Energy Policy: Limitations of Government

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One of the blessings of the U.S. Constitution is that it makes it very difficult to radically change federal law. Major changes to public policies enshrined in legislation must make their way through a labyrinth of checks and balances, including passage from both houses of Congress, presidential approval (or congressional override in the instance of a veto) and judicial scrutiny in the event of a legal challenge.

This labyrinth can be rather frustrating when you are trying to get something done. When I worked on Capitol Hill in the early 2000s, I can recall lamenting with my colleagues over the absence of strong domestic energy production incentives in an energy bill that was in conference between the House and Senate. That experience taught me to keep an eye on the long game, as a provision we added in the next iteration of the bill ultimately helped to prevent the federal government from thwarting the shale revolution before we even knew it was coming.

The system of checks and balances put in place by our founders was designed to prevent radical shifts in public policy from one direction to the other. Importantly, it can also force compromise between political parties, both houses of Congress, and Congress and the executive branch. Compromise is a rare thing these days in Washington because the two parties are so polarized. However, like the viewing of an old movie, elements of compromise have been on display this summer in the form of the much-anticipated infrastructure bill.

While reasonable arguments can be made that the bipartisan infrastructure deal (BID) is too expensive and doesn’t sufficiently address “hard” infrastructure needs, the bill does pave the way for significant spending, regulatory permitting and support for carbon capture utilization and storage (CCUS). This is an important signal that the Biden administration and Congress see fossil energy continuing to play a significant role in the U.S. energy future and in lowering greenhouse-gas emissions globally. The BID acknowledges the importance of CCUS “to meeting our emissions reductions goals” and would also provide significant funding into research for carbon capture, transportation and storage technology, facilitate permitting for storage sites, including on the Outer Continental Shelf, and provide funding for four regional direct air capture hubs.

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Make no mistake, federal action can be taken outside the sphere of legislation (and the compromise contours associated with it) that can have real and significant impacts. However, despite such recent actions, including a pause on new oil and gas leasing and permitting on federal lands, shutting down the Keystone XL Pipeline and subjecting all federal decisions to a climate test, the industry has been able to rebound amid firm commodity prices, recovered demand and decent returns. Economic growth driven by markets, innovation and investment has overcome the negative effects of various administrative decisions.

By no means is the industry out of the woods, however. In addition to lasting effects from the recent administrative actions, some of which are still working their way through litigation, the U.S. Senate is now working on a massive $3.5 trillion budget reconciliation package that will be a virtual Christmas tree of presents for many special interests and lumps of coal for the oil and gas industry.

As to specific proposals to keep an eye out for, anti-fossil energy groups have been on a campaign for years to eliminate “fossil fuel subsidies.” Tax incentives likely to be targets for elimination or amendment include the EOR credit, the marginal wells credit, expensing of intangible drilling costs, the passive loss limitation exception for working interests in oil and gas properties, percentage depletion for oil and gas wells, two-year amortization for geological and geophysical expenditures (shifted to seven years), expensing of exploration and development costs, and capital gains treatment for certain royalties. Some international tax provisions related to oil and gas could also be modified, such as foreign oil related income and foreign oil and gas extraction income. More broadly, a whole host of other tax changes could negatively impact businesses, including an increase in the corporate tax.

Notably, while this legislation will move under reconciliation rules that only require a 51-vote majority for Senate passage, given expected unanimous GOP opposition, elements of compromise will still be necessary in order to ensure that Democrats such as Sens. Joe Manchin (WV) and Kyrsten Sinema (AZ) remain on board. Members like Manchin and Sinema are likely keen on avoiding being associated with a bill seen as overstimulating, overleveraging or otherwise undermining the U.S. economy and global competitiveness.

In other words, that labyrinth of checks and balances once again just might work in our favor and prevent more damage to the industry.