By Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association
As the Texas oil and natural gas industry slowly recovers from a historic decline in global demand brought on by COVID-19 and other market factors, policy leaders must think long-term when considering measures that could impact the future of domestic production and its unmatched contributions from an economic and geopolitical perspective. While challenges remain, no one should understate the resilience of this industry and its importance to our country for generations to come.
We know this election cycle could have a lasting effect on producers, mineral owners and our economy as a whole. Given the tremendous impact of the energy industry, it is incumbent upon all Texans to help educate policymakers about the importance of this sector, as well as its success in advancing environmental stewardship throughout the oil and gas value chain, a common issue raised though often misrepresented. To lead this discussion, a great place to start is a new report released by the U.S. Department of Energy’s Office of Fossil Energy that reinforces the benefits provided from domestic development of oil and natural gas.
As captured by government leaders in the department’s official report published earlier this month, oil and gas accounted for two-thirds of the total energy consumed in the U.S. last year and its continued development remains essential to meeting America’s energy needs, both now and in the future. It is integral to our country’s standard of living, and our economy is also fundamentally dependent on energy at every level. Put clearly, all Americans directly benefit from domestic production. The report also addresses new technologies and innovative advancements that are helping to further minimize the industry’s environmental footprint, while at the same time supporting an increase in production.
Recent polling indicates that Americans understand the essential role of oil and natural gas in our economy. Two-thirds of those polled in a recent Morning Consult survey said they are more likely to support candidates who favor access to U.S. produced oil and natural gas. Further, 93 percent of the respondents said it’s important for the U.S. to produce enough energy to eliminate dependence on other countries, with 73 percent expecting oil and natural gas to still meet a significant part of our energy needs in 2040. With a majority of Democrats, Independents and Republicans in agreement, voters understand the need for American energy security and will make this a ballot box priority.
Looking beyond the elections, the 87th Texas Legislative Session is also quickly approaching. The structure and timeline for next session, which will begin in January of 2021, remains uncertain due to ongoing issues related to COVID-19. The Texas legislature is only constitutionally obligated to pass a budget, and both chambers will need to determine what legislative proposals are deemed essential for consideration next year.
Regardless of its structure, many state legislative issues of consequence to the Texas oil and natural gas industry will be evaluated in the coming months. The following are some of the issues TIPRO will be focused on for next year.
Budget and the Economic Stabilization Fund
With this year’s COVID-19 pandemic and economic downturn, the legislature faces a tough budget cycle to come in 2021, with many comparing it to the 2011 session when the state experienced a significant budget shortfall. In spite of difficult circumstances and more limited revenue streams, the legislature is again constitutionally obligated to pass a budget. Funding projected to be available for the state budget is roughly $11.5 billion less than originally estimated, putting the state on track to end the biennium with a deficit of nearly $4.6 billion. Texas therefore will have approximately $110 billion to work with for the 2022-2023 state budget.
Lawmakers will likely tap the state’s oil-fed Economic Stabilization Fund, known also as the Rainy Day Fund, to support the state budget. The Rainy Day Fund will have an ending balance of $8.8 billion at the end of the 2021 Fiscal Year, unless officials choose to withdraw money from the account to offset budgetary deficits. In this economic climate, it will be difficult to argue against using these funds. It’s important to remember that this safety net is only made possible by severance taxes provided from the Texas oil and natural gas industry.
Transportation infrastructure investment, road repair and maintenance remain a priority for oil and natural gas producers. Quality infrastructure benefits local communities and ensures that product can get to market in the most efficient and safest way possible, promoting a vibrant economy. TIPRO remains committed to working with state lawmakers, local government leaders and other stakeholders to identify a long-term solution to improve the quality of state and county roads.
Ad Valorem and Severance Taxes
Given current market conditions, Texas operators have been particularly challenged by valorem property tax appraisals for 2020. Texas Tax Code §23.175 states that appraisals of oil and gas interests use the average price of oil or gas from the interest for the preceding calendar year multiplied by a price adjustment factor to adjust for the current year. As a result of the imbalance of appraisals during extreme periods of market volatility, our organization is evaluating potential legislative proposals that will provide greater flexibility to appraisal districts and offer relief to operators during these down cycles.
There is also some discussion about the possibility of raising oil and natural gas severance taxes next year to address budget challenges. The Texas oil and natural gas industry already pays more than its fair share in taxes and fees and any attempt to increase severance taxes would directly impact the industry’s recovery and the long-term viability of thousands of small businesses throughout the state. For additional information on the economic contributions of oil and natural gas, including taxes, please review TIPRO’s 2020 State of Energy Report.
Water Use and Recycling
Water treatment and recycling policies will continue to be considered by state lawmakers in the coming legislative session. Through a joint interim charge, both the House Committee on Energy Resources and House Committee on Ways and Means are exploring the status of water reuse efforts in the oil and gas industry in Texas and elsewhere, and working to evaluate options for tax credits, deductions or discounts that would serve to encourage additional water recycling, treatment or reuse of produced water from oil and gas production activities. TIPRO continues to encourage a fair and balanced regulatory framework that will enhance environmental stewardship, without promoting administrative barriers that hinder economic growth through slower permitting or reduced exploration and production activities.
Eminent Domain Reform
In the state’s 87th Legislative Session, the oil and gas industry will lead on the Eminent Domain reform debate to address perceived problems with the current process. Legislative proposals will focus on the main issues landowner groups sought to address in the last legislative session. This includes: adding requirements for an initial offer, revising the land owner bill of rights to include additional information, requiring licensure of right away agents, prohibiting incentives or kickbacks, creating standardized easement terms and tweaking some procedural directives.
These are just a few of our priority oil and natural gas issues from hundreds of industry-related bills under review during a typical Texas legislative session. The outcome of the elections, COVID-19, and economic conditions will impact what legislative proposals are ultimately deemed worthy for consideration next year.
Texas citizens that value the positive contributions of oil and natural gas should join in efforts to inform and educate stakeholders and elected officials, and help promote sound, science-based energy policies to maintain an environment that is conducive to economic growth and opportunity in our state.