Residents of Routt County in northern Colorado – an area not known for its oil and gas development — are gearing up for a major natural gas boom in the Niobrara Shale Formation. Activists are seeking guidance from more heavily drilled parts of the state as Shell and other companies eye gas extraction in the scenic Yampa River Valley.

“There are some new proposals for oil and gas development in the Niobrara Shale Formation around Steamboat, and they want to get themselves caught up [on regulations] and not be caught with their pants down the way other jurisdictions have been,” former Garfield County oil and gas liaison Judy Jordan told the Colorado Independent.

Former Garfield County oil and gas liaison Judy Jordan.

The Community Alliance of the Yampa Valley hosted a forum on oil and gas development late last month, inviting Jordan and members of Colorado’s conservation community to speak about their experiences in other more intensively drilled parts of the state.

“The audience was interested in hearing about any lessons learned from across the state, including proactive mitigation strategies, public health analyses, water quality and quantity protections, and public comment opportunity,” said Frank Smith, director of organizing for Western Colorado Congress.

“Also, the county was encouraged to consider applying its 1041 authorities to better protect the Yampa River system, since that water is vital to many stakeholders and it’s being targeted by thirsty entities — upstream and down.”

Jordan was on staff when Garfield County rejected a request by attorneys for Battlement Concerned Citizens to invoke 1041 powers that have been used successfully in the past by counties seeking to acquire more local control from the state over major infrastructure projects such as water diversions and power lines.

La Plata County weighed using 1041 powers in the 1990s but opted instead for its own set of oil and gas drilling regulations. Now El Paso County has imposed a drilling moratorium in order to consider a set of local regulations – a move reportedly opposed by state regulators and oil and gas industry officials.

Jordan also was on staff in Garfield County – one of the top two most drilled counties in the state – when the commissioners decided not to finalize a University of Colorado Health Impact Assessment that showed the potential for significant public health problems in the face of increased natural gas production. She recommended to Routt County residents that they push for advance baseline sampling of domestic water supplies.

“Most of the contamination we found was naturally occurring. It’s methane; it’s created naturally,” Jordan said. “The question is whether the methane contamination that we see in domestic wells would have arrived if there hadn’t been oil and gas development. I think it’s unlikely that it would have, but it’s difficult to make the case because basically you’d have to go in and examine different [gas] wells and no one would ever give us access to that kind of information.”

State regulatory officials disagreed with an independent consultant hired by Garfield County who found elevated levels of methane in groundwater supplies in areas where drilling had increased dramatically.

Jordan was fired by Garfield County in July – she says because of industry pressure.

Shell has long had interests in northern Colorado, aggressively pursuing water rights in the Yampa River Valley. But in the past the company has been primarily focused on its oil shale research and development in Rio Blanco County.

A Shell official last month told the Colorado Independent the company will consult community members as it moves forward with any natural gas drilling proposals in Routt County.

“Any future operations there will adhere to our global onshore operating principles, including those around footprint, community consultation, water, air, and overall safety,” Shell’s Kelly op de Weegh said.

Follow David O. Williams on Twitter. ]]> http://coloradoindependent.com/101583/routt-county-residents-leery-of-gas-boom-tap-experts-from-gas-patches-around-colorado/feed 1 http://coloradoindependent.com/88375/congressional-report-cutting-oil-company-tax-breaks-is-unlikely-to-affect-consumers http://coloradoindependent.com/88375/congressional-report-cutting-oil-company-tax-breaks-is-unlikely-to-affect-consumers#comments Wed, 18 May 2011 11:23:24 +0000 Eartha Jane Melzer http://coloradoindependent.com/?p=88375 Opponents of ending tax breaks for big oil companies argue that closing tax loopholes will result in higher prices at the pump, but a report from the non-partisan Congressional Research Service finds that ending the tax breaks is unlikely to cause a rise in prices.]]>

Opponents of ending tax breaks for big oil companies argue that closing tax loopholes would result in higher prices at the pump, but a report from the non-partisan Congressional Research Service finds that ending the tax breaks is unlikely to cause a rise in prices.

Senate Democrats were successful in pushing for a vote Tuesday on the Close Big Oil Tax Loopholes Act of 2011, a bill to cut tax subsidies for Exxon Mobil, BP, ConocoPhillips, Shell and Chevron.

The measure, which needed 60 percent to pass, failed with a slim majority.

The money saved by closing these loopholes — estimated at $21 billion over 10 years — would be used to pay down the deficit.

