Leveraging Climate Incentives for Oilfield Electrification Projects

The passage of the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) in 2022 has spurred infrastructure spending and development that will continue throughout this decade. The incentives and funding opportunities available could transform power system infrastructure, eventually benefiting even the unique needs of oil and gas producers.

Given the federal government's primary focus in decarbonizing the economy and moving away from fossil fuels, neither law directly provides funding for oilfield electrification. However, it is acknowledged that oil and gas are still the principal forms of primary energy and important drivers of the economy. Oilfield operators can collaborate with regulators, utilities and cooperatives to apply for the incentives that would help to reduce the carbon footprint of oilfield operations. By identifying solutions to improve grid capacity, reliability and resilience for energy producers, oilfield owners and operators can build interconnections on upgraded transmission and distribution systems that will support their own resiliency, reduce costs and mitigate emissions.

Reasons to Electrify an Oilfield

Oil producers that prioritize electrification can expect economic and environmental benefits, as well as improved business operations and efficiencies. Energy-related costs for oil and gas production are among the most significant lease operating expenses. This is because oil and gas producers often use diesel- and natural gas-powered engines as prime movers for generators, pumps, compressors and other oilfield equipment. When the oilfield is electrified, these oil and gas-powered engines either would be retrofitted, or replaced by grid-connected electric equipment. Electric-powered engines eliminate the need for shipping and storing diesel fuel on-site.

When converting to electric power from diesel generation, owners and operators can expect more resiliency. By connecting to the grid, oilfields access a reliable power source. An infrastructure that is shared by many producers and users and has a robust restoration solution during outages diversifies away the reliability risks of an isolated system.

Opportunities to Implement Oilfield Electrification

The truth is that few direct incentives are available for oilfield electrification, but through partnerships among states, local governments, utilities and oilfield operators, electrification can become a reality with federal incentives providing reliable financial underpinning.

Specific federal programs and funding opportunities that could benefit utilities and oil and gas producers, especially through a collaborative approach, include:

• Grid Resilience and Innovation Partnerships (GRIP): Under this program, $10.5 billion is available to improve grid flexibility while supporting a more resilient power system to counter extreme weather events. This program brings together industry, tribal and state partners to achieve several outcomes, including increasing transfer capacity between regions; addressing consequential system needs; addressing challenges that contribute to increasing interconnection queue time for clean energy; and increasing the supply of geographically and technologically diverse resources to reduce outages.
• Transmission Facilitation Program (TFP): This revolving fund program supports development of large-scale new transmission lines, upgrades to existing lines and the connection of microgrids. The TFP provides $2.5 billion in funding and is well-suited for projects that are almost shovel-ready. This program is most applicable to regions that depend on firm point-to-point transmission systems.
• Energy Infrastructure Reinvestment Financing (EIR): With a total of $5 billion available through 2026, this program provides loan guarantees to projects involved in retooling, repurposing, repowering and replacing energy infrastructure that has halted operations. Funding can also support operating energy infrastructure to mitigate or sequester emissions.
• Transmission Facility Financing (TFF): Under this direct loan program, applicants can use financing to construct or alter electric transmission facilities. This program specifically focuses on facilities deemed necessary for national interest under the Federal Power Act. Funding covers up to 80% of project costs, with a total amount of $2 billion available until 2030.
• Transmission Siting and Economic Development Grants: Under this grant program, siting authorities can use funding for studies and assessments regarding the impacts of the transmission project. Grant recipients can also examine three alternative sitting corridors. This grant program supports involvement in regulatory proceedings at a state regulatory commission or the Federal Energy Regulatory Commission to determine applicable rates and cost sharing. Grants will cover up to 80% of project costs with a total of $760 million available until 2030.
• Tax credit for electricity produced from renewable sources: This tax credit encourages the production of electricity from various clean sources, including geothermal, wind, solar, biomass, suitable hydropower, and hydrokinetic and marine resources. The initial production tax credit amount is set at 0.3 cent per kilowatt-hour (kWh). To qualify for an enhanced production tax credit amount that is five times the base value, facilities must adhere to prevailing wage regulations during the construction phase and the initial 10 years of operations. There are added incentives and conditions attached to these tax credits, including the previously mentioned prevailing wage and apprenticeship requirements, compliance with domestic content requirements, and being situated in an “energy community.”

These tax credits, credit support and grant programs do not provide direct incentives for oilfield electrification. Most of these provisions support regulators, utilities and cooperatives to improve the capacity, access and resilience of their electrical infrastructure, and to increase collaboration among different stakeholders. Building partnerships with state and local governments, as well as other oilfield operators, can drive strategic planning efforts for utilities to build transmission and distribution systems that will ultimately benefit oilfield owners and operators.

When evaluating approaches to secure grant funding or tax incentives through partnerships with utilities, it’s important for oilfield owners and operators to remember that each site and each project is unique. Oilfield electrification projects will vary depending on energy consumption, capital and annual operating costs, project timing, and how the project contributes to the decarbonization goals of all parties. Securing federal investments is a strategic play for oilfield owners and operators, and their project partners, resulting in increased efficiency, improved reliability and production, and reduced costs — while mitigating greenhouse gas emissions.

Investments in electrical infrastructure to support oilfield production can improve reliability while helping owners and operators achieve cost savings and emissions reductions. Achieving these goals requires a strategic and holistic approach that considers load projections, infrastructure availability and well site mapping.