The “catastrophic” impact of anemic crude oil prices on domesticoil and gas producers will require Congress and the Clintonadministration to take “extraordinary” measures to resuscitate an”industry that is on its knees,” lawmakers on the Senate Energy andNatural Resources Committee said last week.

Although they conceded there was little they could do to correctthe supply-and-demand imbalance that has caused the depressed oilprices, the senators identified other steps that Congress couldtake to help cushion the blow of low oil prices on producers – suchas tax credits for marginal well production, expensing ofexploration costs, greater access to public lands for drilling anda 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 direstraits that only major changes could help it re-gain vitality. “Asof this morning, bottled water sells for more than oil. Ourindustry is not [just] depressed, it is shrinking. Wells are beingabandoned [and] little exploration and development is taking place.Frankly, I think that we’re in a situation where some extraordinarythings have to be [done]. I don’t think that this is business asusual.”

To help producers, he suggested that it might be time forCongress to take a look at a number of tax measures – such as the”loss carryback, carryforward rules” for unused alternative minimumtax credits, the exploration and development tax credit andrestoration of the percentage depletion allowance for marginal oiland gas wells.

Senate and House lawmakers already have moved in the 106thCongress to introduce legislation that would give modest taxcredits to marginal oil and gas producers. Sen. Kay BaileyHutchison (R-TX) last week offered a measure that would provide,among other things, a $3 tax credit on the first three barrels ofdaily oil production from a marginal well, and a 50-cent per Mcfcredit on the first 18 Mcf of daily gas production from a marginalwell. The tax credits would be phased in when oil prices arebetween $14-$17 and gas prices are between $1.56-$1.89. Hutchison’sinitiative also would give producers a tax exemption for restartinginactive marginal wells.

Marginal wells are those that produce less than 15 barrels perday 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 gasproduction.

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 ofthe Senate Finance Committee, she urged the energy panel to “takethe lead in fashioning a program that will help this industrythrough its hard times.”

On the House side, Rep. Wes Watkins (R-OK) proposed a similarbill that would provide tax breaks for marginal production when oiland gas prices hit a critical level. The tax credits would beeligible for a ten-year carryback, which would enable producers tooffset losses incurred this year against previous or futureprofits. Rep. William Thomas (R-CA) also has introduced atax-relief bill for small producers. It would allow them to deductoperating losses from their regular and alternative minimum taxesduring the past five years.

Energy Committee Chairman Frank Murkowski (R-AK) imploredCongress to focus its attention on some non-tax issues as well -such as giving industry greater access to onshore and offshorefederal lands, urging the Interior Department to give a blanketterm extension for leases on federal lands and ensuring that theMinerals Management Service (MMS) crafts a “fair rule” fordetermining federal royalties.

Prior to the hearing, Murkowski also said the administration’sproposal for a 5.5% mandate for renewable fuels in itsstill-in-progress electric restructuring legislation was “totallyunrealistic,” and would only serve to exacerbate the oversupplyproblem underlying depressed oil prices.

Nickles Blasts Administration

Sen. Don Nickles (R-OK) chastised the Clinton administration forplanning other moves to further harm the industry, such as bringingback excise and Superfund taxes, eliminating the exploration andproduction waste exemption in the Resource Conservation andRecovery Act (RCRA), preventing exploration and production ofpublic lands, as well as proposing a “new, inaccurate formula” forcalculating royalties.

Some type of support for producers from Congress and the Clintonadministration seems inevitable, given that the Energy InformationAdministration (EIA) doesn’t foresee domestic crude pricesrebounding in the near term. West Texas Intermediate (WTI) willreach $15/barrel by the end of 1999, but it won’t return to itshistorical $17-$21 trading range until the end of 2000 or 2001, EIAAdministrator Jay Hakes told the Senate committee. That’s when theEIA expects the large overhang of worldwide crude stocks that’scausing the low prices to be eliminated. By 2005, EIA sees WTIprices hitting $25 a barrel.

Until then, the oil and gas industry will go through some roughtimes. “From December 1997 through November of 1998, operating oilrigs have fallen 47%, gas rigs 23%, and footage drilled 28%,” Hakessaid. Exploration and production budgets also are taking anose-dive. He cited a Salomon Smith Barney survey that reportedU.S. exploration and production expenditures for 1999 at 21% below1998 expenditures, which were down 0.2% from 1997. He expectsonshore drilling projects to be most affected by these cuts.

John H. Lichtblau, chairman of the Petroleum Industry ResearchFoundation, believes the best way to prop up domestic oil prices inthe short term would be for the Clinton administration to increasepurchases for the Strategic Petroleum Reserve. This would have an”immediate, positive effect on prices.” Also, Congress and thestates could move to temporarily reduce or eliminate royalty andseverance taxes if the price of oil dips below a designated level,he said.

C. Robert Palmer, chairman of Houston-based Rowan Cos. Inc.,said he wasn’t seeking “protection, a hand-out, a subsidy or evensympathy” from the federal government, but he conceded there were anumber of steps it could take – such as ensuring a consistentoffshore policy – to make this happen.

Susan Parker

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