“At a time when families are feeling the pain at the pump and our deficit keeps growing at an alarming rate, we simply can’t afford to keep giving away billions in taxpayer handouts to oil companies that are doing nothing to help lower prices,” said bill sponsor Sen. Robert Menendez (D-N.J.) “The ‘Close Big Oil Tax Loopholes Act’ is based on a simple premise: we need everyone to do their share to lower the deficit, not just working families and the elderly.”

The bill would have eliminated five special oil company exemptions.

In a Senate committee hearing last week, the leaders of Exxon Mobil, BP, ConocoPhillips, Shell and Chevron called the proposal anti-completive and discriminatory and warned that it would threaten American jobs and harm innovation.

But with gas prices over $4 per gallon in much of the country, many Americans are most concerned with high fuel costs.

A report prepared for Sen. Harry Reid (D-Nev.) by the Congressional Research Service says that eliminating tax breaks for large oil companies is unlikely to have much affect on gasoline prices, because crude oil is the largest factor in the price of gas, and the price of crude oil is set by world market.

The tax changes are unlikely to affect oil output, the price of oil and, consequently, the price of gas, CRS found in an analysis of five breaks targeted by Democrats.

The Domestic Manufacturing Deduction

Oil companies get a 6 percent deduction in net income for domestic production.

Ending this would be equivalent to an increase on the tax on corporate profit, CRS said.

It is widely accepted that a proportional change in taxes on profit affects neither the firm’s incremental costs or revenues, and therefore does not change its behavior with respect to output. Since output does not change, there is little reason to believe that the price of oil, or gasoline, consumers face will increase.

The price of oil is high enough to provide incentive for continued production in the U.S, CRS said.

With current oil prices at, or near, $100 per barrel in the United States, it is unlikely that firms will slow production, or close wells as the result of the loss of the Section 199 deduction.

Intangible Drilling Costs

For nearly a century, oil and gas companies have been allowed to take immediate deductions for costs associated with exploring for oil. This was designed to enhance investment returns for financing risky exploration activities. But with oil prices high, companies don’t need incentives to explore. CRS:

Repeal of the immediate expensing of intangible drilling costs provision and replacement with a form of cost amortization more consistent with depreciation methods common in other industries likely will have no effect on current U.S. oil production, and hence no effect on current gasoline prices.

Dual Capacity Rules

Since the 1950s oil companies have been allowed to deduct the tax payments they make to other countries.

These tax payments are broadly defined, and, according to the Center for American Progress, companies have been allowed to claim credits for payments in countries that have little or no business tax.

CRS said that since elimination of this break amounts to a tax on profit it should have no effect on output or pricing decisions, and therefore no effect on the price of gasoline.

“The incidence of the tax would appear to be on shareholders.”

Oil companies are allowed to deduct a flat percentage of revenues from a well. This break is called “percentage depletion.” CRS says that it has been eliminated for most companies and should not be a factor in investment and pricing decisions by the five major oil companies.

The companies are also allowed to deduct the cost of tertiary injectants used in drilling. CRS found that the cost of ending this tax break would be very small for industry.

“[T]he five major oil companies, to which repeal would apply, earned over $32 billion in net income in the first quarter of 2011. Repeal of the [tertiary injectant] deduction for the industry is estimated by the Obama administration to yield only $6 million in revenue in 2012.”

The tax revenue generated by ending these five exemptions is expected to be 5 percent of the earnings of the largest oil companies, the report found.

Observers of the century-long quest to extract oil from the shale rocks of Colorado’s Western Slope are fond of saying “oil shale is the fuel of the future … and always will be.” Never commercially viable because of the costs and resources needed to heat and extract the kerogen trapped in the rocks, an estimated 2 trillion barrels of shale oil remains locked up – perhaps forever.

But why then has Shell spent an estimated $200 million so far on research, development and demonstration (RD&D) at its Mahogany Research Project in western Colorado? And at what point will gas prices rise so high that the cost of producing shale oil suddenly makes sense?

Dr. Jeremy Boak

“With [oil] prices going back up through the roof again,” Boak said, “[companies have] an awful lot of things to spend their money on and some of them more near-term than oil shale. The big budgets tend to move toward things that are a little closer in.” Still, Boak maintains the state and federal governments should be doing far more to encourage oil shale production than the current administrations.

The OPEC oil embargo during the Yom Kippur War saw gas prices in the United States spike from 38 cents a gallon in 1973 to 55 cents a gallon in 1974, in part prompting an oil shale boom in Colorado that culminated in the “Black Sunday” crash of 1982. Exxon literally pulled up stakes overnight and turned communities like Parachute, Rifle and Battlement Mesa into ghost towns.

