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NARO opposes certain items in the Department of Energy’s 2011 budget as described in the
document entitled “Terminations, Reductions, and Savings: Budget of the U.S. Government
Fiscal Year 2011,” as currently produced by the Office of Management and Budget.  The
following testimony describes our concerns that said policies will be harmful to America’s
energy policy as a whole, and also to royalty owners.

While NARO shares several policy concerns with the rest of the energy community, this
testimony seeks to focus the Committee’s attention more acutely on percentage depletion for
royalty owners, which is the only tax deduction many NARO members take on their mineral
royalty income.  As will be discussed, many of the royalty owners which NARO represents do
not have the wealth, time, and resources that larger energy and mineral companies do.  As a
result, they have a more limited ability, compared to the rest of the energy community, to
organize and inform legislators of their concerns.   

1. Who does NARO represent?

We are the National Association of Royalty Owners (NARO) and represent the concerns of an
estimated 8.5 million American private owners of oil and gas mineral and royalty interests. We
live and vote in all 50 states, even though our producing minerals may be in Arkansas, New
Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, and Utah, Wyoming or any of the 33
producing states. NARO has been educating and advocating for mineral/royalty owners since our
original incorporation 30 years ago in 1980.   

The average NARO member is over 60 years old, widowed, and receives less than $500 in
monthly royalties as a supplement to their social security retirement income.  
The majority (something over 70%) of the minerals in the U.S. are owned by individuals and
leased to companies for development.  Thanks to the efforts of one of our members, we recently
took a snap shot of one “marginal” oil well (producing less than 15 barrels of oil per day) in
Grady County Oklahoma.  This one little well has over 300 individuals in 46 states receiving
royalty payments from its production.   
We estimate the number of royalty owners in each state to be:
AK 13,600 AL 33,150 AR 255,000 AZ 144,500 CA 510,000  
CO 654,500 CT 17,000 DC 17,000 DE 2,550 FL 161,500
GA 85,000 HI 8,330 IA 33,150 ID 35,700 IL 76,500
IN 27,200 KS 147,900 KY 11,050 LA 125,800 MA 30,600
MD 35,700 ME 5,525 MI 44,200 MN 47,600 MO 110,500
MS 39,100 MT 47,600 NC 67,150 ND 24,650 NE 19,550
NH 13,600 NJ 47,600 NM 161,500 NV 44,200 NY 127,500
OH 30,600 OK 1,691,500 OR 51,000 PA 119,000 RI 5,525
SC 22,100 SD 5,525 TN 59,500 TX 2,975,000 UT 39,100
VA 85,000 VT 2,550 WA 39,100 WI 39,100 WV 19,550
WY 30,600   Total nationwide: 8,440,755.   
Remember, these are estimated numbers of royalty owners. The total number of mineral owners
is much greater, as vast areas are unproductive or have not yet been explored and developed.

2. A look back at the rationale for percentage depletion in U.S. history

In 1913, the 16th amendment to the constitution made the Federal income tax a permanent fixture
of American life.  That same year, mineral/royalty owners, in accordance with the newly minted
tax code, began to account for the depreciation of their mineral properties which resulted from
the depletion of limited mineral reserves.  Congress enacted this tax deduction so that
mineral/royalty owners could deduct a “reasonable allowance for depletion of ores and all other
natural deposits…” which results from extraction. What follows is an explanation of the
conception of percentage depletion, and illustrates the continued need for the percentage
depletion allowance for mineral/royalty owners today.

What is depletion?  Put simply, in the context of taxation, it represents the depleting value of a
limited reservoir of a non-renewable resource such as Natural Gas, Copper, Oil, etc.  Tax
liability in America has often been dependent on the value of the property being taxed.  As the
object of taxation changes in value, the tax liability changes accordingly.  This is commonly
accepted by federal and state governments with regard to all manner of property, whether brick
and mortar, automobile value, etc.  As an automobile depreciates, the tax rate is lowered in
subsequent years.  As the minerals are extracted from a given property, the reserves are depleted,
and the value of that mineral interest depreciates, as should the tax liability.  

Percentage depletion replaced discovery value depletion, which had been adopted in 1918 as an
incentive to find new oil supplies that were needed in World War I. Under discovery value
depletion, tax on minerals such as oil and natural gas were assessed at the time the minerals were
discovered, but that proved to be an inefficient and unsavory policy for mineral owners,
producers, and governmental tax authorities alike.  Among Discovery value depletion’s
shortcomings; it resulted in lengthy, not to mention expensive, quarrels between taxpayers and
tax administrators over the predicted quantity and value of the minerals, and the subsequent
amount of depreciation that would occur from the depletion of reserves.     


