Regulations could affect natural gas production

State and federal policies, including environmental regulations, are one of the big uncertainties that could affect the continuing production of low-priced natural gas from massive shale formations and the accompanying benefits to manufacturers and consumers, an LSU energy expert said Monday.

“You get mixed signals on any given day about the extent, the degree and the nature of what that regulation will consist of,” said David Dismukes, associate executive director and director of policy analysis at the LSU Center for Energy Studies.

Dismukes was the guest speaker for the Baton Rouge Press Club luncheon.

The shale formations, known as “unconventional plays,” are found throughout the United States, Dismukes said. The geology of the formations and the drilling technology needed to produce gas from the formations are well-known.

The policy-related aspects of production, such as Environmental Protection Agency regulations and changes to state and federal taxes, are unfolding, Dismukes said.

Last week, President Barack Obama said climate change would be a major focus of his second term.

While the EPA is moving forward with carbon regulations, Dismukes said, the Obama administration is apparently not as interested in taxing carbon emissions as some supporters would like.

The Obama administration needs some “big wins” on the economy and is aware of the benefits of shale gas formations and the low-priced natural gas they have generated, Dismukes said. So there may be a “begrudging” relationship, but one that is worth keeping in mind.

Five or six years ago, natural gas prices were so high that companies invested billions in facilities to import liquefied natural gas, Dismukes said. At the time, there were estimates that the United States would import 14 percent of its natural gas needs.

Now, companies are investing billions in facilities to export LNG. Some estimates place the U.S. supply of natural gas at 100 years or more, Dismukes said. The plentiful supply of cheap natural gas has spawned a boom for U.S. manufacturers.

In Louisiana alone, manufacturers have announced $62.3 billion in projects over the next eight years, Dismukes said. Some $20.2 billion of that total will be spent in Louisiana.

“It’s a sizable amount,” Dismukes said, “an order of magnitude of which you probably haven’t seen, I dare say, in the economic history of the state.”

The economic impact in Louisiana will be an estimated $29.7 billion, Dismukes said. The impact will be felt in retail services, such as dry cleaners and restaurants, industrial
construction jobs, as well as real estate because all those workers will need places to stay.

The impact will be split among the Baton Rouge-to-New Orleans region and the Lafayette-to-Lake Charles area, Dismukes said.

When questioned about the potential impact of proposed tax changes, such as the elimination of the horizontal drilling tax break, Dismukes said it’s best to think about the incentives in terms of winners and loses.

Companies get a two-year tax exemption from the date of a well’s first production or until they cover the well’s cost, whichever comes first.

In fiscal 2011, the tax break cost Louisiana more than $100 million; in fiscal 2010, the tax break cost the state more than $200 million.

Still, Dismukes said the incentives typically generate more revenue on the back end of the equation, such as more severance taxes and royalties, than the state would save by eliminating the tax break.

There are more opportunities in shale formations now than there are dollars to pursue them, Dismukes said.

It might be better to wait on changing the horizontal drilling tax break.

Meanwhile, the shale formations in the Ohio, Pennsylvania and West Virginia areas, which also have a long history of manufacturing, will help increase the competition for the type of projects now locating in Louisiana, Dismukes said.

Those states are pulling out all the stops to try to rebuild their manufacturing bases, and it’s only a matter of time before a major announcement is made in one of those states.