Broken Promises and Millennial Despair

President Obama released his Fiscal Year 2013 Federal budget this week and one of the big headlines is that he is seeking to end the tax benefits received by the oil and gas industry. This is not a new effort. President Obama and some in Congress have spoken about ending these tax breaks for the entire Obama term.[1] As a disclosure of bias, I did work for three years for ExxonMobil doing income tax work. After getting that out there, I believe that a focus on taking away oil and gas tax benefits is anti-American and is counter-intuitive to developing energy independence and security.

First, let’s go through the main tax benefits: intangible drilling cost (IDC) and manufacturing income deduction (Sec. 199). [2]

1. IDC – These costs are incurred by oil and gas companies when they drill for oil and gas. For example, building an ice road in Alaska to reach isolated oil or gas can be considered IDC. Mainly, the costs that are intangible meaning that there would be no way to recover the value of the cost if the asset needed to be sold. The costs can be 100% expensed by small companies[3], but 70% expensed by integrated oil companies and then depreciated over 5 years. In 2012, this was about $190 million of the budget.1

I’m not sure why helping lessen risks in the oil patch is a bad thing. There are special types of risks taken by oil companies and the government providing a small inducement to invest in America is a good tradeoff. The elimination of the IDC for small companies would be devastating as this allows for smaller companies to compete with the majors who have a much more robust capital position.

1. Sec. 199 – The manufacturing income deduction allows a percentage of qualified domestically produced income to provide a tax deduction.1 This credit allows for 6% of the qualified income to be deducted from income taxes as long as it is domestically produced. In 2012, this was about $604 million of the budget.1

This deduction applies to everyone who produces domestically, not just oil and gas companies. President Obama’s budget says: “The tax code currently subsidizes oil and gas pro­duction through loopholes and tax expenditures that preference these industries over others.”[4] Hmmm, I’m not sure how a tax deduction that applies to everyone who would produce lemonade or paper planes or any other good produced domestically somehow favors the oil and gas industry.

I have read that the President favors an “all of the above” energy plan[5]  but Mr. Obama has been nothing but inconsistency on energy. This is apparent in the 2013 budget. On one hand he wants to reduce America’s dependence on imported oil[6]. This is in itself is not necessarily a good thing. We can end the dependence on foreign oil, but what do we replace it with and at what cost? We can end importing oil from states that are neither friendly nor stable and start to import more from Canada (Keystone XL pipeline) or more from Brazil. In addition, his recommendation to improve fuel efficiency[7] is a wonderful recommendation. However, this insistence on populist attacks on oil and gas companies do not help us develop more domestically produced oil and gas. This increases the uncertainty of investments into projects that could provide both jobs and tax/royalty revenue to help with the deficit, two sorely needed outcomes.

Cutting $40 billion in the deficit by eliminating fossil energy tax breaks is not an important reform. Investing in America should be favoring all types of energy and letting the market decide. I think these attacks scores easy political points, but does nothing to address the overall structural flaws with the federal budget. Mr. Obama is not at fault for these huge deficits, both parties have put us in a world of pain. But this again points to Mr. Obama being less than advertised. Rejecting the Simpson-Bowles plan and continuing this piecemeal policy on energy shows there are no great transformations in this president. The alternatives do not inspire hope either, so it seems that either way the next ten months and the four years after that will be filled with broken promises and millennial despair.

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[1] http://blog.chron.com/txpotomac/2012/02/obama-seeks-to-end-oil-industry-tax-breaks-again/

Houston Chronicle – Texas on the Potomac blog Puneet Kollipara 2/13/2012

[2] http://jec.senate.gov/public/?a=Files.Serve&File_id=def3390e-c933-4420-a076-19f786cd3af0

Senate Joint Economic Committee

[3] http://www.encapgroup.com/taxbenefits/

Energy Capital Group – Tax Benefits

[4] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 40

[5] http://www.bloomberg.com/news/2012-02-13/obama-proposes-cutting-40-billion-in-u-s-fossil-fuel-credits.html

Bloomberg – Jim Snyder and Brain Wingfield “Obama Budget Would Cut $40 Billion in Fossil-Fuel Credits” – 2/13/2012

[6] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 6

[7] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf Fiscal Year 2013 Budget of the U.S. Government Obama budget Page 19

Offshore Drilling: How big of a role will it play?