Even if the quantity and composition of minerals in the ground can be known with relative
certainty, the markets for energy sources like natural gas and oil are volatile.  This has been
abundantly demonstrated with the dramatic price fluctuations of oil and natural gas in recent
years.  These turbulent markets make it difficult to predict the overall value of mineral reserves,
especially beyond one year.  

Beyond unpredictable markets, there were additional problems with discovery depletion.  Even
today, the science of interpreting seismic data and the drilling of exploration wells remain
something of an art, albeit to a lesser extent than in previous decades.  The accuracy of pre-
extraction predictions on the quality and quantity of minerals can prove disappointing.  However,
the inability to know with certainty the total future value of oil or gas from a given mineral
interest, and the quantity which is likely to be producible, results from more than just the
imperfections of geological data analysis.  The ‘producible’ quantity underground is
unpredictable due to unknowable, yet inevitable changes in technology. The recent advances in
horizontal drilling, and the impact it has had on hydraulic fracturing technology are a great
example.  

In the last decade, horizontal drilling innovations have allowed us to more cheaply use hydraulic
fracturing in layers of shale rock where natural gas was previously unreachable due to the cost of
recovery.  Due to these technological improvements, hydraulic fracturing in shale has grown at
an almost stunning pace.  This has contributed to an increase of more than 50% in proven
reserves of shale gas in just one year, from 2007 to 2008 (the most recent year yet reported by
EIA). These innovations have freed up so much previously unrecoverable gas that the U.S. is
now sitting on an estimated 100 years supply of clean burning natural gas at current consumption
levels. The U.S. is currently in serious contemplation about ways to ensure that our energy
policies are environmentally responsible for our children’s future.  The rapid leap forward in
shale drilling technology, and the resulting massively increased quantities of clean burning,
locally abundant natural gas, are game changers for U.S. energy policy.

Because of the impossibility, both for taxpayer and tax administrator, of predicting the nature
and timeline of technological advances, and the difficulty for both parties of defending variables
like quantity of reserves, quality of reserves, and projected market value,  congress eventually
abandoned the practice of determining the discovery value of minerals for purposes of the
depletion allowance. In 1926, congress simplified the process by allowing mineral/royalty
owners the option to claim percentage depletion.

To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by
your gross income from the property during the tax year. This simplified procedure has proved
essential to encourage the production of dozens of different minerals, both energy related and
not.  The percentage of income from a producing mineral property which one can claim as a
deduction to account for depletion is currently 15% for oil and natural gas, and higher for certain
other minerals. For example, the current rate for sulfur, uranium, asbestos, lead ore, zinc ore,
nickel ore, and mica is currently 22%. These flat percentages save on compliance costs for both
tax payer and administrators, because it prevents the potentially lengthy battle with each
individual mineral owner over the value of depletion for their particular property.



3. Effects of the proposed eliminations on royalty owners


Under current policy, if the mineral owner feels that the depletion percentage specified by statute
is unfair for their property’s particular mineral profile, then they can still alternatively file for
cost depletion.  Large mineral interest owners such as energy companies are more likely to file
for the cost depletion deduction. The reason for this is that they have already incurred the cost of
a complex analysis of their mineral holdings as part of the process of exploration.     

Larger mineral interest owning entities have incentive to be reluctant to share information with
smaller or individual mineral owners from whom they may need to lease or re-lease mineral
rights.  They consider this information proprietary and necessary to compete in the marketplace.  
When compelled by statute to share information, they still have an incentive to under represent
the value of the minerals to these smaller mineral owners because they want to pay them the
smallest royalty that can be negotiated.   

