Will turmoil in the Middle East force Congress to act on U.S. energy policy? During today's OnPoint, Bruce Vincent, chairman of the Independent Petroleum Association of America and president of Swift Energy, discusses the impact of Middle East unrest on energy markets. He also reacts to new reporting on the safety of hydraulic fracturing.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Bruce Vincent, chairman of the Independent Petroleum Association of America and president of Swift Energy. Bruce, thanks for coming on the show.
Bruce Vincent: Glad to be here, Monica.
Monica Trauzzi: Bruce, hydraulic fracturing continues to dominate headlines here in the U.S. and recently the New York Times published a piece discussing the water supply risks associated with fracking. How concerned are you that reports like this could lead to heavy regulation of the industry by the government and possibly a slowdown in gas recovery?
Bruce Vincent: Well, I'm not concerned about the contamination of fresh water resources caused by hydraulic fracturing, because that's never occurred. But, as an industry, we need to be sure that we can continue to hydraulically fracture wells in a safe way and in an environmentally friendly way. The industry currently is regulated in that process. Generally, it's done through well design, because you want to protect wellbore integrity so that anything, whether it's the hydrocarbons being produced out or the fluids that you put in when you frack a well, do not contaminate other horizons and lose that wellbore integrity. Clearly, we have regulation and we have regulatory oversight. It's done by the states currently. It's been an effective job because we've not, hydraulic fracturing has not ever lead to contamination of fresh water resources. So, we don't really need to add regulation on top of existing regulation that's doing a good job.
Monica Trauzzi: But many state and local municipalities don't think enough is being done. The federal government is taking a look at the lifecycle analysis of hydraulic fracturing. You know, we have some cities not allowing any fracking whatsoever until we have further evidence of what's happening below the ground. As an industry, how do you feel about all that and would you be okay with further regulation if, down the line, that seemed to be necessary?
Bruce Vincent: Well, as an industry, we're happy to have people look at processes because we want them to understand it. I mean if I were a citizen in a local community and someone came to me about some new plant that was being constructed and how it might contaminate my freshwater I'd be concerned too. And you would want to look at the facts. And we want to encourage everybody to look at the facts, not the innuendo, but to look at the facts, because we believe that the industry has a track record that supports the activity. Hydraulic fracturing is something we've done for over 60 years and we've done it in a safe and environmentally friendly way for that period of time. There is no known case of hydraulic fracturing ever contaminating a freshwater horizon. We need to continue to protect that track record.
Monica Trauzzi: The New York Times piece goes directly against what you're saying in terms of safety.
Bruce Vincent: Well, I think the New York Times piece, as I read it, and I just glanced at it yesterday, it just came out, really talked more about the fluids that come back from the fracking process and then get processed downstream, not so much contaminating a freshwater reservoir that people drill water wells in and then drink water from. Their concern was the chemicals that are in the fracking fluids that we put in there, plus naturally occurring chemicals that might be in the formation that get included with the wastewater when it comes back. And geographically, dependent upon where your operations is, you might do different things with the wastewater. In Texas, or in Louisiana where the bulk of our company's operations are, we reinject it into salt water reservoirs deep in the ground. So it never goes through the wastewater treatment process and could ever end up either in a river, stream or freshwater reservoir somewhere. In some places, they don't have that ability to do that and so they've sent it to wastewater treatment plants, just like you do with other sewage disposal that goes through wastewater treatment and the water is treated, then it's released again, usually into rivers. And then it may be picked up later.
Monica Trauzzi: And the question is whether that water is fully diluted.
