New Taxes on Oil & Gas

The White House budget request claims that, “Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices.” In the first place, it is odd to hear the White House worrying about high energy prices, and also to hear it deny that tax policy gives incentive for production.

Both of these points flatly contradict the whole philosophy behind the White House’s favored cap-and-trade scheme, which is expressly designed to (a) raise the price of fossil-based energy and (b) reduce the incentives to use such energy sources. The White House can’t have it both ways: Do they want higher energy prices (cap-and-trade) or don’t they? And do they think government policies influence energy production, or don’t they? If they claim tax hikes on the oil and gas industries won’t have any incentive effects on production or jobs, then how can they claim that “green investments” will create jobs in the solar and wind industries?

The White House’s statement also euphemistically labels its tax hikes as ending “subsidies” to the oil and gas industries, but that would only be true if the IRS is considered the rightful owner of every dime earned in America. After all, in 2008 alone, the major energy producers incurred $95.6 billion in total income taxes, of which $23.2 billion went to the U.S. government at all levels (the rest being owed to foreign governments). On top of the straight income taxes, oil and natural gas producers paid an addition $12.5 billion in U.S. production taxes.[i] The oil and natural gas industries are hardly being “propped up” by the taxpayer, in contrast to the solar industry and others that can’t pass the market test. The so-called loopholes and tax subsidies are really just methods of allowing private companies to keep more of the money they earned from providing consumers with low-cost energy.

Explaining the Manufacturing Deduction

The biggest “subsidy” on the chopping block is repeal of the Section 199 manufacturing tax deduction for domestic oil and natural gas companies, which the Office of Management and Budget estimates would raise an additional $17.3 billion in revenue over the next ten years.

It is important to realize that the Section 199 manufacturing deduction was not a “loophole” created exclusively for the benefit of energy companies. On the contrary, it was established as part of the American Jobs Creation Act of 2004 [.pdf], and applied to all domestic manufacturers to spur job creation and stem the outsourcing of manufacturing jobs, which was a sensitive political issue at the time. The Obama Administration is not proposing to repeal the “loophole” in its entirety, but merely to deny it to oil and gas companies, while leaving it in place for every other domestic manufacturer. Apparently in the eyes of the Administration, some domestic jobs are more equal than others.

Regardless of the motivations, the simple fact is that levying new taxes on an industry will reduce the incentives for production, leading to fewer jobs and higher prices for consumers. In the fall of 2008, IER published an analysis of a similar call to end the Sec. 199 deduction for oil and gas companies. Although some of the conditions may have changed in the interim, the results are still sobering. The study projected that the tax hike on oil and natural gas would reduce total household earnings by almost $35 billion over ten years, and reduce total U.S. economic output by $186 billion.

A similar analysis applies to the other tax hikes proposed in the new budget. Raising taxes on efficient industries—ones that are net tax contributors, rather than tax recipients—is no way to create jobs or help consumers. To repeat, if the Administration denies that raising the costs of production will reduce output in these industries, then why would its cherished cap-and-trade program have any effect? Their whole argument is that raising the price of fossil fuels will reduce output in those sectors, and we agree: Politically-imposed cost increases reduce output, raise prices, and destroy jobs in the targeted industries. That’s why we oppose them.

To paraphrase President Ronald Reagan’s view of government programs, the Obama Administration’s view of energy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

Washington, DC – Earlier this morning, President Obama promised that over the next 10 years, the federal government will reduce its carbon emissions by 28 percent – and issued an executive order to make it so. “Actions taken under this Executive Order,” the White House declared today, “will spur clean energy investments that create new private-sector jobs, drive long-term savings, build local market capacity, and foster innovation and entrepreneurship in clean energy industries …”

Following the announcement’s release, the Institute for Energy Research (IER) conducted its own fact-check of key assertions contained in the statement. What follows is what we found:

WH Presser: “Achieving the Federal GHG pollution reduction target will reduce Federal energy use by the equivalent of 646 trillion BTUs, equal to 205 million barrels of oil, and taking 17 million cars off the road for one year.  This is also equivalent to a cumulative total of $8 to $11 billion in avoided energy costs through 2020.”

IER: While it’s not entirely clear from where the 646 trillion BTU number was derived (no citation given), the notion that this initiative will result in the “cumulative total of $8 to $11 billion in avoided energy costs through 2020” is difficult to substantiate. What will this initiative cost? Will expected costs exceed “avoided” costs? To argue that this is a cost savings measure is not only disingenuous, it is misleading.  A proper accounting of costs and benefits would include a recognition that there’s no such thing as a free lunch – especially when dealing with renewable energy resources that are, by their very nature, expensive, unreliable and intermittent.

WH Presser: “As the largest energy consumer in the United States, we have a responsibility to American citizens to reduce our energy use and become more efficient,” said President Obama.  “Our goal is to lower costs, reduce pollution, and shift Federal energy expenses away from oil and towards local, clean energy.”