If small ‘mom and pop’ mineral owners have to rely exclusively on the energy companies to
which they lease their minerals in order to obtain the estimated value of their minerals, then a
common result would be an undervaluing of the minerals, resulting in an undervaluing of the
cost of the depletion of their minerals.  Percentage depletion acts as a hedge that protects these
smaller royalty owners from the potential double disadvantage of receiving an undervalued
royalty from an energy company and then having that loss compounded by a subsequent
undervaluing of the cost of depletion

As previously mentioned, the average NARO member’s royalty income is five hundred dollars
per month, with many getting considerably less.  While collectively the minerals they own are of
vast value, the minerals owned by a single individual are often relatively small in amount.  A
geological & reservoir assessment can be very costly for these small royalty owners.  Geologists
and engineers bill on an hourly basis, plus expenses, and it is hard to estimate the time an
adequate assessment can take. Royalty owners cannot afford to see their income eaten up by the
cost of independent geological & reservoir assessments, attorney’s fees, and accounting fees that
can quickly accrue in the pursuit of claiming cost depletion.  

Also, as previously mentioned, the average NARO member is over 60 years old, and widowed.  
Some are apprehensive about the process of negotiating leases with energy companies.  
Percentage depletion is one tool that encourages these mineral owners to more strongly consider
leasing their minerals for development.

While percentage depletion is of primary concern for NARO members, we realize secondarily
that ALL of the proposed tax law changes in the FY 2011 DOE budget that affect oil and gas
industry decisions to drill -- such as no longer being able to expense intangible drilling costs –
affect owners of undeveloped minerals, by rendering their properties valueless.  We additionally
realize that elimination of credits for marginal wells and tertiary recovery would result in the
plugging of thousands of older wells and a subsequent loss of vital supplemental income for
countless retirees.  
Several of our royalty owner accountants have looked at how the elimination of the depletion
allowance will impact our elderly, low-income, royalty owners. We have found that in many
instances, the elderly folks with incomes less than 50,000 dollars annually will now have their
Social Security benefits become taxable because of the elimination of the depletion allowance.
This will lay an undue burden on these folks, to not only pay additional tax because of
eliminating the depletion allowance, but they will be forced to pay additional tax on currently
non-taxable Social Security benefits.  

We do not believe that congress’s intent is to put these additional tax burdens on our elderly
royalty owners, many of whom already struggle to pay their current property tax, ad valorem tax,
severance tax, state income tax, local tax, non-resident income tax, and federal income tax on
their producing minerals.  Regardless of intent, the proposed tax increases (via deduction
eliminations) in the DOE budget WILL have that effect on many!   

Royalty owners are teachers, farmers, ranchers, homemakers, accountants, firemen, plumbers,
retirees, dentists, small business owners, factory workers, engineers, pet groomers, widows,
roofers, lawyers, policemen, florists, carpenters, bricklayers, and members of Congress; we are
ordinary citizens, not multi-national corporations.  We consider our mineral estates as assets to
be managed and protected with responsible stewardship.  For the majority of us, our minerals are
part of a family legacy acquired through the hard work and sacrifices of our forbearers.  Royalty
income pays to educate our children, care for aging parents, and supplement salaried and Social
Security income.  We spend our money in our communities, give to our local charities and save
for the future.  Our financial benefits come solely from the mineral interests we own – deep
under American soil.  When those resources have been exhausted, the royalty income ends.

4. America’s energy policy as a whole:

A large portion of US Energy Secretary Steven Chu’s February 4th testimony to this Committee
was dedicated to discussing the administration’s plans to parse out research and development
funding for various spheres of technology that the administration has deemed to be inadequately
advanced.  This funding is hoped to further advance said technologies enough to enable a
transition to widespread reliance on them as alternative energy sources.   

Though the dominate theme of his testimony was how investment can eventually improve
alternative technologies, he did acknowledge, albeit sometimes indirectly, that we are not yet
ready to abandon the energy sources that have become the workhorses of our economy.  Let us
first look at some of Secretary Chu’s comments, and then at some important facts that demand
serious attention during the process of formulating a comprehensive energy policy and
departmental budget; facts which have seemingly not garnered the attention due to them.

A. Secretary Chu’s Testimony

In Energy Secretary Chu’s testimony, he listed several challenges to the “...ability of the United
States to meet the growing demand for reliable electricity.”He said that “...we will need
breakthroughs and better technologies to meet our long-term goals.”  He expanded on the current
limitations of these technologies during his discussion of DOE funded research groups called
“Energy Innovation hubs.”   

He called for an additional EIH to be created to “...dramatically improve batteries and energy
storage.” The call for such dramatic improvements is a vicarious admission of the gap between,
on the one hand, our current level of technological attainment and our current infrastructure, and
on the other hand, the level of technology and infrastructure thought to be necessary to
substantially replace fossil fuels.   