Exxon is one of the companies pursuing a more scaled-back RD&D lease being offered by the Obama administration, which announced in February it was taking a “fresh look” at the Bush administration’s so-called “midnight regulations” in 2008 that established a royalty structure and opened up 2 million acres of U.S. Bureau of Land Management land in Colorado, Utah and Wyoming for potential oil shale leasing.

“The previous 2008 regulations made critical decisions such as royalty rate before the RD&D program had a chance to deliver information and answers,” U.S. Interior Secretary and former Colorado Sen. Ken Salazar said in February. “They put the cart before the horse, and in so doing they heightened the risk of speculation and bad decisions and yet another oil shale bust.”

But Exxon officials say they’re keenly aware of past mistakes and determined not to repeat them.

“It sounds to me like there was a lot more hype back then, but it’s always hard to tell where the hype came from,” Boak said. “Was it really the companies that were hyping it or was it the people out there who thought they could buy 5,000 acres and make a killing? Land speculators. Was it the large corporations or was it the Bernie Madoffs of their era that were really trying to cash in on this?”

Ramped up in the late 70s with the embargo fresh in everyone’s minds, oil shale crashed once Middle East oil began flowing freely and the labor-intensive process of surface mining and retorting oil shale was no longer cost-effective. But 30 years later oil prices are skyrocketing again in the wake of ongoing political upheaval in the Middle East and Northern Africa.

The U.S. Energy Information Administration on Monday put the average price for a gallon of regular gasoline at $3.79, closing in on the peak of $4.11 a gallon set on July 17, 2008. In Europe, gasoline broke the $8.60 a gallon barrier this spring as events unfolded in Tunisia, Egypt and Libya.

But even at those prices, commercial oil shale production is of limited interest to Europeans. While still part of the Soviet Union, Estonia developed a commercial oil shale industry, but there have been growing environmental concerns since that nation became part of the European Union.

Boak says companies in Estonia, Brazil and China continue to blaze the oil shale trail, with one Estonian firm “hunting for properties” appropriate for oil shale development in the United States. Still, none of the foreign firms have been able to produce much more than a few thousand barrels of oil a day – a drop in the bucket in terms of global demand. And now the European Union is considering banning oil shale and tar sands development because of studies showing higher greenhouse gas emissions than from conventional fuels.

Meanwhile, Republican members of Colorado’s congressional delegation continue to beat the oil shale drum. Just last month in a guest column in the Grand Junction Daily Sentinel, 3rd Congressional District Rep. Scott Tipton wrote: “The development of [oil shale] resources would lead to tens of thousands of good paying jobs and help stabilize our energy supply – putting an end to spikes in gas prices.”

Juxtapose that statement with what Tom Yelverton of ExxonMobil told the Daily Sentinel late last year: “At best, commercial production is a decade away and most likely more.”

Rep. Doug Lamborn of Colorado’s 4th Congressional District is a big backer of stepping up domestic oil and gas production, including oil shale, on the state’s Western Slope.

“It is all well and good to propose measures that may pay off decades in the future, such as alternative energy research and higher CAFÉ standards for vehicles,” Lamborn states on his website. “The most urgent and immediate solution though is to ramp up domestic production of oil and gas right now.”

Even the companies deeply involved on oil shale research say it’s years from becoming a commercial reality: “In fact, it could take up to 10 to 12 years of additional research, environmental analysis and permitting before a company could develop a federal oil shale lease,” Tracy Boyd of Shell told the Glenwood Post Independent in late 2008.

Editor’s note: This is the second in a two-part series on the future of oil shale in Colorado in the wake of rising gas prices and mounting unrest in the Middle East and North Africa. Click here for part one.

Prop 23, as I’ve blogged previously and Think Progress has enumerated in even greater detail, is an initiative sponsored by Texas independent oil refiners Valero and Tesoro. It has also received a gift of $1 million from Koch Industries. Its goal is to repeal California’s landmark law, AB 32, which seeks to limit greenhouse gas emissions in the state. Now the Wall Street Journal is reporting that both sides of the fight on Prop. 23 are upping their game:

On Tuesday, the president of the National Petrochemical and Refiners Association solicited financial support for Prop. 23 from the group’s members. “I am pleading with each of you—for our nation’s best interest and for your company’s own self-interest,” wrote Charles Drevna in an email that was reviewed by The Wall Street Journal. [...]

Meanwhile, a loose coalition of environmental groups and individuals, including clean-technology investors, has geared up to oppose Prop. 23.

Former Secretary of State George Shultz plans this weekend to hold a fund-raising event to fight Prop. 23 at his home near Stanford University. California Gov. Arnold Schwarzenegger, a vocal opponent of Prop. 23, is expected to attend.

