Impact of Section 29 Tax Credits on Unconventional Gas Development and Gas Markets

Abstract

Abstract This paper provides some context and an empirical basis to evaluate the historical and potential impact of Section 29 production tax credits on the development and production of unconventional gas resources (UGR). The data, analyses and conclusions reported here are based on studies conducted for government and industry clients over the past two years. The federal government implemented incentive pricing and Section 29 production tax credits over a decade ago as the principal policy tools to accelerate development of UGR. Given the large expected potential contributions of tight gas, coalbed methane and Devonian shale gas, these incentives were designed to reduce risk and improve project economics of these "high-cost" gas resources. Despite the fundamental transformation of the gas industry over the past decade, however, the Section 29 credit has not changed in scope or mechanism since its inception in 1980. Critics of the credit allege that, during a time of significant changes in the characterization of the gas resource base, extraction technology effectiveness, gas markets, wellhead prices, and pipeline regulation, the credit has changed from a modest incentive to a major cause of market distortion. The results of two recent studies are discussed that provide a basis for more rational debate about the merits of eliminating or extending the credit, in either its current or an alternative form. The first study1 addressed allegations that Section 29 credits were responsible for widespread wellhead gas price declines in 1991. After looking at supply, demand, transportation and market behavior for UGR-prone basins during 1991, we conclude that Section 29 credits had only a minor direct affect on wellhead prices. The second study2 addressed the potential for an alternative configuration of the credit to restore the credit's originally intended impact. Alternative configurations of the credit are offered as a means to adhere to original Congressional intent for the credits, maximize efficiency and equity and minimize costs to the U.S. Treasury. Selection of an optimum credit configuration, however, first requires a clear specification of federal policy objectives.