Big Oil Sees Upside of Climate Bill As Small Drillers Brace for New Fees, Taxes

Aug 10, 2022 by Bloomberg
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A gas flare stack at an oil well in Midland, Texas, US, on Thursday, April 7, 2022. Midland, Texas, is used to booms and busts. But even here, prices are shocking the local economy — and the Fed may not be able to help.

Oil and gas executives from Exxon Mobil Corp. to Occidental Petroleum Corp. have been quick to applaud parts of the $437 billion climate, tax and health-care legislation that Congress is poised to pass this week. 

The enthusiasm from Big Oil isn’t shared by some smaller and independent producers, which pump the vast majority of the crude and gas produced in the US. They’re bracing for a raft of new fees and taxes, including penalties on leaking methane and much higher payments for drilling on federal land. 

While Occidental’s Chief Executive Officer Vicki Hollub hailed the Democrats’ sprawling bill as “very positive,” and Exxon’s Darren Woods dubbed it “a step in the right direction,” for many smaller oil producers there’s little in the legislation to like, said Dan Naatz, executive vice president at the Independent Petroleum Association of America.

The bill “is going to reduce investment,” Naatz said. It will cause “long-lasting changes to the industry and long-lasting changes to the ability of our guys to get out there, which is all bad.”

The clash over the landmark piece of legislation -- officially known as the Inflation Reduction Act -- underscores longstanding tensions between large, public oil companies and their smaller rivals when it comes to federal policy on climate change. By providing hefty tax credits for carbon capture, hydrogen and biofuels, the bill would help underwrite supermajors’ green transition strategies at a time when they’re under intense pressure to accelerate investments in clean energy. Smaller oil producers that don’t have refining arms or renewable investments are more exposed to provisions that take aim at fossil fuels. 

“The oil and gas industry is actually many different industries under a single umbrella,” said Andrew Logan, a senior director at Ceres, a not-for-profit coalition of investors and companies advocating sustainability. This bill “endorses the vision that many of the large companies have put out around what the transition will look like,” he said. 

Even so, small companies are a big part of US energy production. Independent producers account for 83% of America’s oil production and 90% of natural gas and natural gas liquids, according to the IPAA.

Trade groups representing small- and medium-sized exploration and production companies are making a last-ditch appeal to House leaders and Texas Democrats to block the bill. They warned in a letter Tuesday that it will exacerbate energy supply concerns and have a “negative impact on the oil and gas industry at a time when stability is most needed.” 

Exxon and Occidental are among the large oil companies that stand to benefit from the legislation’s expansion of a tax credit for capturing and storing carbon dioxide emissions from their industrial operations. Both have big carbon capture projects on the drawing board, and the bill would give them more time to claim the incentive, as well as provide a higher credit of as much as $180 per ton for operations that suck carbon dioxide directly out of the air. Conventional carbon capture projects stand to get as much as $85 per ton -- up from $50 today. 

Those credits will be out of reach for some smaller oil companies whose businesses are concentrated on crude production, said Kathleen Sgamma, president of the Western Energy Alliance, which represents scores of oil and gas companies.

“We engage in carbon capture as well, but we’re not focused on getting a handout for it,” she said. “We’re focused on getting more crude out of the ground.” 

And when that ground is leased by the federal government, the process is set to get a lot more costly. The bill would create a nonrefundable fee to simply nominate federal land for potential oil leasing, as well as hiking minimum bids for the acreage, rental payments and royalties on any oil and gas that’s extracted from the territory.

The new charges are a potentially huge hit to independents that have revenue streams tethered to drilling on federal land. 

Bigger companies with better access to capital, regulatory know-how and a more diverse array of projects are “in a better position to ride out some of these problems,” said James Lucier, managing director at Capital Alpha Partners, a Washington, D.C.-based research group.

“If project A slows down because of regulation, you’ve got projects B, C and D in the hopper,” he said. “If you’re a smaller independent working -- God help you -- in the Rocky Mountains, you may be committed to one project, and if that project slows down,” then “you’re stuck.”

Big and small companies alike have raised the alarm about the legislation’s plan to impose an initial fee of $900 on each ton of excess methane emitted from many facilities, including wells, processing equipment, storage tanks and pipelines. Environmentalists say the fee would prod companies to stifle leaks of methane, an especially potent greenhouse gas. Slashing methane emissions by roughly a third from 2019 levels by 2030 is crucial to limit global warming to 1.5 degrees Celsius, according to an April report from the UN Intergovernmental Panel on Climate Change.

Some major oil companies and large independents, such as Diamondback Energy Inc. and Pioneer Natural Resources Co., already have intensified efforts to detect and fix methane leaks in anticipation of coming Environmental Protection Agency regulations. Others, such as BP Plc and Shell Plc, have cheered on tougher federal rules --  going so far as to praise the bill’s clean energy investments in an Aug. 5 open letter to Congress with other businesses. 

Again, the effects of that fee will be felt unevenly across the industry, borne most heavily by smaller oil producers less able to absorb the costs of methane-mitigation programs and more likely to have a portfolio of older, leakier wells drilled before the government stepped up scrutiny of the emissions. 

Despite a change in the Senate-passed bill that raises the emissions threshold -- and potentially shrinks the pool of companies subject to the fee —- independent producers are still concerned.

Some 15,000 small producers are at the greatest risk, Pioneer CEO Scott Sheffield told Bloomberg Television on Tuesday. 

“There’ll be more pressure on that small mom-and-pop independent,” Sheffield said. “It may put a lot of them out of business.”

(Updates with letter from oil associations in eighth paragraph.)

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By Jennifer A. Dlouhy, Kevin Crowley , Zahra Hirji

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