Inflation Reduction Act of 2022

A scaled back version of the $2 trillion Build Back Better Act, the $740 billion Inflation Reduction Act, was signed into law last week.

The bill is wide ranging, with provisions affecting many different industries, but oil and gas will bear the brunt of it. Major provisions include:

• A 15% minimum tax rate after 2022 on corporations with income of $1 billion or more

• Negotiations for Medicare prescription drug pricing to lower beneficiary costs through price reductions and rebates
• Funding for IRS operations and enforcement over the next ten years

• Extensions for Affordable Care Act premium subsidies through 2025
• Funding for energy security and climate change via consumer tax credits and rebates, investment in clean energy production, and carbon emission reduction tax credits
• Federal deficit reduction

Industry Impact: Oil & Gas

Methane fees

The bill includes fees on methane that apply solely to the oil and gas industry. In general, fees apply when emissions exceed 25,000 metric tons of CO₂ equivalent per year. The threshold is lowered in 2026 to include facilities that emit more than 10,000 metric tons of CO₂ equivalent per year. The fee is set to begin at $900/metric ton of methane in excess of the cap and increase each year through 2026.

• 2024 - $900/metric ton
• 2025 - $1,200/metric ton
• 2026 - $1,500/metric ton

The calculation of the methane fee is determined by 1) the facility’s reported emissions under the GHGRP (limits listed above), and 2) an emissions threshold that varies by facility type:

• Production facilities: 0.20% of natural gas sent to sale or 10 million tons of methane per million barrels of oil sent to sale if no natural gas was sent to sale
• Non-production facilities: 0.05% of natural gas sent to sale from or through the facility
• Transmission facilities: 0.11% of natural gas sent to sale from or through the facility

The bill also includes $850 million to the Environmental Protection Agency (EPA) to provide grants, rebates, loans, and other assistance to facilities subject to the methane fee to reduce emissions and $700 million for “marginal conventional wells” for the same purpose.

Leases

The bill require the Department of the Interior (DOI) to offer at least 2 million acres of public lands and 60 million acres of onshore waters for oil and gas leasing each year for a decade as a prerequisite for new solar or wind energy projects

It also reinstates OCS Lease Sale 257 and directs three other OCS lease sales to be held within the next year that were previously canceled by DOI.

The bill increases rental rates and minimum bidding standards for onshore oil and gas leases; and creates a new per-acre fee paid for submissions of expressions of interest for onshore oil and gas leases.

The bill also adds a new fee on “wasted gas”. For all future leases on federal land and OCS, royalties must be paid on all produced gas consumed or lost (venting, flaring, or equipment use). Codifies existing royalty-free exceptions for gas vented or flared for not longer than 48 hours due to emergencies, gas used on the lease unit, or communitized area for its benefit, and any gas that is “unavoidably lost”.

Taxes

The bill increases tax incentives for carbon capture, utilization, and storage (CCUS) by enhancing carbon tax credits, known as 45Q. Direct air capture for utilized carbon rises from $35 to $130 per metric ton and for carbon not utilized (stored) from $50 to $180 per metric ton. Capture from industrial facilities and power plants rises from $50 to $85 per metric ton when stored and from $30 to $60 per metric ton for captured carbon used for enhanced oil recovery (EOR).

Section 45Q is also extended to include facilities in which construction begins before 2033 and encompass smaller-scale facilities by lowering minimum capture thresholds. In the case of a direct air capture facility, the annual minimum capture amount is now 1,000 metric tons of qualified carbon dioxide.

The bill permanently reinstates the Hazardous Substance Superfund financing rate for certain excise taxes, including the excise tax on domestic crude oil and imported petroleum products at the rate of 16.4 cents per barrel in 2023, adjusted annually for inflation.

Pipelines

While not explicitly mentioned in the bill, Senator Manchin (WV) also secured commitments that construction of the Mountain Valley Pipeline will be allowed to proceed along with "streamlining the permitting process for all energy infrastructure" in the state of West Virginia. Legislation will be voted on by the end of the fiscal year, which is Sept. 30, 2022

Conclusion

While the bill takes significant steps to reduce emissions, it penalizes existing production in the process, which ultimately harms energy security and consumers.

In particular, the methane fee is premature as monitoring is still in its infancy. Until a uniform baseline for methane or a generally accepted measurement system is in place for production, processing, and transport operations and equipment a cap on methane is a shot in the dark.

While the movement on leasing to make federal land available for energy production is welcomed, it was long overdue, and the effects of this delay are only beginning to be felt.

Additionally, incentives for renewable energy will create higher prices for components and processes, and so increase the price of electricity while complicating the grid with market distortions.

Overall, we can expect escalating energy prices due to punitive measures against existing production and handouts to renewable energy as the primary accomplishment of the Inflation Reduction Act.

For operators looking to lower methane emissions, BioSqueeze® has proven to be the most effective solution for sealing leaking wells, ensuring efficient and successful mitigation.

Inflation Reduction Act