Federal subsidies boosted US shale oil and gas profits by billions of dollars, study finds

The US government added as much as $20 billion a year to the value of new oil and gas projects over the last two decades, amplifying companies’ expected profits during the shale booms in the Bakken Formation, Haynesville Shale and Appalachian, Eagle Ford and Permian Basins, according to a new SEI report.

The report, How subsidies aided the US shale oil and gas boom, is one of the first analyses to estimate how much federal government policy has increased the expected value and reduced the risk of unconventional oil and gas development. Researchers focused on the three largest US oil and gas subsidies, all of which work by reducing the tax payments that the industry owes the government.

“Our findings show that these tax provisions amplified firms’ expected profit from investing in shale oil and gas. This made risky projects more desirable to investors, paving the way for a shale boom that significantly increased the country’s production of oil and gas,” said SEI Scientist Ploy Achakulwisut, who performed the modeling for the project. “In high-price years, companies would have expected $4 more per barrel of oil on average than they would have without these subsidies.”

Researchers analyzed the production and costs data of 2450 oil and gas fields that started producing from 1998–2019. For each field, they estimated how three subsidies affected the expected value in the year development began: the accelerated amortization period for geological and geophysical expenses, expensing of intangible drilling costs and use of percentage depletion for oil and gas wells. Since the analysis is retrospective and companies do not make their investment decisions public, the findings are estimates.

The study’s main findings include:

• Two tax incentives alone – the expensing of intangible drilling costs and percentage depletion provisions – increased the expected value of new oil and gas projects by billions of dollars in most years and over $20 billion in some high-price years (2008 and 2010–2014).
• These two subsidies added substantial value to new unconventional oil and gas projects considered in the Bakken formation in 2005–2006, the Appalachian and Haynesville regions in 2008, the Eagle Ford play in 2009–2010 and the Permian Basin in 2011–2015.
• Certain oil and gas firms benefitted more than others. For example, in 2008, subsidies boosted Chesapeake Energy Corporation’s expected project returns by $9 billion, primarily from fields under development the Marcellus Shale of the Appalachian Region and in the Haynesville Region. In 2012, the three subsidies amplified Pioneer Natural Resources’ expected project returns by $8 billion, mainly from fields developed in the Permian Wolfcamp shale play.
• From 2007–2014, when oil prices were high (above $60/barrel), subsidies had relatively little effect on the decision to drill. However, in low-price years, such as 2016, subsidies increased expected returns enough to push more than 30% of new oil projects into profitability, greenlighting their investment decisions.
• Subsidies likely played a substantial role in making new gas projects in Appalachia viable starting in 2010, when more than 30% of new gas projects may have been subsidy-dependent.

“This analysis shows that the tax code is a powerful policy tool – one that can influence what energy projects get developed. As the Biden administration and Congress consider reforming the tax code, they can think about how to move away from fossil fuel development, using the tax code instead to support investments that lead to improved public health and cleaner energy”, said SEI Senior Scientist Peter Erickson, the study’s lead author.