April 27, 2021
Your Source for Updated and Breaking Oil & Gas News For Members of the Kansas Independent Oil & Gas Association
KIOGA Members:

           Greetings!   KIOGA continues to stay engaged providing updates and resources for the Kansas oil and gas industry.

Federal Tax Policy Discussions Keep Oil & Gas Taxes at Risk

On April 21st, U.S. Senate Finance Committee Chair Ron Wyden (D-OR) and 24 colleagues introduced the Clean Energy for America Act "to overhaul the federal energy tax code, create jobs and combat climate change."

According to the Senators, "the current system of energy incentives is overly complex and far less effective than it should be, with more than 40 different energy tax incentives, including permanent subsidies for Big Oil. The Clean Energy for America Act moves in a different direction, making the climate crisis and reducing carbon emissions the lodestar of America's energy tax policy."

The bill repeals important tax provisions for fossil fuel companies, including expensing of intangible drilling costs, percentage depletion, deductions for tertiary injectants, and credits for enhanced oil recovery, marginal oil wells, coal gasification, and advanced coal projects.

The bill also reinstates the current taxation of multinational oil companies' non-extraction income and ensures multinational oil companies are not specially exempted from the 2017 tax law's global minimum tax. It also repeals the fossil fuels publicly traded partnership rules, closing the "Lone Star Loophole."

KIOGA was asked by the U.S. House Ways & Means Committee tax counsel for information and input to contribute to the U.S. House/U.S. Senate Joint Committee on Taxation examination of oil and gas tax provisions. KIOGA has prepared a strategy for defending percentage depletion and intangible drilling costs (IDCs) including the development of white papers and briefing documents on the origin of percentage depletion, reasons to maintain percentage depletion and IDCs, and more. KIOGA shared these white papers and informational briefing reports with the committee tax counsel and key members of the Joint Committee on Taxation including Senators Tim Scott (R-SC), James Lankford (R-OK), John Barasso (R-WY), and  Mark Warner (D-VA) as well as Representatives Ron Estes (R-KS), Kevin Brady (R-TX), Adrian Smith (R-NE), and Lloyd Doggett (D-TX). KIOGA also shared the white papers and briefs with our allies at the Domestic Energy producers Alliance (DEPA) and National Stripper Well Association (NSWA).

On April 22ndSenator Roger Marshall (R-KS) asked Randall Atkins, Chairman and Chief Executive of Ramaco Coal, questions during a Senate Energy & Natural Resources Committee hearing. During his questions they discussed the importance of the percentage depletion allowance to the oil and gas industry, as well as the coal industry. You can see a clip of Senator Marshall’s discussion. After this conversation, Senator Marshall met with Senator Joe Manchin (D-WV) and discussed the importance of the percentage depletion allowance to producers in Kansas as well as West Virginia. 

KIOGA continues to actively engage and educate Members of Congress with the facts on the tax treatment of our industry and coordinating with allied trade groups on strategy to combat this legislation. 

Methane Update

U.S. Senators Martin Heinrich (D- NM) and Angus King (I-ME) drafted a resolution of disapproval on the August methane rule, the first step in using the Congressional Review Act (CRA) to unwind a regulation. The CRA allows Congress to nix any regulations finalized in the previous 60 legislative days, a period stretching back to mid-August. U.S. Senate Majority Leader Charles Schumer (D-NY) said the Senate would vote on ending the Trump methane rule this week (by April 30th).

           The CRA has seldom been used – perhaps because the law prohibits agencies from reissuing any rule in the future that is “substantially the same form” as the rule being nullified.  

KIOGA President Edward Cross discussed this issue with Senator Marshall (R-KS), Lankford (R-OK), and Manchin (D-WV) on March 25th. Cross told the Senators that independent producers recognize the importance of environmentally sound, cost-effective regulations to manage their methane emissions. Industry seeks to find a regulatory pathway designed for the sources it regulates. Big new oil and natural gas wells and low producing older wells have differing emissions profiles. 

The Heinrich CRA to overturn the EPA's methane policy regulations would have limited short-term implications for oil and natural gas production because the underlying New Source Performance Standards for this segment of the industry would remain the same. The same technology that manages methane also manages volatile organic compounds. In the long run, however, this change in regulations would open a pathway to the regulation of one million existing facilities ("existing sources"), 750,000 of which are small business operations. 

Cross told them that it is KIOGA’s view that any regulatory actions should recognize the differences between these existing small operations and newly built large facilities. KIOGA will stay engaged and keep members informed of any activity in the coming weeks and months.

Federal Orphan Well Plugging Proposal

On April 12th, a federal orphan well stimulus bill was introduced by U.S. Senator Lujan (D-NM) and U.S. Senator Cramer (R-ND). The Revive Economic Growth and Reclaim Orphan Wells (REGROW) Act of 2021 (S. 1076) was referred to the Senate Committee on Energy & Natural Resources.

