The Democrat-controlled House is expected to vote on an energy package Jan. 18 that would roll back billions of dollars in tax breaks for oil and natural gas producers, as well as recoup royalties from the faulty 1998 and 1999 deepwater leases that lacked price caps. House leaders are proposing to divert the revenues to fund alternative and renewable energy sources.

The proposed measures understandably have oil and natural gas producers, particularly independents, worried. “It’s going to be a challenging year” for traditional energy producers, said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America (IPAA), which represents independent producers.

He said one of the “most probable” issues on the Democrats’ plate is the revision or repeal of producer tax breaks that were included in the Energy Policy Act of 2005 (EPAct). Fuller is concerned that the House may tinker with an EPAct provision that established a 24-month amortization period for the expensing of geological and geophysical costs primarily for independent producers. Congress, in a separate tax package in 2005, created a five-year amortization period for the geological and geophysical expenses of the top integrated energy companies.

The House “could come back and revisit that provision [in the 2005 tax package] or do something more broadly” that could affect the 24-month amortization period for independents, Fuller said.

The top majors, including Shell, BP and ExxonMobil, told Congress last year that they didn’t need the tax incentives, but an IPAA spokesman noted “our members really rely on that financial kickback to make the initial investment in exploration and production potentially profitable.”

Democrats also plan to tackle the issue of the missing price thresholds in the Gulf of Mexico oil and natural gas leases that were issued by the Interior Department in 1998 and 1999. The absence of the price thresholds, which trigger the payment of royalties when market prices exceed certain levels, could cost the federal government up to $10 billion over the life of the leases if they are not renegotiated, according to the Government Accountability Office.

One option being considered is the collection of a conservation fee from the holders of the 1998-1999 royalty-free leases when the market price for oil and gas rises above a certain level, Fuller said. The conservation fee would be on par with whatever a producer should be paying in royalties under the 1998-1999 leases, he noted.

A second option calls for the House to pass a proposal, sponsored by Reps. Edward Markey (D-MA) and Maurice Hinchey (D-NY), to bar the holders of the 1998-1999 leases from bidding on future government leases if they refuse to renegotiate their existing contracts with Interior’s Minerals Management Service (MMS). Fuller said the House may consider either or both proposals in the first 100 hours of the 110th Congress.

Five producers who hold 1998-1999 leases have renegotiated their contracts with Interior, but the deals call for recovery of royalties on future production from the leases, not on past production (see NGI, Dec. 18, 2006). The renegotiated deals failed to silence House critics, who want producers to pay royalties on past production from the disputed leases as well. Approximately 50 companies still haven’t renegotiated their 1998-1999 leases.

Interior’s MMS gave producers a break on royalties in the late 1990s, when oil and gas prices were low, to spur exploration and production in the Gulf. The lease agreements contained language stating that the price relief would come to an end when oil and gas market prices soared above a certain level. However, the MMS left this language out of the 1998 and 1999 leases — a mistake that is costing the government billions in lost royalties.

House Democrats also may seek to repeal a tax deduction in the “American Jobs Creation Act of 2004” for companies engaged in manufacturing, including oil and natural gas producers, Fuller said. Another “dynamic” that will affect IPAA members is the return of the federal pay-as-you-go rule, which requires future tax breaks to be offset by tax increases elsewhere, he noted. On Friday, the House voted 280 to 154 to reinstate the PAYGO rule.

He believes the proposed measures have a good chance of clearing the House. “I would anticipate whatever they put on the table in the House in the first 100 hours will pass the House,” Fuller told NGI. But the Senate will be a bit more slow to act. For instance, he noted that the issue of the faulty 1998-1999 offshore leases captured some attention in the Senate last year, and “it clearly will continue to have attention in the Senate [in the year ahead], but exactly how they will approach it is unknown.”

Fuller doesn’t expect greater access to the Outer Continental Shelf (OCS) to be immediately considered in the new Congress. “I don’t know that anything will be identified there quickly,” he said. But there could be some activity later. Natural gas prices, in particular, and energy security concerns “may put greater pressure on Congress” to reconsider elements of the broader House OCS bill, which was jettisoned in the final days of the 109th Congress in favor of a more limited Senate version that provided access to the Lease Sale 181 area in the eastern Gulf. The Senate bill was ultimately passed by Congress and signed into law by President Bush (see NGI, Dec. 25, 2006). The House bill would have lifted the moratorium on drilling off the Pacific and East Coasts.

Congressional action on broadening access to the OCS this year “will be driven a lot by what happens to oil and gas prices over the next six months,” Fuller said.

In a related development, Senate leaders last Thursday signaled that energy will be a priority item for the chamber, but they will move more deliberatively on the issue than House Democrats.

Majority Leader Harry Reid (D-NV) introduced a “placeholder” measure, a major environmental security, global-warming bill (S. 6), to stress that energy will take precedence in the 110th Congress.

Reid’s action was a “symbolic” gesture, and “substantive [energy] legislation will follow in a few months,” said Bill Wicker, a spokesman for Sen. Jeff Bingaman (D-NM), the new chairman of the Senate Energy and Natural Resources Committee and co-sponsor of the bill.

Reid would like to see Senate committee action on an energy bill begin after the February recess and run through the Easter break, Wicker told NGI.

“I’m not sure there will be a whole lot for oil and gas” in the Senate legislation, he noted. “I think the trend line is going in the opposite direction” towards renewable and alternative energy.

The Senate legislation is expected to focus on developing alternative fuels; new technologies for cars and trucks; reducing exposure to global warming; expanding the use of secure, efficient and environmentally friendly energy supplies and technologies; reducing the burdens on consumers of rising energy prices; and eliminating tax giveaways and preventing energy price gouging and manipulation.

“All of this is a tall order for Congress,” said Bingaman on the Senate floor last Thursday. “I would predict that instead of seeing just one big energy bill, we will be addressing these issues through multiple bills that move through the Senate.”

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