Because most of the “light” crude oil that has been discovered in the United States has already been drilled and refined, other options must be explored for domestic production.  Offshore drilling has emerged as another option, and it looks like it may play a bigger role than ever.

In a recent press conference, President Obama unveiled plans to open up more of the U.S. coast to offshore drilling, mostly on the Virginia coastline and possibly in the Gulf of Mexico [1].  So let’s look at a few of the most important aspects of offshore drilling:

Technical Info

The basic process of offshore drilling is very similar to onshore.  A drill bit drills into the ground, and at a certain depth, steel pipe casing seals off the well to ensure the integrity of the hole.  The well continues deeper into the ground, using a smaller diameter hole in each section.  Horizontal drilling is also an option to reach more area under the surface.  However, offshore drilling must account for completing this process in the middle of the ocean and at depths of hundreds of feet, which requires equipment such as the BOP (blow-out preventer), gate valve, and stack structure at the surface of the ocean floor [2].

Offshore drilling animation.  Subsea equipment necessary for drilling is shown at the end of the animation sequence [3]. **Video disabled embedding, sorry!

Positives

1. It creates jobs.  “Virginians will benefit from the thousands of jobs that will be created and the economic activity and development that will accompany this vital industry’s arrival in the state,” said Virginia’s governor Bob McDonnell [1].  Louisiana receives about $1.5 billion annually for drilling off its coast [4].
2. It is readily available.  New deepwater resources have recently been discovered in the past month by Shell in the Gulf of Mexico Mississippi Canyon, and more exploration will most likely lead to more discoveries [5].

Negatives

1. It has large environmental impacts.  Not only are offshore oil spills a threat to marine animals, “the biggest environmental impact has been the estimated 10,000 miles of canals dug by the oil and gas companies to transport oil and lay pipelines” [4].
2. It is very expensive.  Much more resources must go into offshore drilling than onshore drilling since the equipment must reach the ocean floor before it can drill.  Also, offshore platforms are required to reach the oil reserve.  These platforms are like small communities that require food and living accommodations around the clock, as well as transportation to and from the platforms and meteorology stations.

Offshore drilling platform in the Gulf of Mexico [6].

Whether people support it or not, policy makers look like they plan on making offshore drilling a bigger part of America’s domestic production.  What are your thoughts on this trend?

Sources:

[1]http://www.cnn.com/2010/POLITICS/03/31/obama.energy/index.html?hpt=T2

[2]http://www.ccop.or.th/projects/PPM/Case_Study_Indonesia_files/Expert_visit/2_Deepwater_Tech/PRESENTATIONS/Carita_5.pdf

[3]http://www.youtube.com/watch?v=WPOi1WYTf2c&feature=fvw

[4]http://www.usatoday.com/money/industries/energy/2008-07-13-offshore-drilling_N.htm

[5]http://www.offshore-mag.com/index/article-display/3507506700/articles/offshore/drilling-completion/us-gulf-of-mexico/shell-hits_oil_in.html

[6] http://www.learner.org/courses/envsci/visual/img_med/drilling_platform.jpg

Coal’s Hidden Cost in the Billions

A study ordered by Congress says the burning of fossil fuels costs the U.S. $120 billion annually and declares coal the biggest single source of such external expenses. But the damages are likely to be even higher.