IER: That the U.S. Government is the largest consumer of energy in America is accurate; beyond that, very little of this statement seems to reflect the reality of the present world. It is indeed easy to cast demagogic aspersions on oil – and then leave the podium to board an aircraft that runs entirely on fuels derived from it. More difficult – but more representative of the actions of a leader – is to admit that any attempt to radically restructure the means by which the federal government secures it energy will necessarily require higher costs, higher taxes, and the potential for significant disruption owing to the use of an unreliable, but politically correct, product. Framed in that context, some Americans may still support the broader program – but at least none would be deluded into thinking it can be secured without cost.

WH Presser: “Federal Departments and Agencies will achieve greenhouse gas pollution reductions by measuring their current energy and fuel use, becoming more energy efficient and shifting to clean energy sources like solar, wind and geothermal.”

IER: At its core, this initiative is nothing more than a renewable electricity mandate and a cash for caulkers program wrapped into one, sweet-sounding cipher. While the President cites “avoided” costs, he fails to mention the untold additional costs such a program like this will cost the taxpayer. According to Energy Information Administration (EIA) statistics, wind and solar energy will continue to be the most expensive way of generating electricity for years to come. Click HERE for a levelized cost analysis of all generating technologies.

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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• IER President: “Americans need jobs and America needs fuel to drive economic growth and prosperity. Increasing domestic energy production is a common sense solution embraced by a clear majority of Americans”

Washington, DC – Today, one in 10 Americans are out of work. However, the Obama Administration has the opportunity to help create hundreds of thousands of jobs, increase America’s long-term energy security and reduce our dependence on imported energy by allowing responsible, environmentally-sound offshore energy production.

“The President has directed an enormous amount of hard-earned tax dollars to prop up ‘green jobs’ that would otherwise not exist without heavy and ongoing government support. At the same time, this Administration has discouraged common sense job creation efforts, especially responsible offshore oil and gas development,” said Thomas J. Pyle, president of the market-oriented Institute for Energy Research (IER). “And despite widespread public support for increasing all forms of domestic energy – especially offshore – the President and his Administration continue to add layers of red tape and bureaucratic hurdles on access to homegrown energy.”

Pyle is referring to the job-creating energy resources along the outer continental shelf (OCS), an energy-rich area located between 3 and 200 miles off our coast. Developing oil and gas reserves along the OCS has the potential to create 1.2 million jobs and provide an additional $70 billion in annual wages.

“This Administration continues to embrace Washington-dominated, command-and-control national energy policies focused on mandates, subsidies and political favors – not market forces,” continued Pyle. “Subsidizing one form of energy, while restricting the exploration of another, will lead to several measurable outcomes: increased energy prices across the board, fewer jobs and a weaker footing in the global economy.”

According to the Interior Department, this Administration has leased less taxpayer-owned land than any other year on record during its first year in office, while realizing one-tenth the amount of revenue from leasing taxpayer-owned land than it did in 2008.

Pyle notes that free enterprise continues to create tens of thousands of energy-related jobs right here at home.

“Without a government handout or a Washington mandate, natural gas production created nearly 48,000 jobs last year in Pennsylvania alone,” said Pyle. “Now more than ever, Americans need jobs and America needs fuel to drive economic growth and prosperity. Increasing domestic energy production is a common sense solution embraced by a clear majority of Americans. If the President was serious about redirecting our economy and helping to put struggling Americans back to work, he’d move forward aggressively to expand domestic energy production.”

More from IER:

• OCS Economic Impact Study
• Actions Speak Louder Than Words on Domestic Energy Production
• IER sets the record straight on Obama Admin energy leasing program

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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IER Prez: Picking winners and losers in the market—the cornerstone of this Administration’s energy agenda—is the quickest path to increasing our dependence on imported energy and driving costs up even further.”

Washington, DC – Thomas J. Pyle, president of the non-partisan market-oriented Institute for Energy Research (IER) issued the following statement today on wind energy and the American Wind Energy Association’s (AWEA) year-end report:

“Using taxpayer subsidies and mandates, the Obama Administration and its allies on Capitol Hill have all but guaranteed that wind energy will be part of our nation’s energy portfolio. But to force the use of technologies that have yet to pass the market test is shortsighted and will lead to increased electricity costs across the board.

“AWEA announced today that installed wind generating capacity in 2009 broke previous records. But big wind misses the point. As much as proponents of wind energy want to ignore the facts, wind is an inefficient and unreliable power source. And, even more importantly, wind is unable to deliver the affordable and reliable electricity this nation needs to drive economic growth.

“The government can waste taxpayer resources to cover the United States with windmills if it so chooses, but it cannot force mother nature to turn those turbines. And while replacing coal or natural gas with the power of the wind might make for a good talking point, this industry will fail in the marketplace as soon as government subsidies dry up.

“That said, I look forward to the day when renewable energy plays a meaningful role in helping to meet our nation’s energy needs. But in the meantime, the government should not prohibit exploration for homegrown fossil fuels and increase the regulatory burden on domestic energy production. Picking winners and losers in the market – the cornerstone of this Administration’s energy agenda – is the quickest path to increasing our dependence on imported energy and driving costs up even further.”