U.S. Senator Roger Marshall (R-KS) is a member of the Senate Committee on Energy & Natural Resources. KIOGA President Edward Cross relayed industry concerns about the measure to Senator Marshall as well other members of the Senate Energy & Natural Resources Committee including Committee Chairman Senator Joe Manchin (D-WV) and committee members Senator John Barrasso (R-WY), Senator James Risch (R-ID), and Senator Steve Daines (R-MT) on April 26th. The Kansas oil and gas industry already pay into a state abandoned well plugging fund and we are concerned that federal funds allocated to plug abandoned/orphaned wells could cause state government to see these federal funds as a surrogate for the fee funds paid by Kansas oil and gas operators and then sweep the fee funds to use for something else. In essence, federal funds allocated to plug orphan/abandoned wells could risk the fee funds the Kansas oil and gas industry have been paying for decades. In addition, it should be noted that even with more funding the Kansas Corporation Commission (KCC) could not plug abandoned/orphaned wells in Kansas any faster. Cross also shared these concerns with Kansas Governor Laura Kelly on April 26th

KIOGA Continues to Engage on Electric Rate Issues

Electric and natural gas users (including oil and gas operators) have experienced outrageously high energy bills associated with the February cold weather. KIOGA has been engaged to find more information and be a part of discussions to address this critical issue. 

There is a lot of conflicting information about the cause of electricity blackouts and energy costs. KIOGA participated in legislative informational briefings on ratepayer perspectives on electric rates. KIOGA Electric Power Committee Chair Adam Beren testified before the Senate Utilities Committee on March 25th. Adam did an excellent job providing detailed information. KIOGA President Edward Cross testified before the House Energy Committee on March 23rd. Cross also distributed informational reports to legislators about the causes/effects of the polar vortex event of mid-February. Both Beren and Cross told the lawmakers that the root cause of the blackouts in Kansas and elsewhere was national and state policies that prioritized the adoption of unreliable wind/solar energy over reliable energy. Lawmakers were told that the high natural gas prices experienced were NOT a windfall to natural gas producers. 

Both Beren and Cross explained to lawmakers that during the polar vortex weather event in February, wind was not available (down 93%) and baseload natural gas and coal plants ramped up (coal up 47% and natural gas up 450%), but it was not enough to meet demand. However, natural gas plants did not have fixed price natural gas contracts and when told by the Southwest Power Pool (SPP) to operate, were subject to high spot natural gas prices due to high demand. 

In addition, the grid failed to prioritize natural gas facilities for non-interruption of electric service and so, although badly needed, some natural gas wells, plants, and transmission compressor facilities did not run due to lack of electricity. The bottom line is the SPP grid put too much emphasis on wind and solar power and not on baseload preparedness. In other words, the grid was mismanaged. 

KIOGA emphasized that that ratepayers, like oil and gas producers and citizens in general, should not be punished for electric grid mismanagement. 

In Mid-April, KIOGA President Edward Cross asked the Kansas Electric Cooperatives, Inc. (KEC) how the losses experienced by electric cooperatives associated with the winter storm were allocated between rate classes. Cross also asked if residential customers and farmers were seeing the same proportionate allocation of loss as the oil producers. KEC said they would respond to our concerns. As of this writing, KIOGA has not received a response from KEC, but we expect a response soon. KIOGA will continue to stay engaged on this critical issue.

Royalty Payment Issues Emerge

In July of 2015, the Kansas Supreme Court ruled on the Fawcett v. Oil Producers, Inc. of Kansas case. The case involved the royalty clause of an oil and gas lease that provides for a royalty payment of the proceeds from the sale of gas at the well. An effort to reanimate the case made its way back to the Kansas Supreme Court on March 30th

The controversy arises because the lessee-operator sells its raw natural gas at the wellhead to third parties, who in turn process the gas before it enters the interstate pipeline system. The price an operator is paid – and upon which royalties have been calculated – is based on a formula that starts with the price those third parties receive for the processed gas (or a published index price) then deducts certain costs incurred or adjustments made. The class argued those subtracted costs and adjustments are the operator’s sole responsibility. 

In 2015, the district court granted summary judgment to the class. The Court of Appeals affirmed. KIOGA filed an amicus brief in the 2015 case that was contrary to the district court and Court of Appeals judgments. In July 2015, the Kansas Supreme Court reversed the judgement of the Court of Appeals and reversed the judgment of the district court to this issue and remanded the case to the district court. The Law Office of Morris Laing defended Oil Producers, Inc. of Kansas in the case in 2015 and David Nickel, then of Depew, Gillen, Rathbun, & McInteer, LC prepared and submitted the amicus brief on behalf of KIOGA.   

            The 2015 Kansas Supreme Court opinion was an evenly-reasoned opinion. The plaintiffs’ attorney (Rex Sharp) has now changed his theory. On remand, he argues that the implied duty to market may be satisfied by a wellhead sale, but the implied obligation of good faith and fair dealing is not. Sharp is attempting to start over seeking the same damages based upon this new theory. The District Court rejected this theory, and the Court of Appeals affirmed the District Court also rejecting that theory. Now, however, the Kansas Supreme Court has granted review of the case.

           In seeking review, the plaintiffs directly asked the Kansas Supreme Court to overrule its first Fawcett decision. It is important for all natural gas operators in Kansas that the Fawcett decision be preserved and the clear holding that enforced the leases permitting wellhead or on the lease sales be continued. Jeff Kennedy of the Martin Pringle Law Firm is preparing and submitting an amicus brief on behalf of KIOGA supporting the Kansas Supreme Court’s 2015 opinion.