Congress Looking for Ways to Help Industry
The "catastrophic" impact of anemic crude oil prices on domestic
oil and gas producers will require Congress and the Clinton
administration to take "extraordinary" measures to resuscitate an
"industry that is on its knees," lawmakers on the Senate Energy and
Natural Resources Committee said last week.
Although they conceded there was little they could do to correct
the supply-and-demand imbalance that has caused the depressed oil
prices, the senators identified other steps that Congress could
take to help cushion the blow of low oil prices on producers - such
as tax credits for marginal well production, expensing of
exploration costs, greater access to public lands for drilling and
a more equitable formula for calculating federal royalties.
At an oversight hearing last Thursday, Sen. Pete Domenici (R-NM)
told the committee that the petroleum industry was in such dire
straits that only major changes could help it re-gain vitality. "As
of this morning, bottled water sells for more than oil. Our
industry is not [just] depressed, it is shrinking. Wells are being
abandoned [and] little exploration and development is taking place.
Frankly, I think that we're in a situation where some extraordinary
things have to be [done]. I don't think that this is business as
To help producers, he suggested that it might be time for
Congress to take a look at a number of tax measures - such as the
"loss carryback, carryforward rules" for unused alternative minimum
tax credits, the exploration and development tax credit and
restoration of the percentage depletion allowance for marginal oil
and gas wells.
Senate and House lawmakers already have moved in the 106th
Congress to introduce legislation that would give modest tax
credits to marginal oil and gas producers. Sen. Kay Bailey
Hutchison (R-TX) last week offered a measure that would provide,
among other things, a $3 tax credit on the first three barrels of
daily oil production from a marginal well, and a 50-cent per Mcf
credit on the first 18 Mcf of daily gas production from a marginal
well. The tax credits would be phased in when oil prices are
between $14-$17 and gas prices are between $1.56-$1.89. Hutchison's
initiative also would give producers a tax exemption for restarting
inactive marginal wells.
Marginal wells are those that produce less than 15 barrels per
day of crude, or average less than 90 Mcf/d of gas production.
There currently are about 500,000 such wells in the United States,
and they account for up to 20% of domestic oil and natural gas
Hutchison said her legislation presently has 17 co-sponsors,
including "most of the members" of the Senate Energy Committee.
Although many of her proposals will fall under the jurisdiction of
the Senate Finance Committee, she urged the energy panel to "take
the lead in fashioning a program that will help this industry
through its hard times."
On the House side, Rep. Wes Watkins (R-OK) proposed a similar
bill that would provide tax breaks for marginal production when oil
and gas prices hit a critical level. The tax credits would be
eligible for a ten-year carryback, which would enable producers to
offset losses incurred this year against previous or future
profits. Rep. William Thomas (R-CA) also has introduced a
tax-relief bill for small producers. It would allow them to deduct
operating losses from their regular and alternative minimum taxes
during the past five years.
Energy Committee Chairman Frank Murkowski (R-AK) implored
Congress to focus its attention on some non-tax issues as well -
such as giving industry greater access to onshore and offshore
federal lands, urging the Interior Department to give a blanket
term extension for leases on federal lands and ensuring that the
Minerals Management Service (MMS) crafts a "fair rule" for
determining federal royalties.
Prior to the hearing, Murkowski also said the administration's
proposal for a 5.5% mandate for renewable fuels in its
still-in-progress electric restructuring legislation was "totally
unrealistic," and would only serve to exacerbate the oversupply
problem underlying depressed oil prices.
Nickles Blasts Administration
Sen. Don Nickles (R-OK) chastised the Clinton administration for
planning other moves to further harm the industry, such as bringing
back excise and Superfund taxes, eliminating the exploration and
production waste exemption in the Resource Conservation and
Recovery Act (RCRA), preventing exploration and production of
public lands, as well as proposing a "new, inaccurate formula" for
Some type of support for producers from Congress and the Clinton
administration seems inevitable, given that the Energy Information
Administration (EIA) doesn't foresee domestic crude prices
rebounding in the near term. West Texas Intermediate (WTI) will
reach $15/barrel by the end of 1999, but it won't return to its
historical $17-$21 trading range until the end of 2000 or 2001, EIA
Administrator Jay Hakes told the Senate committee. That's when the
EIA expects the large overhang of worldwide crude stocks that's
causing the low prices to be eliminated. By 2005, EIA sees WTI
prices hitting $25 a barrel.
Until then, the oil and gas industry will go through some rough
times. "From December 1997 through November of 1998, operating oil
rigs have fallen 47%, gas rigs 23%, and footage drilled 28%," Hakes
said. Exploration and production budgets also are taking a
nose-dive. He cited a Salomon Smith Barney survey that reported
U.S. exploration and production expenditures for 1999 at 21% below
1998 expenditures, which were down 0.2% from 1997. He expects
onshore drilling projects to be most affected by these cuts.
John H. Lichtblau, chairman of the Petroleum Industry Research
Foundation, believes the best way to prop up domestic oil prices in
the short term would be for the Clinton administration to increase
purchases for the Strategic Petroleum Reserve. This would have an
"immediate, positive effect on prices." Also, Congress and the
states could move to temporarily reduce or eliminate royalty and
severance taxes if the price of oil dips below a designated level,
C. Robert Palmer, chairman of Houston-based Rowan Cos. Inc.,
said he wasn't seeking "protection, a hand-out, a subsidy or even
sympathy" from the federal government, but he conceded there were a
number of steps it could take - such as ensuring a consistent
offshore policy - to make this happen.