Read more about wind energy:

• IER Fact Sheet: Facts on Energy: Wind
• IER Fact Sheet: Wind, A Historical Perspective
• New York Times (1/15/10): Fossil Fuel Use in 2034? Not Much Different

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For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

China’s Economy and Economic Strategy

China became the world’s third largest economy in 2007, overtaking Germany, and it is expected to become the world’s second largest economy, unseating Japan, as early as this year.[iii] Forecasts by the Energy Information Administration, the U.S. Department of Energy’s statistical arm, predict that China will replace the U.S. as the world’s largest economy within the next 15 years.[iv]

As a result, Chinese economic growth rose to 8.9 percent in the third quarter of 2009, and the government is forecasting a full-year expansion of 8.3 percent. China’s trade boom has helped Beijing pile up the world’s biggest accummulation of foreign currency reserves— more than $2 trillion.[vi] Meanwhile, the U.S. and other countries are still struggling with a recession, continued high unemployment, and an energy policy that retards its growth.

The People’s Daily, a Chinese newspaper, indicated that the large level of economic growth achieved in 2009 was due to its leaders’ ability to make quick decisions and to ensure that underlings carry them out, something that leaders of the free-market countries cannot do.[vii]

The Auto Race

In the area of automobile sales, the China Passenger Car Association reported that China’s total vehicle sales soared 45 percent in 2009, to an estimated 13.6 million, partly as a result of the Chinese government’s stimulus programs. By contrast, U.S. sales of cars and light trucks dropped 21 percent last year to 10.4 million,[viii] because of the recession, credit crisis, uncertainty regarding government stimulus programs, and worries concerning the financially troubled U.S. automobile industry. That made last year the worst U.S. auto sales year since 1982.

Except for August, when U.S. auto sales were boosted by the cash-for-clunkers incentive program, China sold more vehicles than the U.S. in every month since January of last year. Increasingly, global auto makers are also looking to China for sales.[ix]

Kevin Wale, president of General Motors’ China Group, expects Chinese auto sales to grow to 14.5 million to 15.5 million in 2010, far above the level predicted for the United States (11.5 million to 12 million), creating a gap that may be too large to close. [x] There is uncertainty, however, among analysts regarding how much China’s auto sales will grow this year. Some think growth may be as low as 5 percent, whereas others think it may be as much as 15 percent, increasing Wale’s range slightly.[xi]

One reason why analysts do not believe the strong sales growth experienced in 2009 can be repeated is the scaling back of the Chinese government stimulus for autos. China’s central government last January halved the sales tax from 10 percent to 5 percent on smaller-engine vehicles, which resulted in the sales boom. But for 2010, the sales tax is set at 7.5 percent on small cars.  And while that is still lower than the normal 10 percent rate, the effect that the economic stimulus policies had in 2009 could subside in 2010.[xii]

The Auto Industry in China

General Motors has been making headway into China’s auto sales, with 14 factories there and more than 1.8 million cars sold in 2009, just shy of its U.S. sales of slightly more than 2 million vehicles. While Buicks in the U.S. are deemed cars for the 60-and-over crowd, many young and middle-aged Chinese like what GM delivers in its Buick series. However, China has its own automobile manufacturers, who are ready to make headway into the booming Chinese auto market as well as into overseas markets.[xiii]

The Great Wall Motor Company Limited, for example, is a large multinational automaker, with product sales in more than 120 countries and regions. The company, which has more than 30 subsidiaries and over 22,000 staff members, manufactures sedans, sport utility vehicles, and pickups. It has an annual capacity of 400,000 vehicles and the capability to independently produce key parts such as engines and front and rear axles.[xiv]

Another Chinese auto company, BYD or Build Your Dreams Auto, has grown to be one of the largest automakers in China in just seven years. In 2009, BYD sold 450,000 vehicles, and the company expects sales to increase to 800,000 this year. The company’s goal is to be China’s top automaker by 2015 and number one in the world by 2025. Bolstered in part by Warren Buffett’s 10 percent investment in the company, BYD has plans to begin selling vehicles in the U.S. by the end of 2010. It also plans to market a fully electric crossover called the e6 that uses a proprietary ferrous battery technology. BYD claims that the five-passenger e6 can go 205 miles between charges, double the expected mileage of electric vehicles in the works by Nissan and Ford. The company also purports that the e6 can be fully recharged in less than one hour when plugged into a high-voltage outlet and that a 10-minute charge will replenish the battery to 50 percent.[xv]

China’s Oil Imports Reach Record Share

To fuel both its growing economy and its transportation vehicles, China in 2009 imported 52 percent of its total oil consumption (204 million tons versus 190 million tons produced domestically). According to the China Daily, importing more than 50 percent constitutes a “globally recognized energy security alert level.”[xvi]

According to the chief geologist with the Chinese Ministry of Land and Resources, Zhang Hongtao, “This year we will control the amount of imported oil and accelerate the exploration of domestic oil and natural gas.”  He added that, owing to the country’s fast economic development, increased oil imports would continue for a long time and that China urgently needed to step up the exploration and development of natural gas as a substitute energy source.[xvii]