Tom Steyer, a San Francisco hedge-fund manager, has contributed $2.5 million to the opposition campaign, while the National Resources Defense Council has given nearly $1 million. Silicon Valley venture capitalist John Doerr has given $500,000, according to filings.

No matter how you slice it, the environmental groups will be out-financed, but it looks like they have popular opinion among Californians on their side, for now. Meanwhile, WSJ notes that, at least so far, oil companies are divided as to whether they should pour money into the race:

Several big oil companies have steered clear of supporting Prop. 23. Royal Dutch Shell PLC opposes the measure, while Exxon Mobil Corp., BP PLC and Chevron Corp. remain neutral. Unlike Valero and Tesoro, these oil giants have broader operations, such as finding and pumping oil, in addition to refining and marketing it. AB 32 primarily affects oil refiners, because refining emits far more greenhouse gases than the extraction of oil.

“From the standpoint of the major oil companies, they could benefit if the independents [such as Valero and Tesoro] go out of business,” said Ann Kohler, an energy analyst at Caris & Co. “There’s a sort of chess game going on.”

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Issued as amendments to six existing research and development leases on public lands (five in Colorado and one in Utah), the 11th-hour Bush regulations set the ground rules for moving forward with commercial oil shale production if and when oil and gas companies arrive at viable technologies capable of affordably squeezing kerogen from shale rock and sand in western Colorado, eastern Utah and southwestern Wyoming.

Some estimates place oil shale reserves in the region’s Green River Formation at up to 1 trillion barrels of oil that could then be refined into petroleum. Kerogen is the organic material trapped in the shale that can be extracted at extremely high temperatures.

But the process remains highly speculative, and environmentalists who have legally challenged the Bush rules say the current technology requires far too much water for arid western lands to support, too much electricity that would further exacerbate global warming and that the process degrades sensitive Rocky Mountain landscapes with adverse impacts on wildlife and tourism.

“We want to avoid the booms and busts of the past,” said Salazar, a former U.S. senator from Colorado, referring to a devastating oil shale bust on the Western Slope in the 1980s. “We want to ensure the potential development is done in a way that is environmentally appropriate, and we want to assure that the American taxpayers get a fair return for the potential development of America’s public lands.”

The Bush rules called for a royalty rate starting at 5 percent to be paid by oil and gas companies to the federal government for the use of public lands. Critics claim that rate is far too low.

“There is a question about how those royalty rates could actually be set when these very important fundamental questions [about technology, water and power] have not been answered,” Salazar said, adding the 11th-hour process was done without public scrutiny and was too favorable to a handful of companies currently holding leases.

“These lease addenda conveyed lucrative benefits to the leaseholders to the exclusion of others,” he said, reading from a letter he sent to the inspector general today. “Further, the addenda were executed at the very end of the last administration and were issued in contrast to the underlying leases without any opportunity for public review or comment.”

Royal Dutch Shell holds three of the Colorado R&D leases and is currently part of an ongoing investigation by the Justice Department of former Bush Interior Secretary Gale Norton, who later accepted a job with Shell. The DOJ is investigating whether Norton, a former Colorado attorney general, gave favorable treatment to Shell in exchange for a position with the company.

“There are serious questions about whether those lease addenda are legal or whether they should be rescinded,” Salazar said, although he said he’ll reserve judgment until the inspector general’s report is completed. At that point he said Interior will either defend the rules, modify them or rescind them.

Salazar also announced the Bureau of Land Management will begin accepting an unlimited number of applications for a new round of R&D leases of up to 640 acres, or approximately one square mile. Energy companies have up to 60 days to apply for those leases, which will be managed under a new set of guidelines.

Besides being smaller than the existing leases, which are for more than 5,000 acres each, companies issued a new lease would have to submit a plan of development within nine months, and once approved by the BLM, would then have to get all state and local permits for development within 16 months.

The development plans, Salazar said, will have to address key concerns about water and power consumption and environmental impacts on wildlife, air and water quality and local communities. Water, he stressed, especially in the Colorado River Basin, is a key concern.

“This is an obviously important question in Colorado and Utah, which are arid states with limited water supplies where commercial oil shale development would have major impacts on agriculture and other uses,” Salazar said.

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Meeting Schedule:

Meeker: Tuesday, Feb. 20, 5-6:30pm at the Fairfield Community Center

Rangely: Wednesday, Feb. 21, 9-10:30 am at the Colorado Northwestern Community College

Grand Junction: Wednesday, 6-7:30 pm at the Doubletree Hotel

Rifle: Thursday, Feb. 22, 9-10:30, Garfield County Fairgrounds