Bruce Vincent: Is fully diluted, that's true. And, you know, I don't know that I know the answer to that. I think part of their article was saying a lot of that's not tested for. And so we ought to be testing for that. We do want to be sure that radioactive materials or things are properly cleansed, that's a problem, not so much with the wastewater or fracking fluids, but perhaps with the water treatment itself and the whole process in terms of the design of our freshwater drinking supplies. We need to protect those at all costs and it's really not just hydraulic fracturing that's an issue there. What many operators are now doing is they're trying to recycle virtually all their wastewater and so there is a lot less of the wastewater going into these facilities to begin with. It's an expensive process to take water and use it in a hydraulic fracturing process and then bring it back out of the wellbore and dispose of it. If you can bring it back out of the wellbore and reuse it into the next well and the next well, now the operators themselves save money and, of course, you're using less water in the process.
Monica Trauzzi: Let's switch gears and talk about the president's recent budget proposal. He's calling on Congress to repeal oil company tax breaks in order to pay for innovation and investments in the clean energy sector. What's the net effect of a change like that on your industry?
Bruce Vincent: Well, if they actually did that, first off, it's not a surprise. This is the third year in a row that he's asked for it. He also mentioned it in his State of the Union address in January, so it's not a surprise. But the net effect of that is it would be a job killer. If you look at those tax deductions, which is what they are, I know they're often characterized as subsidies, but they're not subsidies. They're tax deductions for normal and ordinary and customary business expenses that our industry and other industries get. We may call them something different, but they're normal and ordinary expenses that we use in terms of making our product, in this case producing oil and natural gas. And they directly impact the amount of cash flow that companies have, which directly impacts the amount of money that they have to invest. Generally, if you actually took those tax deductions away from the industry, most companies would lose between 20 and 35 percent of their cash flow, which means you would be investing less into drilling activities, which would immediately cost lots of jobs. The second thing, and the longer-term impact, you would also cost the country supply, because we would be developing less of our resources and producing less oil and less natural gas for this country.
Monica Trauzzi: The big issue though seems to be with the bigger oil companies that are having these record profits. So, what if the government were to somehow divide the tax breaks and perhaps give it to the smaller producers, but take them away from the larger producers?
Bruce Vincent: Well, to some extent that's already done. And I know it's common practice today to demonize big oil and people don't realize that it's actually independent oil and gas producers, the people that IPAA represents, that actually drill over 90 percent of the wells in this country. Independents actually produce over 70 percent of the natural gas in this country and over 40 percent of the oil. Percentage depletion, as an example, is one of the tax deductions the president wants to take away. That is limited to the first thousand barrels a day of production. So only the small producers get that today and so that's not something you can take away from the big oil companies, because they already don't have it. But, again, it's those tax deductions that are normal, ordinary, customary business expenses. The same thing a manufacturing company might have in their business. And why should we, from a policy standpoint, target a particular industry and tax them more than somebody else? You know, it's often we talk about, you mentioned record profits, well, one of the things that people don't realize, because there's a lot of focus on oil, is companies are making money from the oil side of their business. But natural gas is selling for less than four dollars or actually at best breaking even on natural gas. And so you really need to look at the overall net profits that someone makes on oil and natural gas.
Monica Trauzzi: I want to get in a question about international energy markets before we run out of time. In light of unrest in the Middle East, how do you think the U.S. should be responding in terms of domestic policy?
Bruce Vincent: Well, we should've been responding for the last several decades to have a comprehensive energy policy and strategy that develops America's resources and help protect us from being so vulnerable to many unfriendly places in the world. I mean you're seeing that today. The crisis in Egypt, which really wasn't a big supplier of oil to the world, led to a slight rise in prices that pulled back. But then Libya has accentuated it, because Libya produces this real sweet crude that is used in the world markets. As that dominoes, potentially dominoes to other countries, our country becomes even more vulnerable and we can talk about focusing on alternatives and we should as part of a strategy, but the biggest source of our energy supply comes from oil and natural gas. And one of the best ways to help minimize that vulnerability is to develop our own country's resources and develop policies that actually support and advocate that.
Monica Trauzzi: OK, Bruce, we'll end it right there. Thank you for coming on the show, very interesting.
Bruce Vincent: Glad to be here, thanks, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]