However, China has already agreed to purchase 1.04 million barrels per day from Saudi Arabia, up 12 percent from its 2009 import levels. This is a larger percentage increase than in 2009, when its imports from Saudi Arabia increased almost 10 percent over 2008 levels. China is now the world’s second largest oil consumer, behind the U.S.[xviii]

Believing in diversity of supply, China has made a bid for Canadian oil sands, reaping benefits from threatened U.S. energy policies that would limit such imports. The Canadian government recently approved PetroChina’s $1.8 billion bid for Alberta oil sands, making this PetroChina’s largest North American investment and providing a foray into the Canadian natural resource sector. Under the agreement, PetroChina will assume a non-operating majority interest in two oil sands projects in northeastern Alberta, which is believed to hold 5 billion barrels of recoverable reserves. In addition, PetroChina has agreed to invest $250 million to fund its equity share of the project’s development through 2013.[xix]

The prediction for China’s total crude oil imports in 2010 is a 15 percent increase over 2009 levels. While crude oil prices are still low, China is expected to launch the second phase of its state petroleum reserve, according to China Oil, Gas & Petrochemicals, a report published by the state-run Xinhua news agency.[xx] Phase one consisted of a 101.9 million barrel reserve, which was mostly completed by the end of 2008. The second phase of an additional 170 million barrels is expected to be completed by 2011. Recently, Zhang Guoboa, the head of the National Energy Administration in China, indicated that there will be a third phase that will expand reserves by 204 million barrels, with the goal of increasing China’s petroleum reserves to 90 days of supply by 2020.[xxi]

Conclusion

China is savoring in its world domination of export markets and auto sales, while quietly ensuring that it has the energy to sustain its economic development. Its economic stimulus policies have actually put the country on a path of huge economic growth, while the U.S. is still seeing high unemployment and slow economic growth. Our energy policy of going “green” (empasizing wind and solar power) while stalling the development of fossil energy, has resulted in more expensive and highly-subsidized energy and an increase in jobs that are temporary at best. Our government may need to learn by example from other countries, a policy that it hasn’t had to adopt in a very long time.

[ii] The Economist, “China’s Economy: Not Just Another Fake,” January 14, 2010, http://www.economist.com/displayStory.cfm?story_id=15270708 , and China Daily, The fastest in the world, December 28, 2009,  http://www.chinadaily.com.cn/bizchina/2009-12/28/content_9235505.htm

[iii] “China becomes biggest exporter, edging out Germany,” Associated Press, January 10, 2009, http://hosted.ap.org/dynamic/stories/A/AS_CHINA_TRADE?SITE=MSJAD&SECTION=HOME&TEMPLATE=DEFAULT

[iv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html

[vi] “China becomes biggest exporter, edging out Germany,” Associated Press, January 10, 2009, http://hosted.ap.org/dynamic/stories/A/AS_CHINA_TRADE?SITE=MSJAD&SECTION=HOME&TEMPLATE=DEFAULT

[vii] “As China Rises, Fears Grow on Whether Boom Can Endure,” New York Times, January 11, 2010, http://www.nytimes.com/2010/01/12/world/asia/12china.html

[viii] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[ix] “China Overtakes U.S. to Become Largest Auto Market,” The Wall Street Journal, January 12, 2010, http://online.wsj.com/article/SB10001424052748703652104574651833126548364.html?mod=googlenews_wsj

[x] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[xi] “China Overtakes U.S. to Become Largest Auto Market,” The Wall Street Journal, January 12, 2010, http://online.wsj.com/article/SB10001424052748703652104574651833126548364.html?mod=googlenews_wsj

[xii] Ibid.

[xiii] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[xiv] http://www.gwm.com.cn/eng/html/about/profile.asp

[xv] “Chinese Company Wants to Build Your Dream Car,” FOXNEWS.com, January 15, 2010, http://www.foxnews.com/story/0,2933,583042,00.html

[xvi] “Oil Imports Hit an Alarming Level in China: Study,” China Daily, January 14, 2010, http://www.chinadaily.com.cn/bizchina/2010-01/14/content_9317926.htm

[xvii] Ibid.

[xviii] “China oil imports from Saudi to rise by 12% in 2010,” November 22, 2009, http://www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=117033

[xix] “China Buys Into Canadian Oil Sands,” Oil Voice, January 3, 1020, http://www.oilvoice.com/n/China_Buys_Into_Canadian_Oil_Sands/7d689186d.aspx

[xx] Reuters, January 19, 2010, http://www.reuters.com/article/idUSTRE5B30OK20100119

[xxi] http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves#China

WASHINGTON – America’s shale gas resources can play a critical role in securing America’s energy future, members of a key Energy and Commerce subcommittee heard today — but only if the technology needed to produce those resources remains intact and under the regulatory oversight of the states. Subsequent to this morning’s hearing, Thomas J. Pyle, president of the Institute for Energy Research (IER), issued the following statement:

“Considered within the context of an administration almost singularly focused on denying Americans access to energy resources offshore, America’s onshore shale resources was an inevitable development – but one that could not be possible without advances in horizontal drilling and a key technology known as hydraulic fracturing.