The study conducted by the National Academy of Sciences set out to measure the costs not incorporated into the market price of a kilowatt-hour or a gallon of gasoline or diesel. The main budget item: excess mortality. According to the authors, 20,000 people die prematurely every year due to health complications brought on by criteria air pollutants that are released in the process of burning fossil fuels. These toxins include soot particles, which cause lung cancer; nitrogen oxides, which contribute to smog; and sulfur dioxide, the main culprit behind acid rain. While these hidden public health costs are caused almost equally by coal and oil, their single biggest source is coal burning, according to the study.

The findings add support to the efforts of regulators and environmentalists who are pushing for stricter regulations of power plant emissions at a time when representatives of the Obama administration and the E.P.A. are debating how to move forward on the issues. However, critics of the status quo say that the estimates that were not incorporated in the study are even more noteworthy than the enormous price tag researcher from the National Academy of Sciences put on the hidden costs of fossil fuels. These include, aside from the environmental damage of global warming or the damages from burning oil for trains, ships, and planes, the damages from current solid waste management practices in the power industry.

Evidence shows that there has been a dramatic increase in coal waste products that are discarded in waterways or stored in ways that endanger human health. In many cases, such disposal or storage is not regulated or existing regulations are not enforced. Consequently, the hidden cost of power production from coal is likely to be significantly higher than the NAS estimate, critics argue. And thus far it is unclear when the Obama administration will push for additional regulation to curb the increase in harmful pollution.

The production of coal waste such as fly ash and other toxic byproducts of generating electricity from coal, in particular, has increased over the past two decades. To some extend this is the result of an increasing demand for electricity in the U.S. However, improvements in air pollution controls have contributed to this trend even more. Contaminants and waste products that used spew through the power plants’ smokestacks are now captured with greater frequency in solid form. As a result, American coal fired power plants produced 45 percent more combustion waste last year than in 1990, some 130 million tons in total. That’s enough to fill a train of box cars stretching from the District of Columbia to Australia.

While some of this waste product is used for construction fill and other “beneficial uses”, the majority is deposited in 1300 storage sites across the country, most of them unregulated and unmonitored. These dumps, which hold huge piles of this solid waste in 46 states, can reach up to 1500 acres. Frequently, they contain heavy metals such as arsenic, lead, mercury and selenium, all of which the EPA considers a threat to water supply and human health. Different studies have shown that substances leaching from storage sites can cause cancer and birth defects, according to the New York Times.

Yet currently these disposal sites are not subject to federal regulation. Tyson Slocum, an expert in environmental regulation and energy policy with the consumer rights organization Public Citizen in Washington whom I spoke with a few weeks ago, says, “The way we deal with coal combustion products is a big loophole in the country’s waste management system.” He explains that in the absence of federal policy, the states have set requirements, which vary significantly. Alabama, for example, does not regulate the waste product at all, except through nationally mandated water discharge permits. In Texas no groundwater monitoring or engineering requirements exist for utilities that dump coal ash on site.

According to Slocum, these differences in regulation are as much as the result of the varying regional influence of the coal industry as they are the product of tight state budgets. “Many states simply do not have the financial resources to pay the personnel costs necessary to regulate and monitor these waste sites.”

axelgerdau

Obama’s Nuclear Plan

The Obama administration this week unveiled its plan to “jumpstart”  the U.S. nuclear power industry by awarding U.S. government financing for nuclear reactors.

Under the plan, the Department of Energy will provide $8.33 billion in loan guarantees to Southern Company for the construction and operation of two new nuclear reactors in Georgia, which will generate approximately 2200 megawatt hours of electricity annually, once the plants are up and running.  (source) It’s enough energy to power 550,000 homes (says the POTUS).  This is a strong step toward increased nuclear energy production after 30-year hiatus.  It suggests that  U.S. policymakers finally acknowledge the need for more nuclear power resources, despite environmental opposition and the major financial investments.

Yet at the same time, the Obama administration has pulled the plug on an important component to the equation for successful nuclear plant construction: where to store increased nuclear waste.

