the House later this week, is far from where it started when President Joe Biden introduced his $2 trillion Build Back Better legislation after coming into office. Gone is the requirement that power companies generate increasing amounts of electricity from carbon-free sources, which would have delivered a blow to natural gas producers. Clean energy subsidies are two-thirds of what the House passed last year.
But after more than a decade of political stasis on climate change, the legislation represents a significant step forward in cleaning up the energy sector, said Michael Webber, an energy professor at the University of Texas.
“The energy transition has already been underway for 15 years, but this accelerates it,” he said. “It feels like a big win after years of little progress.”
In Midland, at the heart of one of the world’s largest oil fields, the Permian Basin, those in the industry are trying to figure out where the legislation
leaves them.
In the short term, the spending bill is unlikely to have much impact on their oil revenues. But longer term, some in West Texas aren’t so sure, with U.S. production already flat and Wall Street pressuring oil companies to rein in their spending.
Larry Oldham, a veteran Midland investor, said he’d recently diversified his portfolio of oil interests by investing in a lithium mining startup in Arkansas.
“I guess we’re hedging ourselves,” he said. “That’s the American way. You have to zig and zag.”
Carrots, not sticks
The strategy laid out in the legislation is far different from Democrats’ earlier efforts at climate legislation.
Unlike the cap and trade system former president Barack Obama tried to pass, there are few penalties in the legislation for emitting greenhouse gases. Rather, Congress is flooding the clean energy industry with money, in hopes of drawing greater interest from investors.
Among the provisions are an end to the limit on how many car buyers can claim the $7,500 electric vehicle tax rebate from an individual manufacturer — a limit that Tesla and GM have already hit.
Tax credits for wind and solar power, along with other forms of clean energy, have been extended out another decade. And carbon capture projects can now claim an $85 tax credit for every ton of carbon dioxide they store underground, up from $50.
“This is not everything, but the key thing is it’s going to get private capital off the sidelines,” said Brad Townsend, vice president for policy at the Center for Climate and Energy Solutions, a think tank. “The $370 billion for clean energy, it’s catalytic. And those tax credits are locked in. The time of uncertainty around clean energy tax credits is over.”
How exactly the legislation will play out for individual oil and gas companies remains to be seen.
The bill guarantees continued oil and gas leasing on federal lands and waters, including the Gulf of Mexico, which the Biden administration had repeatedly held up. And for some large oil companies, clean energy subsidies are likely to help them decarbonize through new technologies such as carbon capture and hydrogen fuel.
“Shell is encouraged by recent actions of Senate lawmakers to pass legislation to help diversify lower-carbon energy supply and secure domestic energy production,” Gretchen Watkins, president of Royal Dutch Shell’s U.S. operations, said in a statement.
Small and mid-sized companies are not as encouraged. In addition to the funding advantages their clean energy competitors are gaining, they face a tax on methane emissions that escape during oil and gas drilling and a new minimum corporate tax rate of 15 percent. Many are worried about their future.
Mike Sommers, president of the American Petroleum Institute, the oil lobby, said Saturday that the legislation “falls short in addressing America’s energy needs” and would likely “discourage investment in U.S. oil and natural gas.”
What’s next?
The legislation passed Sunday is projected to reduce greenhouse gas emissions up to 41 percent below 2005 levels by 2030. But that is still well short of the United States’ commitment to reduce emissions more than 50 percent in that time frame — and to net zero by 2050.
Some Democrats are already pressing for more legislation, with Sen. Brian Schatz, of Hawaii, telling reporters Monday the bill is “the start of what we need to do on climate action.”
Many economists, as well as several oil companies, argue for the creation of an economy-wide carbon fee to speed the transition to clean energy along by providing economic incentive for companies to cut emissions. But so far, most politicians have resisted such policies, wary of doing anything that might raise energy prices on voters.
“They’ve been discussing these policies for 15 years and it’s never come to be,” Webber said. “In the end, it’s easier to reward the good stuff than punish the bad stuff.”
Biden is expected to sign the legislation into law early next week.