The good news for oil and gas inside the Inflation Reduction Act

REPORT

By Sarp Ozkan

The Inflation Reduction Act of 2022 has been getting a lot of attention lately. Despite its non-descript title, the new act will have a major impact on energy.

The investment of nearly $370 billion in energy security and climate change programs over the next decade is the largest of its kind. It will aim to incentivize further renewable energy development, increase electric vehicle (EV) adoption, encourage energy efficiency, and even target emissions from oil and gas infrastructure and the agricultural sector.

The act restores tax credits for solar and wind projects to their full rates and ensures they stay in effect at those levels for at least another decade. In addition, the act introduces tax incentives for standalone storage and hydrogen projects, as well as expanding and extending 45Q carbon capture credits.

Most of the benefits of this plan come from tax breaks intended to reduce the cost of renewable energy without burdening the cost of traditional energy. Even if you’re not invested in renewable energy, it’s worth paying attention especially as we look at an integrated energy future and comparisons across all forms of energy. As an example, the figure below shows how the BTAX single well economics across major oil and gas producing basins compare to the ATAX project economics of solar and wind projects across different ISOs. It is worth noting that the economics of oil and gas are superior even at lower price levels ($60/bbl & $3.50/MMBtu) than we see today and higher power prices ($60/MWh) than are realized by almost all these projects. Although these figures reflect economics of projects at the pre-act tax credit levels, it is clear to see that even with increased

tax incentives, the competitiveness of these projects do not measure up to the best opportunities in oil and gas. The project finance structure of many of these projects means that a lot of risk is shed through EPC and O&M contracts (for The good news for oil & gas inside the Inflation Reduction Act construction and operational risk) and By Sarp Ozkan PPAs (for price risk). We consistently see The Inflation Reduction Act of 2022 has been getting a lot of attention lately. Despite its non-descript solar and wind projects in a low, but tight title, the new act will have a major impact on energy. range in terms of their returns. Oil and The investment of nearly $370 billion in energy security and climate change programs over the next gas companies’ cost of capital is too high decade is the largest of its kind. It will aim to incentivize further renewable energy development, to target mid-10 percent IRRs. Even with increase electric vehicle (EV) adoption, encourage energy the higher tax credits afforded to these efficiency, and even target emissions from oil and gas infrastructure and the agricultural sector. technologies through the new act, all but The act restores tax credits for solar and wind projects to their full rates and ensures the majors will likely continue to engage they stay in effect at those levels for at least another decade. In addition, the act introduces tax incentives for standalone storage and hydrogen projects, as well as expanding and extending 45Q carbon capture credits. with this space through PPAs rather than partnerships, JVs or direct ownership.Most of the benefits of this plan come from tax breaks intended to reduce the cost of renewable energy without burdening the cost of traditional energy. Even if you’re not invested in renewable energy, it’s The act could also open up new, often worth paying attention especially as we look at an integrated energy future forms of energy. and comparisons across all overlooked opportunities for oil and gas. We may see some companies (from As an example, the figure below shows how the BTAX single well economics across major oil and gas producing basins compare to the ATAX project economics of solar and wind projects across different E&P & OFS to midstream & downstream) ISOs. It is worth noting that the economics of oil and look at the prospects of participating in gas are superior even at lower price levels ($60/bbl & $3.50/MMBtu) than we see today and higher power prices ($60/MWh) than are realized by almost carbon capture and hydrogen markets. all these projects. After all, expertise in these areas is already within their ranks. The extension of the 45Q for carbon capture and the new PTC for hydrogen will have similar positive impacts on investments in these technologies. Just to demonstrate, prior to the expansion of the 45Q, only 15 percent of hub emissions broke even below $50/tonne. The increase to $85/ tonne more than doubles the amount of CO2 emissions in the money for potential abatement (Figure 5). Additionally, this increase will motivate broader CCUS adoption across most sectors (Figure 6). Sure, the Inflation Reduction Act is Figure 1 - Economic comparison of oil & gas versus solar & wind projects (pre-IRA). Figure 1 - Economic comparison of oil and gas versus solar & wind projects (pre-IRA).

certainly positive for the wind and solar industries. However, as good as these measures may look for those focused on renewables, they still don’t solve some of the immediate structural problems such as the all too apparent supply chain issues, ongoing anti-dumping/circumventionrelated concerns, location and security of rare earth minerals reserves and manufacturing, or the aging and frail power grid.

With minimal negative impact to oil and gas, the act also signals that fossil fuels will remain a part of America’s energy future for years to come. And with the right ingenuity and some intelligent connections, it may even open up new, overlooked opportunities for oil and gas, and that is good news for the Bakken and its producers. Every company focused on the energy industry, from oil and gas to power and renewables has to be quick to respond to the energy transition we’re seeing before us. The need for clear, actionable intelligence of the entire energy ecosystem, a single source of truth that brings all the data together, and the speed to be able to seize opportunities and mitigate risk has never been more important. Together, these intelligent connections will help create and discover previously unseen insights and opportunities, act fast, and deliver extraordinary outcomes to be ready for the future – no matter what it brings.

Sarp Ozkan is vice president, commercial product for Enverus. He has more than 10 years of research and modeling experience in the upstream, downstream and power markets. Ozkan has been a trusted energy markets expert for the media and has led consulting projects around many M&A and strategy-related inquiries. He holds a Master of Science in Mineral and Energy Economics from the Colorado School of Mines, a Master of Science in Petroleum Economics and Management from the Institut Francais du Petrole (IFP School), and a Bachelor of Arts in Economics from the University of Chicago. w

Figure 2 - CCUS: 2.5X more CO2 abatement is in the money.Figure 2 - CCUS: 2.5X more CO2 abatement is in the money.

Figure 3 – CCUS expansion makes abatement economic for most sectors. Figure 3 – CCUS expansion makes abatement economic for most sectors.

Sure, the Inflation Reduction Act is certainly positive for the wind and solar industries. However, as good as these measures may look for those focused on renewables, they still don’t solve some of the immediate structural problems such as the all too apparent supply chain issues, ongoing antidumping/circumvention-related concerns, location and security of rare earth minerals reserves and SUITE 300, 6 ROSLYN ROAD, WINNIPEG, MANITOBA, CANADA manufacturing, or the aging and frail power grid. www.delcommunications.com With minimal negative impact to oil and gas, the act also signals that fossil fuels will remain a part of America’s energy future for years to come. And with the right ingenuity and some intelligent connections, it may even open up new, overlooked opportunities for oil and gas, and that is good news for the Bakken and its producers. Every company focused on the energy industry, from oil and gas to power and renewables has to be quick to respond to the energy transition we’re seeing before us. The need for clear, actionable intelligence of the entire energy ecosystem, a single source of truth that brings all the data together, and the speed to be able to seize opportunities and mitigate risk has never been more important. Together, these intelligent connections will help create and discover previously unseen insights and opportunities, act fast, and deliver extraordinary outcomes to be ready for the future – no matter what it brings.

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Sarp Ozkan is vice president, commercial product for Enverus. He has more than 10 years of research and modeling experience in the upstream, downstream and power markets. Ozkan has been a trusted energy markets expert for the media and has led consulting projects around many M&A and strategy-related inquiries. He holds a Master of Science in Mineral and Energy Economics from the Colorado School of Mines, a Master of Science in Petroleum Economics and Management from the Institut Francais du Petrole (IFP School), and a Bachelor of Arts in Economics from the University of Chicago. • Creative Design • Advertising Sales • Trade Publications • Video Production & Editing • Qualified Sales & Editorial Team