For more than decade the federal government has been working to create a nuclear waste storage site at Yucca Mountain in Nevada. But that plan has been bogged down in political wrangling, thanks in large part to opposition from Senate Majority Leader Harry Reid as well as decision by the Obama administration in 2009 to de-fund the project. (source) The FY 2011 federal budget scraps all funding for the project, despite billions already spent.  The DOE budget explains: “The Administration has determined that Yucca Mountain, Nevada, is not a workable option for a nuclear waste repository and will discontinue its program to construct a repository at the mountain in 2010.”

It seems disingenuous to hail a decision to award loan guarantees for nuclear plant construction and at the same time, completely rule out a location for radioactive waste storage that’s been years in the making at the cost of billions.

Of course, I’m counting chickens before they are hatched.  It could take another decade for these two reactors to actually come online, thanks to the construction and regulatory requirements of the U.S. Nuclear Regulatory Commission.  It was the Bush administration that originally signed 2005 energy law that created the DOE’s loan guarantee program. In that time, the agency has received dozens of applications, but no grants have been awarded for nuclear plant construction.  The Wall Street Journal reported that DOE received 21 applications in 2008 for more than $121 Billion in loans. (The program is currently funded at about $18 Billion). What’s remarkable is that if all 21 applications were approved and the subsequent plants were online tomorrow, it could increase energy production by up to 33 percent.

I applaud the push to increase energy output, particularly if nuclear reactors can generate large amounts of electricity without the nasty emissions.  However, President Obama needs to be consistent in his push for cleaner energy – that includes funding the mechanism for storing nuclear waste in spite of the NIMBY lobby.

Is Nuclear the Solution?

Since it has become trendy to be ‘green,’ talk of reducing greenhouse gases, eliminating carbon emissions, living sustainably, and getting off coal and imported oil has been on the rise among everyone from college professors to hippies for years now. As people continue to acknowledge real concerns about the issues surrounding power generation, the government is taking actions to increase the amount of energy generated from renewable sources.

One source that has been receiving much attention lately is nuclear power. Whether this is truly a renewable energy source is up for debate, and for years the argument against nuclear has revolved around the expensive cost of building nuclear plants, concerns about safety, and the question of how to store the spent nuclear fuel. While most of the country’s nuclear power plants came online in the 70’s and 80’s, President Obama has recently mentioned nuclear power, and even established a commission to develop a long-term nuclear energy strategy and deal with these concerns. This week Obama will announce his plans to follow through with his State of the Union remarks with an additional$36 billion in loan guarantees for the construction of at least one new nuclear plant in Georgia. Site preparation has already begun, and construction approval by the Nuclear Regulatory Commission is expected by early 2012.

Nuclear power, unlike coal and natural gas, releases no carbon dioxide, a greenhouse gas, into the air. This is one reason why many pro-nuclear environmentalists are pushing for the construction of new plants, which can cost between $8 and $10 billion, and have a tendency to go over budget. President Obama’s budget could potentially provide for six or seven new plants, enough to provide electricity to millions of homes across the country. Although the up-front cost of nuclear plants is high, they produce electricity that is cheaper than electricity from fossil fuels and the plants are more efficient. There are currently 104 nuclear power plants in the country that produce 20% of the nation’s electricity (source).

The fact that nuclear power involves mining uranium, using hundreds of thousands of gallons of water, and permanently storing spent nuclear fuel probably means that it is not the best way to permanently meet our nation’s energy needs. It takes a decade for nuclear waste to become 1,000 times less radioactive than immediately post-fission, and 500 years for the waste to be less radioactive than the original uranium (source). Realistically, it will take decades to achieve a completely renewable energy portfolio, if it is even possible. Until our grid can completely incorporate wind, geothermal, solar, hydroelectric, and other forms of energy, we need a solution that is less harmful to the planet than mining and burning coal. Perhaps nuclear power is that in-between step.