Federal subsidies for fossil fuels are expected to be pulled back while more investment goes toward clean energy and water, with a hefty portion targeted to areas like Louisiana under an executive order signed Wednesday by President Joe Biden.
The pull-back on subsidies is another setback for the oil and gas industry in Louisiana, which is already reeling from low oil prices and the economic recession, and hit earlier this week by Biden with a moratorium on new federal leases offshore in the Gulf of Mexico that was highly criticized by the industry. The moratorium also affected federal lands, which aren't being drilled as much in Louisiana as in other areas of the country.
During his speech Wednesday on climate change initiatives aimed at transitioning from fossil fuels to cleaner energy, Biden projected that the federal government has allocated $40 billion for federal subsidies to oil and gas businesses nationally, which appears to include tax breaks.
He later committed "40% of the benefits of key federal investments in clean energy, clean water and wastewater infrastructure" to help support communities across the country that are near industrial sites, singling out two areas that included the industrial corridor from Baton Rouge to New Orleans in the comment.
“With this executive order, environmental justice will be at the center of all we do addressing the disproportionate health, and environmental and economic impacts on communities of color, so-called fenceline communities," he said, "especially those communities, brown, black and Native American, poor whites, those hard and haunting areas like Cancer Alley in Louisiana or the Route 9 corridor in the state of Delaware," Biden said. "Lifting up these communities makes us all stronger as a nation and increases the health of everybody.”
If popular tax breaks are removed, that would be a "really big deal," said David Dismukes, executive director and director of policy analysis at the LSU Center for Energy Studies.
Some oil and gas industry incentives have price triggers so the value of the incentive drops the higher the price of the commodity. To take away incentives during an economic recession when prices are low might plunge the industry further down, he said.
"Oil and gas is an important sector. Drilling activity is down already, so if you make it less profitable the money is going to go somewhere else," he said. "That doesn't help with economic recovery."
Meanwhile, the Biden administration plans to invest in renewable energy technology, which could mean offshore wind along the Gulf Coast or solar power on land.
So far there's been little appetite for wind power development off Louisiana's coast, due to lower wind speeds than nearby Texas or Maine. It hasn't been seen as economically feasible. Even if incentives were included, offshore wind projects might not make it along the Louisiana coastline, Dismukes said.
Solar has a more promising future in Louisiana. There are already plans for utility-scale solar plants spearheaded by Entergy Louisiana. Southeast Louisiana is emerging as the hub for six of seven solar farms that would produce nearly 600 megawatts of electricity combined in the next few years. Lafayette Utilities System looks to purchase an additional 300 megawatts of solar power.
Dismukes also said economic incentives encourage companies to use new technologies, which he fears may be at risk if they get caught in the crosshairs of the pull-back in subsidies to fossil fuel companies.
"I'm worried what might happen with that after all these machinations," Dismukes said, citing in particular carbon capture technology investments by industrial sites that help reduce greenhouse emissions.
That's because carbon capture involves injecting carbon extracted from emissions into the ground, which may require federal leases for wells.
"If the methanol plant goes online and they don't have the incentive to capture the CO2 they won't," Dismukes said.
Of major concern is the new oil and gas lease ban on federal land and water that affects the Gulf of Mexico and has financial repercussions for Louisiana. The state benefits from a revenue-sharing model for Gulf of Mexico wells.
"Every lease sale in the Gulf of Mexico that doesn’t happen prevents tens of millions of dollars from going to Louisiana’s coastal work," said Marc Ehrhardt, executive director of the Grow Louisiana Coalition.
During fiscal 2020, Louisiana and 19 parishes were collectively allocated $155 million by a revenue-sharing agreement through The Gulf of Mexico Energy Security Act, which splits oil and gas production revenue with states along the Gulf Coast.
A joint analysis by industry organizations, such as the Louisiana Mid-Continent Oil and Gas Association and American Petroleum Institute, projected that Louisiana could lose 48,000 jobs if leases for federal lands and waters are banned.
The Biden administration suggested that some displaced oil and gas workers could be put back to work to cap abandoned wells. It would take about 1,000 workers to cap all the orphan wells for one year across Louisiana.
It's an effort that already has industry support, but the movement to cap abandoned wells was already in the works and doesn't have to be in coordination with banning new leases, said Tyler Gray, president of the Louisiana Mid-Continent Oil and Gas Association.
"The leasing and development ban on federal land and waters has a tremendous impact going forward," Gray said, noting that he's hoping the president will reevaluate the decision.
The move could be chilling to new investment and lead to more economic uncertainty.
"Whenever you make decisions to freeze permits or rate reductions, you're going to affect all the decisions made previously and it can be a challenge to the business environment," he said.
As for the loss of subsidies, it hasn't really been a big topic for membership as the industry doesn't consider tax deductions subsidies, he said.
Critics argue the breaks are a fossil fuel-specific subsidy, while others characterize them as tax deductions applicable in other industries.
The Joint Committee on Taxation estimates that the federal government lost $1.2 billion in potential revenue in fiscal 2019 due to several major fossil fuel industry tax breaks.
The largest tax break often used by oil and gas companies is the intangible drilling costs deduction, which accounted for $500 million in lost revenue nationwide. This tax break allows companies to take a tax deduction for the majority of costs to drill new domestic wells. If repealed, it could generate billions for the federal government over the next decade.
Another popular tax break is known as percentage depletion, which allows oil and gas companies to deduct taxes based on how much oil is recovered and sometimes that can exceed capital costs. It's similar to a depreciation allowance used by other industries. Likewise, it would generate tens of billions for the federal government if eliminated.
A reduction of royalty payments for oil and gas exploration in the Gulf of Mexico is a subsidy that could be reversed. Federal leases sold until 2010 had automatic relief to spur deepwater exploration, which can be expensive and high risk. During the coronavirus pandemic, companies requested federal royalty rate reductions of which more than 100 applications for land-based wells were approved and a dozen applications for wells in the Gulf of Mexico. Typically companies pay 12.5% royalty payments on revenue from oil and gas on public land or water, which was cut for some below 1% last year.