Secretary Chu expressed hope that “Breakthroughs in digital network controls, transmission,
distribution, and energy storage will make the power grid more efficient….”Those dramatic
increases in efficiency and storage technology would be necessary in order to more heavily rely
on energy sources like wind and solar without intermittently suffering significant energy
shortages.   

There is no doubt that these technologies will either improve eventually, or else other superior
technologies not yet conceived will take their place.  The problems are: First, on what timescale
will these advances be made; second, what will be the specific quantitative and qualitative nature
of these advances?  Central planners and prognosticators throughout history have struggled to
grasp at, and have often fumbled with, predicting the answers to questions like these.   

Let us once again return to the example of hydraulic fracturing technology.  Few, if any, could
have predicted the pace of the current energy renaissance that has occurred in the last few years
in regards to the recovery of clean burning natural gas.  It has resulted from rapid strides in
drilling technology.  According to Secretary Chu:  

“Due to research sponsored by DOE from 1978 to 1990 [which studied] methane, coal
bed, and shale gas, that research was finally picked up by the oil and gas industries.  In
1990, Schlumberger started investing in shale gas research.  That has effectively
doubled the gas reserves of the United States.”   

It has been 32 years since DOE first researched shale gas, and 20 since Schlumberger began such
research.  Drilling for natural gas in shale has only become economically feasible within the last
few years.  The decades it took for shale hydraulic fracturing technologies to become economical
should forewarn us not to be surprised at the untold decades to come before today’s alternative
energy sources might become viable.  

In formulating our energy policies and budget, we would be wise to heed the old idiom: don’t put
the cart before the horse.  We must have viable alternatives BEFORE we consider abandoning
the energy workhorses of our economic security.   Putting the “green” ‘cart’ before the energy
‘horse’ is precisely what our energy policy would do if we simply fund research for, as of yet,
unreliable energy sources, and simultaneously pull the rug out from under our conventional
domestic energy industry (i.e. removing virtually every incentive they have to produce, as is
being proposed in the DOE budget eliminations).   

B.  Facing the facts as they are, not as some may wish them to be

Throughout this winter season (2009-2010), wind turbines in Britain have produced only 20% of
their capacity due to lower than average wind resulting from a colder than average weather
pattern. They currently rely on wind for only 5% of their total power, but have been planning to
rely on it to meet a quarter of their power demand within the next ten years, due in part to
pressure from the E. U.  If they had been reliant on wind for 25% of their demand during this
winter, then the wind generation deficit wouldn’t just be an eyebrow raising note of caution, it
would be an outright crisis, with dramatic, real, and painful human costs.     


Let’s examine, frankly and forthrightly, the energy situation as it exists. Alternative energy
sources (i.e. not petroleum, nuclear, natural gas, or coal) accounted for 7.301% of total U.S.
energy consumption in 2008 (the most recent year reported by EIA). Let’s temporarily remove
hydroelectric from the discussion, since the U.S. is not building more hydroelectric dams.  Let’s
remove geothermal as well, since most available sources are already being exploited.  Biomass is
limited due to the limited acreage upon which to grow the fuels, and also because of concerns
about the impact of large scale biomass crop production on global food prices as subsidized
demand for the fuels makes them compete with food crops.  We are essentially left with wind
power and solar power as the only alternative “green” energy sources that are substantially
expandable.   

Wind and solar/photovoltaic energy combined account for just 0.605% of our total energy
consumption. Fossil fuels currently provide 83.436% of our energy consumption. Even if you
remove the technological limitations and reliability issues from the equation (i.e. the wind
intermittently not blowing or the sun not shining) you’re still left with a sobering fact: to replace
fossil fuels, our wind and solar/PV generating capacity would have to be 137.91 times what it is
today.   

From 2007 to 2008 according to EIA, U.S. wind generating capacity increased to provide an
additional 0.173% of our energy needs. Solar capacity increased even more slowly, only
providing an additional .01% beyond its previous levels. If we add the increases together, then at
this combined increase of 0.183% share of total consumption per year, solar and wind combined
could close the gap, and grow to replace fossil fuels in just over 455 years.    