“Unfortunately, national activists understand the potential of this technology as well and are currently engaged in an aggressive campaign to block the responsible development of homegrown energy – this time, not by attacking the carpenter, but by taking away his tools.

“The irony here is that hydraulic fracturing has for decades been considered an environmentally sensitive technology – not only because 99.5 percent of the solution it uses is water and sand, but because it allows operators to produce ten times the amount of energy by drilling one-tenth the number of wells. And there, my friends, is exactly the reason why the technology is coming under fire: It’s safe, it’s effective, and it’s used to produce fossil fuels.

“At a time when Washington begins to focus on job creation and the economy, the domestic coal, oil and natural gas industry can no longer be ignored by the Obama Administration and Congress. Our domestic energy industry, and the environmentally sound technologies used to extract these energy resources – like hydraulic fracturing – have the potential to put thousands of Americans back to work. Any ‘jobs bill’ that fails to recognize this fact, will shortchange the American people.”

More on hydraulic fracturing

• IER: America: Awash in Natural Gas—as Long as Hydraulic Fracturing is Allowed

• Energy In Depth Fact Sheet: Frac vs. Fiction

• Energy In Depth Library: Studies, Fact Sheets, Memos and more

• Penn State University: An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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Largely owing to shale gas discoveries, estimated reserves of natural gas in the United States in 2008 were 35 percent higher than in 2006.[iii] Further, because of shale gas production, net imports of natural gas are more than 30 percent lower and domestic production of natural gas is 12 percent higher for the first 9 months of 2009 than they were during the same period of 2007.^[iv] Shale gas has made up for declining pipeline imports of natural gas from Canada and slower than expected increases of liquefied natural gas,[v] some of which is being diverted from U.S. markets to China.[vi] Expectations are that production of shale gas will make the U.S. the world’s largest producer of natural gas, overtaking Russia, whose demand plunged as a result of its economic decline.[vii]

U.S. Natural Gas Shale Deposits

There are several natural gas shale deposits in the United States: two of the largest being the Marcellus Shale and the Barnett Shale deposits.  The Marcellus Shale is a sedimentary rock formation located in the Eastern United States that contains significant quantities of natural gas. The area extends from southern New York, across Pennsylvania, and into western Maryland, West Virginia, and eastern Ohio. The first Marcellus well began production in Washington County, Pennsylvania, in 2005. Between then and 2007, more than 375 gas wells were permitted in Pennsylvania. With proven reserves currently at 50 trillion cubic feet, recent estimates are that Marcellus might contain more than 500 trillion cubic feet of natural gas.^[viii]

Source: Marcellus Shale – Appalachian Basin Natural Gas Play

Barnett Shale is located in north Texas and its reservoir underlies the cities of Dallas and Fort Worth, plus at least 17 counties totaling 5,000 square miles.  The field, with 2.5 trillion cubic feet of proven reserves, may contain as much as 30 trillion cubic feet of natural gas resources.^[ix]

Two other notable shale plays are in north central Arkansas, the so-called Fayetteville Shale, and in northwestern Louisiana, the so-called Haynesville Shale.^[x] The Fayetteville Shale play stretches across Arkansas from approximately Fort Smith east to beyond Little Rock. It is approximately 50 miles wide from north to south.^[xi] Original gas in place in the Fayetteville Shale is estimated at 52 trillion cubic feet with recoverable reserves of 41.6 trillion cubic feet.[xii]

The Haynesville Shale came into prominence in 2008 as a potentially major shale gas resource and has recently been estimated to contain 250 trillion cubic feet of recoverable gas. Production has boomed since late March 2008.^[xiii] Because of the size and location of the Haynesville Shale play, there has been speculation of exporting some of that gas, in the form of liquefied natural gas, from Louisiana ports.

Horizontal Drilling and Hydraulic Fracturing Technology

There are two key technologies that allow the recovery of natural gas from shale rock—horizontal drilling and hydraulic fracturing.  Shale rock contains pore spaces where most of the recoverable gas is located. The gas has difficulty escaping through the pore spaces because they are tiny and poorly connected. Shale rock also contains fractures that break through the rock allowing gas to flow. These fractures intersect other fractures, producing a network of fractures. Given the fracture network and a proper drilling technology, such as horizontal drilling, natural gas can be obtained from a very large volume of shale with just a few wells. A single well can recover gas from many acres of surrounding land.

