The Inflation Reduction Act of 2022 that is expected to be signed by President Joe Biden is designed to accomplish a number of policy goals, many of them directly affecting the oil and gas industry both in terms of near- and long-term strategies.
Name aside, the act’s ability to reduce inflation in any meaningful way is in doubt, according to the Penn Wharton Budget Model. Consider the title to be a marketing tool. However, the law is serious about deficit reduction.
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The Moody’s Analytics estimate of cumulative deficit reduction through 2031, based on data from the Congressional Budget Office and the Joint Committee on Taxation, shows a total impact of about $300 billion.
![IRA debt chart](/sites/default/files/inline-images/Debt%20chart%20complete.jpg)
Wharton’s estimate is a bit more conservative. Its forecast is a reduction of $264 billion over 10 years, but it also estimates a reduction in government debt of 0.9% in 2031, 4.1% in 2040 and 8% in 2050.
But that’s just one aspect. The biggest ramifications for oil and gas involve the extensive climate change component. Here, the news is a combination of good and bad.
First, the good
![Cook Inlet, Alaska](/sites/default/files/inline-images/Cook%20Inlet.jpg)
Offshore lease sales in Cook Inlet, Alaska, and the Gulf of Mexico – hung up in the courts and the bureaucracy – will go forward. So will construction of the Mountain Valley Pipeline, a 300-mile natural gas pipe in West Virginia and Virginia that has been hung up in the courts.
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The deal between Sens. Chuck Schumer (D-N.Y.) and Joe Manchin (D-W.Va.) involves a bill coming up in September that will pass judgement of the 2 Bcf/d pipe to the U.S. Court of Appeals for the D.C. Circuit.
What else? Most of the $370 billion in investments is aimed at encouraging clean energy and reducing carbon emissions.
![IRA tax credit impact](/sites/default/files/inline-images/Tax%20Credit%20Impact%20chart.jpg)
Specifically, the act significantly enhances credits to carbon capture, utilization and storage projects. The credit for sequestration and storage will jump from $35 a ton to $85 a ton. EOR, now at $23 a ton, will be $60 a ton. And the direct air capture credit will jump from $23 a ton to $180 for secure storage and $130 for utilization.
Accelerating the development of hydrogen as a widely used energy source is a key part of the legislation – but not just green hydrogen, which is hydrogen produced by wind or solar energy.
Producing blue hydrogen with natural gas could qualify for a credit from 60 cents to a dollar per kilogram.
Not all good
Sure, there is a lot not to like. Royalty rates will rise with the Inflation Reduction Act and methane leaks will cost you. Corporate taxes on billion-dollar companies will increase a minimum 15% and a 1% excise tax has been added to stock buybacks.
![Ryan Lance, ConocoPhillips](/sites/default/files/inline-images/ryan%20lance%2C%20conocophillips.jpg)
But take the good with the bad. We’re in an energy transition away from fossil fuels. That’s not going to change. And as Ryan Lance, CEO of ConocoPhillips, said:
“At least the agreement recognizes that natural gas and oil are an important part of the energy transition and are going to be here for decades. So that’s a positive."
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