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Tax Credits for Producers Sought on Capitol Hill

Tax Credits for Producers Sought on Capitol Hill

In an effort to reduce U.S. dependence on foreign oil, Sen. Kay Bailey Hutchison (R-TX) introduced legislation last week that would offer tax credits to domestic producers of marginal oil and natural gas wells. Although the credits would not become effective until the prices of oil and gas fell significantly, they would provide a sort of financial safety net to encourage marginal well producers to reopen shut-in wells in the face of a volatile market.

The bill is identical to two, unsuccessful measures that she previously introduced in the 106th Congress to shore up producers when crude oil prices were in the basement. Hutchison quickly resurrected the bill last week after President Clinton in his radio address pledged to support, among other things, tax incentives to encourage domestic oil and gas production in the wake of rising home heating oil and gasoline prices.

"This is the time to do this," an aide to Hutchison said. "We hope to put it on a fast track" through the Senate and to the president's desk. "We think we have a good shot this time," the aide told NGI. The prior proposals failed primarily because they were part of larger legislative packages, and the nation's attention wasn't as focused on energy as it is now. he noted. But the situation has changed immensely, with escalating gasoline and heating oil prices making the daily headlines. Also, Hutchison has offered her bill as a stand-alone measure this time.

The Texas lawmaker said her tax-relief legislation would help to reopen about 75,000 oil wells, inceasing domestic production by 250,000 barrels per day. "Boosting our domestic oil and gas production is the only permanent solution to today's high [gasoline] and home heating oil prices," she said in a prepared statement.

"We must regain control over our own economic destiny. An energy policy that requires us to go hat-in-hand to foreign oil producers is not a short-term cure --- it is an embarrassment.....," noted Hutchison, who has been a sharp critic of the Clinton administration's energy policy. She urged the president to support her legislation.

More than 150,000 domestic oil and gas wells were closed during 1997-98 when crude oil prices dropped below $10 per barrel, cutting U.S. production by about 500,000 barrels per day. Although prices are much higher now, many independent producers still are reluctant to incur the high costs associated with reopening their wells without assurances that they will not face additional financial losses if prices should again fall below break-even levels. Hutchison believers her bill will provide that safety net for small producers.

At the heart of her bill is a $3 per barrel tax credit for marginal oil wells --- which produce less than 15 barrels per day --- that would be triggered when oil prices dip to $14 per barrel or below. The credit would apply to the first three barrels of daily oil production, which means the maximum daily credit an oil producer could receive would be $9. The credit would be phased out when prices hit $17 per barrel.

On the natural gas side, Hutchison's bill would provide a tax credit of up to 50 cents for the first 18,000 cubic feet of daily gas production from marginal wells, which produce less than 90,000 Mcf per day. The tax credit would kick in when gas prices fall below $1.59/Mcf, and would phase out at $1.89/Mcf.

Susan Parker

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