Of course, 455 years is a bit ridiculous, as it assumes the growth rate seen in the last year of EIA
data will be constant, which it obviously won’t.  It also precludes increases in generating
efficiency per installation, etc.  There is no crystal ball that can tell us what will happen next
year, let alone decades or centuries from now.  But, for the sake of the argument, let’s say that
we keep pumping hundreds of millions, or billions of dollars in subsidies a year into research and
development for wind and solar.  Can that timeframe be cut in half?  Even at 10% of that figure
we’re looking at half a century.  While the 455 years figure is certainly an exaggeration because
it factors in neither unquantifiable future changes in supply and demand, nor unforeseeable
future technological advances, it is nonetheless a thought provoking figure based on real
performance data.   

The fact that solar energy generation has grown so slowly is quite disappointing considering the
level of investment the government has been making.  The federal government has been
subsidizing solar energy for years, and the DOE’s proposed FY 2011 budget plans to invest 302
million of taxpayer dollars into solar energy.  Subsidizing the solar industry seems to have had
some kind of effect on their bottom line, because shipping of solar cells was up 280% from 2007
to 2008 according to EIA. Unfortunately, for all the investment of taxpayer dollars into solar, and
notwithstanding the increased shipments of solar cells, that very same time period showed only
the aforementioned increase of .01% more of total U.S. power consumption being provided by
solar/pv.  This is partly because solar is currently a MUCH more expensive way to create
electricity than clean burning natural gas. Thus far, this seems to strain credibility as a good
return on investment, at least for the short and medium term.   


5. The Need for Energy Independence


The American public, our national security interests, and our economy have long demanded, and
still demand three results from the energy policy of our elected officials: an abundant, affordable,
and uninterrupted energy supply.  The more secure our energy supply is, the safer we feel, and in
fact, the safer we are.  Certain policy analyses recently expressed by administration officials
leave some room to question whether those three things are fully understood by our leaders.   

In Secretary Chu’s testimony, he repeated the mantra of “reducing U.S. dependence on oil” four
times. While the search for alternative sources may have its merits, the fact remains, as Secretary
Chu himself pointed out in his address to the 2010 Washington Auto Show, that our
“transportation fuels [are] almost totally dependent on petroleum.”  95% of our transportation
fuels are from petroleum. 28% of the total energy used in the U.S. is used for transportation.   

Americans are going to purchase fuel for their vehicles somewhere, whether that supply is
domestic or from abroad.  Administration officials, including Secretary Chu and President
Obama, have repeatedly talked about the need to break our addiction to foreign oil.  An obvious
step would be to maximize our domestic oil production.   

In testimony submitted to the Senate Finance Subcommittee on Energy, Natural Resources, and
Infrastructure on Sept. 10, 2009, Alan B. Krueger, Assistant Secretary for Economic Policy and
Chief Economist, U.S. Treasury department, said that “The domestic price of oil is determined
by global supply and demand because oil is an internationally traded commodity.”  He
continued, saying “The relatively small U.S. share of global production means that any changes
in domestic U.S. oil production will have a limited impact on the world supply of oil.”   

His focus on the “world” supply of oil myopically focuses on mathematical equations that in no
way account for very real, legitimate national security concerns.  The American people, and
historically congress as well, have recognized the importance of maximizing the independence of
an American supply.  Although he painted a relatively rosy picture of the negative impact on
domestic production that the proposed elimination of deductions will bring,  he does concede
that “on the supply side, a change in domestic producer costs could cause production to shift
from domestic non-integrated producers to integrated domestic or foreign suppliers” of oil.   

Assistant Secretary Krueger’s basic conclusion, all things being equal, was that the “world”
supply of oil and gas and therefore the supply available in the U.S. should only be negligibly
affected by any decline in domestic production resulting from the elimination of percentage
depletion and other deductions.  It is understandable how a trained economist could arrive at this
result.  The first thing learned in any economics class is the Latin phrase: Ceteris Paribus,
meaning “All other things being equal.”  Economists are trained to analyze hypothetical
mathematical situations independently of harder to quantify human variables.  If the “455 years”
figure on the previous page seemed somehow suspect, then so too must Assistant Secretary
Krueger’s apparent trust in the stability of our supply of oil from the rest of the world.  Ceteris
Paribus may be a useful academic exercise that assists with the understanding of certain
economic philosophies (via studying them in a vacuum); but in this situation, all things are
regrettably not equal.   

Of course the domestically produced supply does not seem as sizable when compared to the total
world supply, but history is full of examples of supply chains, especially foreign supply chains,


being suddenly and unpredictably interrupted for extended periods of time.  To think that similar
interruptions could not occur again in the future would be naïve.  In order to safeguard our ability
to provide reliable and affordable energy, we must maximize our ability to produce energy
domestically.   