For example,  the fractures in the Marcellus Shale are vertical. A horizontal well is drilled perpendicular to the fractures, intersecting a large number of the fractures.  Some horizontal wells in the Marcellus Shale have initial flows that suggest that they are capable of yielding millions of cubic feet of gas per day, making them some of the most productive gas wells in the eastern United States.[xiv]

A second method—a technique known as “hydraulic fracturing”—is used to increase the number of fractures  This method uses high-pressure water or gel to induce fractures in the rock surrounding the well bore.  Hydraulic fracturing is done by sealing off a portion of the well and injecting water under very high pressure into the isolated portion of the hole. The high pressure fractures the rock and pushes the fractures open.  To prevent the fractures from closing, several tons of sand is pumped into the pressurized portion of the hole and into the fractures, keeping them open and improving the permeability of the shale.[xv]

While these technologies have been around for years, recent advances have allowed their use in producing natural gas from shale formations.[xvi]

Jobs and Tax Revenues

In 2006, the natural gas development of the Barnett Shale was responsible for creating 55,385 permanent jobs and is estimated to have contributed $490.9 million in revenues to the state of Texas, as well as $227.7 million to local governments.^[xvii] The economic benefits, however, are growing even faster than expected.  At the end of 2007, permanent jobs in natural gas development had increased to 83,823 (8.9 percent of total jobs in the Forth Worth area), and annual output had increased to $8.2 billion, up from $5.2 billion, an increase of over 50 percent in just one year. Texas also increased its revenues in 2007 from Barnett Shale activities to an estimated $715.5 million, and revenue to local governments increased to an estimated $378.7.[xviii] Economic projections indicate that by 2015 the Barnett Shale may be responsible for more than 108,000 jobs.[xix]

In 2007, Fayetteville Shale yielded $1.8  billion  of  direct  expenditures, total  economic  output  of  $2.6  billion, and employment  of  9,533  people.  Tax  revenues  from  operations  in  the  Fayetteville  Shale, though not as  significant as those for Barnett, were more  than  $54.6  million  in  revenues and more than $7.0 million in sales tax generated for cities and counties.[xx]

An economic impact analysis on Haynesville Shale indicates that state revenues may reach $1.8 million in 2009, $229.5 million by 2015, and $615.5 million by 2023.[xxi]

Since exploration and drilling in most of these shale plays is new, the extent of the economic benefit is not known and is dependent on the amount of activity at the play. Some studies (e.g., Potential Economic Impacts of Marcellus Shale in Pennsylvania) have compared the economic benefits to those of Barnett Shale, where more data are available for economic assessments.[xxii]

And it seems that the benefits of U.S. innovation in shale gas technology and experience have impacted global politics. The Chinese would like to use the experience gained by the U.S. to determine the potential of shale gas in China and to conduct joint technical studies with the U.S., in order to accelerate the development of China’s own shale gas resources. This is the new “U.S.-China Shale Gas Resource Initiative,” recently launched by the presidents of the two countries.[xxiii]

Criticism of Hydraulic Fracturing

Critics of hydraulic fracturing want it to be regulated by the Environmental Protection Agency (EPA), because they contend that toxic fluids pumped into the ground during fracturing may seep into nearby ground water supplies. However, no actual case of water contamination has been connected to hydraulic fracturing, and U.S. states, which currently regulate hydraulic fracturing, believe that it should remain under their jurisdiction, where regional and local conditions are best understood and where local governments have 60 years of experience. [xxiv] Further, the great majority of hydraulic fracturing activities take place at depths far below any existing groundwater sources that could reasonably be considered underground sources of drinking water.[xxv]

Because of such claims, the EPA conducted a study, released in 2004, in which they concluded that hydraulic fracturing did not threaten water supplies.[xxvi] In February 2009, former U.S. Energy Secretary and current Democratic Governor Bill Richardson of New Mexico introduced a plan to ease unnecessary compliance burdens, recognizing that thousands of jobs and millions in potential revenue were tied to safe, responsible, state-regulated natural gas and oil production.[xxvii]

However, some environmental groups and members of Congress are still pressing the EPA to regulate hydraulic fracturing. Current law exempts hydraulic fracturing from EPA review under the Safe Drinking Water Act. A bill to repeal that exemption has been proposed but not enacted.   Supporters of the bill, however, were able to include funding for an additional study of hydraulic fracturing and its impact on drinking water in EPA’s 2010 funding bill, which was signed into law on October 30, 2009.[xxviii]

Another issue that has been raised is the amount of water used to obtain shale gas. A recent study, however, found that shale gas used the least amount of water when compared to producing and transporting other energy sources. Shale natural gas requires only 0.60 to 5.80 gallons per million Btu. In comparison, nuclear generation requires 8 to 14 gallons to produce the same amount of energy, and conventional oil requires 8 to 20 gallons.  The energy source that requires the most amount of water is plant-based biodiesel from soy, requiring 14,000 to 75,000 gallons of water per million Btu of energy produced.[xxix]

Conclusion

U.S. shale gas resources have significantly increased U.S. reserves of natural gas and increased U.S. production of natural gas, the cleanest of the fossil fuels from a greenhouse gas perspective. Its future, however, may be threatened by unnecessary regulation by the EPA of hydraulic fracturing, a technology needed to increase the permeability of the shale rock. Though hydraulic fracturing has been used for years in coal bed methane mines, it is now being attacked by environmentalists as contaminating ground water, although there has been no documented case of such contamination. With fossil fuels providing 84 percent of our current energy, and a projected 78 percent of our energy in 2035,[xxx] natural gas production is important for meeting heating needs as well as industrial and electric utility demand. The Chinese recognize its importance and have signed the U.S.-China Shale Gas Resource Initiative to help promote the industry in China using U.S. expertise.

