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Producers Decry House Energy Bill, Say It Will Discourage Investment

Independent producers blasted the House Democrats' energy bill -- released late Friday -- that seeks to repeal tax breaks for oil and natural gas producers, force holders of the flawed 1998-1999 leases to renegotiate their contracts and eliminate royalty relief for shallow and deepwater production in the Gulf of Mexico.

"This is a time to encourage American investment in energy projects here at home, not discourage it. This bill takes capital from the U.S. oil and natural gas companies that otherwise would be spent on domestic energy initiatives," said Barry Russell, president of the Independent Petroleum Association of America (IPAA), which represents more than 5,000 independent producers.

The energy bill (HR 6) was crafted by House Speaker Nancy Pelosi (D-CA) and key House energy committee chairmen. The measure is considered the cornerstone of the "first 100 hours" agenda that the Democrats are promoting. Drew Hammill, a Pelosi spokesman, said he expects the energy bill to gain the support of both Democrats and Republicans.

The bill bars the Interior Department secretary from issuing any new leases in the Gulf to producers unless they have renegotiated their flawed 1998-199 leases to include the missing price triggers for royalty payments. If they choose not to renegotiate, the holders of the 1998-1999 leases can either pay a "conservation of resources fee" or be deemed ineligible to bid on future leases.

The measure establishes a "conservation of resources fee" for producing and nonproducing federal oil and gas leases in the Gulf. The fee for producing leases would be set at $9/barrel of oil and $1.25/MMBtu of natural gas when the price of oil on the New York Mercantile Exchange exceeds $34.73/bbl and the price of natural gas exceeds $4.34 MMBtu. For nonproducing leases, the fee would be set at $3.75 per acre per year.

"This bill penalizes offshore oil and natural gas companies that signed leases in 1998 and 1999 that, due to [a] federal agency mistake, did not set a price threshold for royalty incentives," said the IPAA's Russell. The companies had "no responsibility" for the contractual error made by Interior's Minerals Management Service (MMS), he noted.

Federal auditors estimate that MMS' failure to include price thresholds in the 1998-1999 leases has cost the federal government $2 billion in lost royalties so far. They believe the figure could climb to $10 billion if the flawed leases are not renegotiated.

The measure also would repeal four incentive price areas: royalty relief for producers drilling from deep wells in shallow waters; an expansion of deepwater royalty relief; royalty relief for Alaska offshore areas; and royalty relief for the National Petroleum Reserve in Alaska, said Rep. Edward Markey (D-MA), a long-time critic of the oil and gas industry.

In addition, the House bill repeals two special tax breaks for oil and gas producers, one which expanded the tax break for expensing of geological and geophysical costs, and another which allowed producers to take advantage of a tax break intended for domestic manufacturing activities, he noted.

The repeal of the manufacturing tax deduction "is purely political with the goal of punishing an industry that has low favorability on Capitol Hill," Russell said.

The proposed changes are expected to generate $13 billion in recovered funds, which will be earmarked for the creation of a "Strategic Energy Efficiency and Renewables Reserve" to accelerate the use of domestic renewable and alternative energy sources.

The House is scheduled to vote on the bill Thursday. "Sources around Washington expect the House to pass this easily and, indeed, give it very good odds in the Senate. It also looks as if it would be rather unlikely that the Bush administration would veto it," said energy analyst Christine Tezak of Stanford Group Co. in a report issued last Thursday.

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