There seems to be a decent level of bipartisan agreement that we need to break our addiction on
foreign oil, though there are disagreements on the most prudent way to do that.  Other than
maximizing our domestic oil production, and in light of the technological immaturity and
expense of wind and solar, natural gas currently seems like the only viable alternative, and for
several reasons.   

The EPA has stated that “natural gas is the cleanest alternative transportation fuel commercially
available today.” The group NGV America says that the U.S. presently has around 1100 natural
gas vehicle fueling stations, with about 50% open to the public. Around 1.5 million miles of
natural gas pipelines are already in place throughout the country. This preexisting infrastructure
would make it easier to deliver supplies to newly constructed filling stations well beyond those
currently available.  Also, natural gas is significantly cheaper, costing between half to one third
the cost of gasoline.

According to a report from the Edison Electric Foundation and the Brattle Group, building new
combined-cycle natural gas plants to generate electricity is significantly cheaper in dollars per
kilowatts of capacity added than building new plants for utilizing nuclear, solar, wind, or new
coal-combustion (CSS).  The report says building a new combined-cycle natural gas plant would
cost $1000/KW of capacity added.  The most expensive type of new plant would be solar,
costing $6,600 for the same capacity increase.

98% of the natural gas the U.S. uses comes from the U.S. and Canada.  As stated earlier, there is
likely enough in the U.S. for up to 100 years.  There is relatively low cost for converting a
conventional gasoline engine to run on it.  It also burns much cleaner than petroleum and “twice
as clean as coal” when burned for electricity.   

Secretary Chu’s testimony reports that DOE is “committed to being good stewards of the
taxpayers’ money.” If that is true, then we sincerely urge the Committee, Secretary Chu, DOE,
and the Administration at every level to support a budget that will support natural gas as an
alternative energy source.              

6. Conclusions

Secretary Chu did acknowledge in his testimony the continued need for conventional energy.  He
said that “The world will continue to rely on coal fired electrical generation to meet energy
demand.  It is imperative that the United States develop the technology to ensure that base-load
electricity generation is as clean and reliable as possible.”  Interestingly, in his 20 pages of
testimony, secretary Chu failed to mention natural gas at all, other than to say:

“…we eliminated more than $2.7 billion in tax subsidies for oil, coal and gas
industries. This step is estimated to generate more than $38.8 billion in revenue for the
federal government over the next 10 years.”


In 1952, the President’s Materials Policy Commission examined percentage depletion, and
concluded that:  

“…no alternative method of taxation has come to the Commission’s attention or could
be devised by the Commission which, in its judgment, promises to overcome these
limitations and still achieve the desired results, particularly not without seriously
dislocating well established capital values and other arrangements in the industries
concerned, with highly adverse effects on supply.  Taking the practical situation as it
finds it, the Commission believes that any radical alteration of existing tax
arrangements would be undesirable.”  

The “limitations” they referred to are the imperfect allotments of the cost of depletion that can
occur under percentage depletion.  “Desired results,” in this case, refers to encouraging the
production of American minerals in order to provide the energy to grow our economy and to
provide a greater measure of independence and security.   

We believe the U.S. would presently be better served by a DOE budget which invests in
maximizing domestic oil and natural gas production.  We believe this because natural gas is
cheap, locally abundant in supply, clean burning, and efficient.  As a transportation and
electricity generating fuel, it can work in tandem with currently imperfect and experimental
technologies like wind and solar.  When the wind isn’t blowing, the sun isn’t shining, or yet to be
invented experimental energy storage systems malfunction, natural gas can provide us the
uninterrupted electricity we rely upon, cheaply, and cleanly.  Investing in the natural gas industry
will buy us the time we need for the market to truly perfect alternative energy systems that are
presently unreliable.       

We take exception to the provisions in the DOE budget which propose to raise the tax burden on
what are currently America’s only reliable energy sources by “38.8 Billion” dollars over the next
decade, which will slow domestic development. Those provisions include raising the tax burdens
on many of America’s most vulnerable retired royalty owners.  In our pursuit of an energy policy
that encourages domestic production, we must not allow the smallest participants in America’s
energy production to go unprotected from abuse by the larger ones.  The protection that
percentage depletion provides to them must, itself, be protected.   