[ii] Ibid.

[iii] http://en.wikipedia.org/wiki/Shale_gas_in_the_United_States

[iv] Energy information Administration, Monthly Energy Review, Table 4.1, www.eia.doe.gov/emeu/mer/pdf/pages/sec4_3.pdf

[v] Energy Information Administration, Short-term Energy Outlook, December 2009, http://www.eia.doe.gov/pub/forecasting/steo/oldsteos/dec09.pdf

[vi] Reuters, “Qatar diverts LNG to higher-paying China from U.S.”, October 27, 2009, www.reuters.com/article/companyNews AndPR/idUSLR15622520091027

[vii] U.S. Overtakes Russia as the Biggest natural Gas Producer, January 12, 2009,  Bloomberg.com, http://ow.ly/WfEs

[viii] Marcellus Shale-Appalachian Basin Natural Gas Play, http://geology.com/articles/marcellus-shale.shtml

[ix] Barnett Shale, http://en.wikipedia.org/wiki/Barnett_Shale

[x] Ibid.

[xi] About the Fayetteville Shale, http://lingo.cast.uark.edu/LINGOPUBLIC/about/index.htm

[xii] The Fayetteville Shale, http://shale.typepad.com/fayettevilleshale/reserves/

[xiii] Haynesville Shale, http://en.wikipedia.org/wiki/Haynesville_Shale

[xiv] Marcellus Shale-Appalachian Basin Natural Gas Play, http://geology.com/articles/marcellus-shale.shtml

[xv] Ibid.

[xvi] http://en.wikipedia.org/wiki/Hydraulic_fracturing and http://en.wikipedia.org/wiki/Horizontal_drilling .

[xvii] The Barnett Shale Formation of North Texas and Oklahoma, http://www.expertsreviewof.com

[xviii] Drilling for Dollars: An Assessment of the Ongoing and Expanding Economic Impact of Activity in the Barnett Shale on Forth Worth and the Surrounding Area, http://www.bseec.org/images/summaryreport.pdf

[xix]Barnett Shale, http://en.wikipedia.org/wiki/Barnett_Shale

[xx] University of Arkansas, Projecting the Economic Impact of Fayetteville Shale Play for 2008-2012, http://cber.uark.edu/FayettevilleShaleEconomicImpactStudyEXECSUMMARY2008.pdf

[xxi] An Economic Impact Analysis of the Haynesville Shale Natural Gas Exploration, Drilling and Production, August 28, 2008, http://dnr.louisiana.gov/haynesvilleshale/manfred-dix-impact-analysis.pdf

[xxii] Potential Economic Impacts of Marcellus Shale in Pennsylvania: Reflections on the Perryman Group Analysis from Texas, Penn State, http://www.energyindepth.org/PDF/PSU.pdf

[xxiii] Statement on U.S.-China Shale Gas Resource Initiative, November 17, 2009,  http://www.america.gov/st/texttrans-english/2009/November/20091117145333xjsnommis0.4233515.html&distid=ucs

[xxiv] http://en.wikipedia.org/wiki/Hydraulic_fracturing

[xxv] American Petroleum Institute, Hydraulic Fracturing, http://www.api.org/policy/exploration/hydraulicfracturing/index.cfm

[xxvi] http://www.epa.gov/ogwdw000/uic/wells_coalbedmethanestudy.html

[xxvii] http://www.istockanalyst.com/article/viewiStockNews/articleid/3056805

[xxviii] The Dallas Morning News, EPA to study impact on hydraulic fracturing on drinking water, December 16, 2009, http://energyandenvironmentblog.dallasnews.com/archives/2009/12/epa-to-study-impact-of-hydraul.html

[xxix] Deep shale gas uses the least amount of water, January 12, 2010, http://www.greeningofoil.com/post/Deep-shale-gas-drilling-uses-least-amount-of-water.aspx

[xxx] Energy Information Administration, Early Release of Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/index.html

WASHINGTON – Following President Obama’s remarks on “green” jobs and “clean energy technology,” Thomas J. Pyle, president of the market based Institute for Energy Research (IER), issued the following statement on the President’s commitment of $2.3 billion additional taxpayer dollars to further subsidize the wind and solar energy industry:

“Show me one other industry that requests and receives a nearly 30 percent taxpayer subsidy. That’s what the wind and solar industries require – at a minimum – to exist. All the President did today is throw more money at an unproven technology that is not economically viable in the marketplace.  Unfortunately, the only winners in this latest taxpayer giveaway will be Wall Street money managers and corporate interests in the wind and solar industry.

“If the President really wants to create an environment that will foster economic growth and job creation, he need not look any further than the domestic oil, gas and coal industries. These three industries and energy sources built this nation. For the Administration to continue to ignore this fact and to keep the vast resources that taxpayers own under lock and key at the Department of Interior is irresponsible and a disservice to the American people.

