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Background:
In the wake of the 1973 oil embargo, Congress in 1980 established a generous tax credit under Section 29
of the Internal Revenue Code. The credit provided energy companies with incentives to develop the drilling
and production technologies for hard-to-tap gas-saturated geological layers.
By developing one such source, the Antrim Shale formation underlying much of Michigan's northern
lower peninsula, energy producers can subtract from their federal taxes $1.02 for each thousand cubic feet of
gas produced. That amounts to $37,230 annually for a typical well that produces 100,000 cubic feet of gas per
day. Any well drilled in the Antrim formation before December 31, 1992, qualified for the credit. The lucrative tax write-off does not expire until December 31, 2002.
Spurred by the subsidy, energy companies developed highly productive extraction techniques. Some 6,000
Antrim wells have been drilled in northern Michigan. They account for 70% of Michigan's annual gas production of 260 billion cubic feet. Michigan now is the nation's 12th-leading producer of natural gas.
Recent Action:
During consideration of the 1995 omnibus budget reconciliation bill, Republicans in the House and Senate
attempted to extend the tax break beyond its scheduled phase-out date. They were defeated, but may try again
in the 105th Congress at the behest of the oil and gas industry.
Taxpayer Concerns:
• The subsidy has outlasted the need to increase the supply and lower the price of natural gas, and has cost
taxpayers far more than planned.
As energy supplies increased in the mid-1980s, natural gas prices plummeted by 60%. Originally, the total
cost of the subsidy nationally was estimated to be $500 million to $1 billion over 22 years. The subsidy, however, already has cost taxpayers $5.4 billion through 1996 and will cost another $4.6 billion before its scheduled phase out, according to the U.S. Treasury Department.
• Tax break recipients -- large and profitable utilities, well operators, and multinational energy companies
-- have seen the value of their businesses increase dramatically, at taxpayer expense.
In 1995, Michigan's largest Antrim gas producer, Terra Energy, was sold for $63.6 million to CMS
Energy, a multi-billion dollar utility, in the largest private energy company sale in state history. About half of
Terra Energy's 1,600 wells qualify for the Section 29 subsidy.
• By tying tax deductions to production, the subsidy has led to unnecessary drilling, and the accompanying
overdevelopment of roads, pipelines, and processing stations. An estimated two out of every three wells in the
Antrim formation were drilled to reap the federal tax benefit.
Local Community Concerns:
• In dozens of communities, citizens and local leaders have called for greater public oversight of oil and
gas development.
• Year-round residents and vacationers complain of an "invasion" by the oil and gas industry, which has
altered the rural character and small town way of life in Michigan's north woods.
• Thousands of new wells, the operation of hundreds of loud compressing stations, and the noise and traffic of heavy trucks have driven property values down in some places.
• The development has turned narrow country roads into muddy highways, which is an inconvenience for
residents, and an added burden for the local road commissions.
• The intensity of the development also is threatening the region's outdoor recreation industry.
Environmental Concerns:
• In Michigan alone, the tax subsidy has led to the fragmentation of more than 1,000,000 acres of public
and privately-owned forest. Thousands of miles of new roads and pipeline corridors have been cut, along with
clearings for drilling sites and compressing stations.
• Single-lined waste pits that are buried alongside each well have the potential to leak and contaminate
groundwater.
• Erosion and runoff from the new drilling sites and roads have degraded watersheds.
• The cuts in the forest have harmed wildlife habitat, and the overall development has impaired the quality
of life for residents in nine counties. $
Green Scissors Contacts: Keith Schneider or Hans Voss, Michigan Land Use Institute, 616/882-4723.
Pro-Spending Contact: Martin Lagina, Michigan Oil and Gas Association, 616/941-7919. |
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