The DOE budget will eliminate the percentage depletion deduction used by ‘the little guy,’
(AKA: small time royalty owners) while leaving the cost depletion deduction used by big energy
companies untouched. Percentage depletion is an important incentive for domestic energy
development, which helps supply the energy we need to drive our economy while making us less
dependent on foreign sources of energy.  It does this while simultaneously protecting small time
royalty owners, who unlike ‘big energy’ corporations, can’t afford to file cost depletion.  The
proposal to eliminate it should be removed from the DOE budget for fiscal year 2011.

We appreciate the opportunity to provide the Committee with our thoughts and concerns on these
issues and welcome any questions about this testimony or the sources we may have utilized.
National Association of Royalty Owners has a strong stance on the EPA study. They are calling the EPA out on this discrepancy they found between what the Congress INSTRUCTED the EPA to do and what the EPA has taken as their (apparently biased from the get go) position: "In the announcement materials for this meeting EPA stated . . . ” In its Fiscal Year 2010 budget report, the U.S. House of Representatives Appropriation Conference Committee identified the need for a focused study of this topic. EPA agrees with Congress that there are serious concerns from citizens and their representatives about hydraulic fracturing’s potential impact on drinking water, human health and the environment, which demands further study. EPA’s Office of Research and Development (ORD) will be conducting a scientific study to investigate the possible relationships between hydraulic fracturing and drinking water. EPA will use information from the study to identify potential risks associated with Hydraulic Fracturing to continue protecting America’s resources and communities.” Here, in fact is what the Congress said to EPA. . . “The conferees urge the Agency to carry out a study on the relationship between hydraulic fracturing and drinking water, using a credible approach that relies on the best available science, as well as independent sources of information. The conferees expect the study to be conducted through a transparent, peer-reviewed process that will ensure the validity and accuracy of the data. The Agency shall consult with other Federal agencies as well as appropriate State and interstate regulatory agencies in carrying out the study, which should be prepared in accordance with the Agency's quality assurance principles.”

Study says millions of PA residents relying on private water wells that may contain contaminants – none of which are related to the Marcellus Shale

Nearly 20,000 new wells are drilled in Pennsylvania every year. And among these, not a single one of them has anything to do with oil or natural gas.

Instead, these wells are drilled for the purpose of accessing underground sources of water. In Pennsylvania, more than three million residents rely on private wells for essential sources of potable water – second most in the entire nation behind Michigan. So lots of wells must mean lots of good, high-quality drinking water, right? Not according to a report issued last year by researchers from Penn State.

The study, available here and commissioned by the Center for Rural Pennsylvania, was conducted over two years and drew on samples from more than 700 individual private water wells installed all across the state. What did the researchers find? For starters, a full 40 percent of tested wells failed to meet the state’s drinking water standards for safety. Keep in mind that Pennsylvania supports more than 1 million private water wells – which means it’s possible that more than 400,000 water wells, serving roughly 700,000 residents, are of a quality and nature of potential concern. And the worst thing about it? According to the survey, very few of these well owners even knew they had a problem.

With more than 1,300 Marcellus wells developed in Pennsylvania this year, it’s become a popular thing to assume that wells drilled for the purpose of tapping enormous and clean-burning reserves of natural gas 5,000 to 9,000 feet below the water table are having a deleterious impact on underground drinking water. The alleged culprit? A commonly deployed well stimulation technology known as hydraulic fracturing, a technique that’s been used more than a million times over the past 60 years not just for oil and natural gas, but for geothermal production and even by EPA for Superfund clean-ups.

But as mentioned, the report on private water wells from Penn State was issued in 2009, roughly 50 years removed from the first-ever application of fracturing technology in the Commonwealth -- and five years after the fracturing of the first-ever Marcellus Shale well. In other words, hydraulic fracturing has been around an awful long time in Pennsylvania, and so has the development of oil (1859) and natural gas (1881). So if the critics are right, those activities must have been identified by researchers as the greatest threats to the state’s underground water resources, right?

Take a look for yourself

Of the 28 variables measured for each well, the results demonstrated that natural variables, such as the type of bedrock geology where the well was drilled, were important in explaining the occurrence of most pollutants in wells. Soil moisture conditions at the time of sampling were the single most important variable in explaining the occurrence of bacteria in private wells. … Inadequate well construction was strongly correlated with the occurrence of both coliform and E. coli bacteria in wells.