“The outer continental shelf (OCS), if opened for business, would create over 1 million high-wage jobs. It would reduce our dangerous dependence on hostile nations for their energy resources and spur economic growth across all fifty states. Development of these energy resources will create sustainable employment, not taxpayer dependent make-work jobs.

“Unfortunately, today’s announcement only continues the expensive, failed energy policy this Administration brought to town one year ago.  The American people deserve better than this.”

Studies: IER Green Jobs Resources

IER Press Release: 1.2 Million Energy Jobs Available, Will Obama Admin. Open OCS for Business?

Wall Street Journal: Clean Energy Sources: Sun, Wind and Subsidies

Fact Sheet: Facts on Wind Energy

Fact Sheet: Facts on Solar Energy

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

#####

WASHINGTON – Earlier today, Interior secretary Ken Salazar outlined a series of changes to federal leasing rules aimed at making it more difficult, expensive, and time-consuming to explore for and produce abundant reserves of American energy on federal, taxpayer-owned land. Subsequent to the announcement of the new rules, Institute for Energy Research (IER) president Thomas J. Pyle released the following statement:

“When it comes to paving the way for the responsible development of homegrown, job-creating energy resources, no administration in history has done more to ensure producers do less.

“It’s a superlative not achieved by accident. Over the course of a single year, we’ve seen the Interior secretary block commonsense exploration through a number of creative means – from executing a pocket veto on a sensible plan to produce offshore, to outright rescinding existing lease contracts in Utah.

“But while the means and methods have changed, the loser continues to be the American taxpayer. In 2008, the Interior Department collected 10-times the amount of revenue from lease sales than it did in 2009. Thanks to today’s announcement, that number has nowhere to go but down in 2010.”

NOTE: Back in November, IER published a detailed exposition of Secretary Salazar’s record of leasing this year as head of the Interior Department. Among the highlights from that report:

• Under the first year of the Obama administration’s 2009 oil and gas leasing program, fewer onshore and offshore acres have been leased than in any previous year on record.

• The Interior Department collected less than one-tenth the revenue from oil and gas lease sales in 2009 than it did in 2008

• For the year 2008, lease sale revenues produced a return for the taxpayer of $942 per acre leased.  In 2009, taxpayers received about $254 in return for each acre leased under the Obama administration – indicative of the quality of leasable land made available under Sec. Salazar

• More than 97 percent of the 2.46 billion acres of taxpayer-owned lands in the public domain are presently not leased for oil and gas exploration

#####

Senator McCain called “the agreement to take note of the accord” reached by the United States and a handful of developed nations a “nothing burger.” Senator Kerry, on the other hand, believes the accord is important and called China’s participation “the most critical thing” to ensuring Senate passage of the national energy tax, even though few observers believe China will actually do anything to curtail their growing use of carbon-based energy.  Meanwhile, the question of whether the outcome in Denmark was enough to advance international efforts to control emissions can best be summarized by Henry Derwent, president of the Geneva-based International Emissions Trading Association, who noted that the climate talks were a “step backward” in terms of a signal that will support carbon prices.

While the Copenhagen Accord does not represent a major change from the status quo, there are a few troubling aspects of the U.S. effort in Copenhagen worth noting.   

First, U.S. negotiators opposed efforts from China and India to ban the use of border tariffs on energy-intensive exports.  That means the U.S. actively fought to leave the prospect of Smoot-Hawley-type trade wars on the table for Senate cap-and-trade negotiators. The United States has benefited greatly from free trade; now the U.S. government is opposing free trade. 

Second, unlike China and other developing countries, the U.S. will allow “international consultations and analysis” of our greenhouse gas emissions. It is not clear how intrusive these international consultations will be, but with millions of sources of greenhouse gas emissions, it’s hard to believe that they won’t in some way encroach on U.S. sovereignty.

Third, the U.S.’s commitment to hand over billions of dollars a year in taxpayer money was a premature gesture that will only serve as the new floor for developing nations in the next round of international talks.  Why would nations in the third world operate under this agreement if they can now see that the starting point for COP 16’s bargaining talks is $30 billion?

Fourth, we must consider the sheer size of the U.S. delegation; press accounts reveal that in addition to the President, five cabinet officials, four other high ranking officials, one czar, over thirty Members of Congress and a host of staff attended all or part of the conference. The United States spent millions to send a small army to Copenhagen to forge a non-binding “accord” that very few Americans view as a priority.

Finally, contrary to Senator Kerry’s hopes, China’s willingness to sit at a non-binding negotiating table will not ease the pain a national energy rationing cap-and-trade tax will cause for American families and is certainly not a sufficient gesture to justify its passage.

Ultimately, Copenhagen will have no impact on the outcome of the cap-and-trade legislation moving through Congress.  As we have just seen in the health care debate, Senate passage of this increasingly unpopular measure will depend on how much taxpayer money Majority Leader Reid is willing to give away to his fence-sitting colleagues to reach the 60 votes necessary to move this bill forward.