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Reconciling climate & energy goals
U.S. oil and gas subsidies could increase production by 17 billion barrels
A new study in Nature Energy finds that nearly half of discovered U.S. oil is dependent on subsidies, more than previously thought.
The study – conducted by researchers at the Stockholm Environment Institute and Earth Track – assessed the impact of major federal and state subsidies on U.S. crude oil producers. The results provide a unique window into how subsidies affect more than 800 new oil fields throughout the country, with important negative effects on climate.
Tax incentives provide billions of dollars each year to the oil and gas industry. The study shows that such subsidies are a lose-lose: they boost oil production and contribute to global warming when oil prices are low, and they flow directly into investors’ pockets when prices are high.
The key findings of the study are:
• Tax preferences and other subsidies could boost U.S. oil production by 17 billion barrels over the next few decades, at current oil prices of $50 per barrel. That's 20% of U.S. oil production if we are to meet the Paris Agreement's 2°C target.
• That oil, once burned, will emit 6 billion metric tonnes (Gt) CO2, or about 1% of the world's remaining carbon budget under the 2°C target.
• 47% of U.S. oil fields that are discovered – but not yet developed – are dependent on fossil fuel subsidies.
• Subsidy-dependency varies fairly widely by region. In the Williston Basin of North Dakota, for example, 59% of oil resources are subsidy dependent. In the Permian Basin of Texas, that number is 40%.
The effects of climate change are already being felt around the world, including through more frequent and powerful weather events, such as hurricanes and floods. Some local governments have begun filing lawsuits that sue fossil fuel companies for the costs of climate damages. For example, the cities of San Francisco and Oakland sued five major oil and gas companies this month over sea level rise.
The Nature Energy study shows how fossil fuel subsidies contribute to global greenhouse gas emissions by looking at how a dozen subsidies affect the profitability of more than 800 new oil fields. Those fields contain more than 35 billion barrels of oil.
Researchers considered major federal and state subsidies that forgo government revenue, transfer liability, or provide services at below-market rates. Among the subsidies evaluated were federal expensing of intangible drilling costs (IDCs), the percentage depletion allowance, and the manufacturing (“Section 199”) deduction. Another subsidy – excessive (uncompensated) government costs for fixing roads damaged by heavy fracking trucks – also proved to be significant.
Investors typically require at least a 10% return to develop an oil project. At oil prices of $50 per barrel, researchers found that subsidies boosted the return of most projects by 2-6 percentage points – pushing many past the 10% hurdle and into profitability. Once developed, fields dependent on subsidies would produce 17 billion barrels of oil, releasing 6 billion metric tons (Gt) CO2 when consumed.
Subsidies also increase oil industry profits. Though 47% of their value goes to projects that wouldn’t be developed otherwise, 53% goes to projects that would be profitable without them. At higher oil prices, more fields are profitable without the subsidies – and thus more flows straight to industry profits.