That’s right – we forgot to mention the fecal coliform (exactly what you think it is) and E. coli bacteria. According to the report, it turns out that 33 percent of private water wells in PA were found to be contaminated with the coliform, while a staggering 14 percent tested positive for E. coli. Another contaminant of concern is naturally occurring arsenic. Two percent of tested wells had increased levels of that, which potentially translates into 20,000 water wells across the state. According to the report, arsenic “most often occur[s] naturally from certain types of rocks but it can also come from treated lumber and pesticides.” Incidentally, Pennsylvania is among the only states in the nation without regulations governing the construction of private water wells or the periodic testing of the quality of water that comes from them.

This presentation prepared by the U.S. Geological Survey will take a minute or two to load, but take a look at slide 23 if you get the chance. Turns out Pennsylvania’s water wells are among the only ones in the nation with “high contaminant concentrations” for every one of the Big 3: arsenic, nitrates and radon. Again: Nothing in the report remotely related to Marcellus Shale activities. But don’t take our word for it – ask DEP (by way of Scott Perry, director of DEP’s Bureau of Oil and Gas Management)

“If there was fracturing of the producing formations that was having a direct communication with groundwater, the first thing you would notice is the salt content in the drinking water. It’s never happened. After a million times across the country, no one’s ever documented drinking water wells that have actually been shown to be impacted by fracking.”

Protecting underground sources of drinking water is and will always be our top priority – after all, we live here too. But if we expect the quality of our water to improve, first we’ll need to be honest about how it got where it is today, and then we’ll need to get serious about what needs to be done to improve it. That, we think, is what you’d do if you genuinely cared about the state and status of Pennsylvania’s private water wells. Unfortunately, too many folks seem all too willing to blame the entire phenomenon on the development of the Marcellus Shale – irrespective of the science, and blind to the history of the past 60 years.

Propaganda is dangerous. This isn’t news to most, but it’s important, nonetheless, to remind ourselves periodically of just how pervasively propaganda can alter perceptions of reality.

Recognizing the effectiveness of well executed propaganda blitzes, it is important that the public identify them when they arise in order to allow sound decision-making based on the facts, not the flash. This brings us to the issue of natural gas.

Analysts recently found North America to be abundant in natural gas reserves, a fuel touted by many as the bridge between traditional fossil fuels that we greatly depend on now and the far off potential of renewable energy technologies. It would seem that gas would be embraced as invaluable to solving energy issues in the U.S., and that policymakers would be embracing it as both a job creating engine and one of the keys to a reduced carbon future.

Yet, a small cabal of special interest groups opposes the resource and, consequently, has sought publicity to spread their dubious beliefs. Case in point: a scene from the upcoming documentary Gasland, which features a man lighting his faucet water on fire and making the ridiculous claim that natural gas drilling is responsible for the incident. The clip, though attention-getting, is wildly inaccurate and irresponsible.

To begin with, the vertical depth separation between drinking water aquifers and reservoir targets for gas production is several thousand feet of impermeable rock. Any interchange between the two, if it were possible, would have happened already in geologic time, measured in tens of millions of years, not in recent history.

The only way that drilling could have caused communication is through the vertical well bore itself which is cemented and cased. Millions of wells have already been drilled throughout the world, of which only a handful have experienced accidental leaks into water aquifers-- a percentage smaller than a person’s chances of being struck by lightning in fact. In the rare instances of a leak to the surface, energy companies alert and voluntarily evacuate residents while the safety of the site is evaluated.

Occurrences of flammable tap water, if not the result of existing gas transport pipelines, can be explained by totally unrelated gas leaks that occasionally occur around coal beds, which are far closer to the surface than natural gas deposits. Coal reservoirs contain methane. This is the same gas responsible for recent coal mine accidents, and it can infiltrate the water reservoir if there is too much pumping, which creates a pressure draw down. Attempting to portray this as the result of natural gas drilling is taking poetic license to near criminal extremes.

Abounding benefits of natural gas for the economy, the climate, and America’s overall energy security are well worth accepting the limited risk associated with its development--risks that have been widely overstated by propagandists. Don’t be sucked into the hype regarding negative effects of natural gas. The positives are overwhelming.

By: Dr. Michael Economides

Thanks to the initiative and hard work of some of our friends in the Bainbridge Landowners Coalition we're glad to announce that banners are now available!

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