Key Senate Republicans yesterday introduced a broad-basedlegislative package of tax measures and other incentives aimed atspurring the production of crude oil, natural gas and alternativeenergy in the Lower 48 states and Alaska.

The legislation, which was the product of a 10-member task forceled by Senate Energy Committee Chairman Frank Murkowski (R-AK),seeks to open up for the first time the Arctic Coastal Plain to oiland gas development, turn over regulation of oil and gas leases onfederal lands to the states, provide royalty relief for producersin remote Outer Continental Shelf (OCS) areas, offer tax incentivesfor marginal oil and gas producers, allow the expensing of oil andgas exploration costs and the delay of rental payments, expand thetax credit for renewable energy, establish a Northeast home heatingoil reserve and a number of other measures.

The goal of the legislation is to reduce the nation’s dependenceon foreign oil to at least 50% by 2010. Currently, it’s estimatedthe United States depends on foreign sources for nearly 60% of itsenergy needs. The full Senate “should take this bill up before weleave this year because a disaster is looming on the horizon,”Majority Leader Trent Lott (R-MS), who formally introduced the”National Energy Security Act of 2000” on Tuesday, said during apress briefing on Capitol Hill.

This is happening on “my watch as majority leader. I’m not goingto stand by and not…try to do something about it. If theadministration [wants to] join us, that would be great,” Lott toldreporters. But Congress can no longer ” [wait] on theadministration to do something, to do anything” about lesseningU.S. reliance on foreign oil.

Because there is only a short time left in the session, Lott hasattached “special rules” to the legislation that essentially wouldallow him to pull the bill out of committee for a vote on theSenate floor. “We did set it up in such a way,” he said, but addedthat taking such action would be a last resort. Further, he notedhe intends to discuss the bill with the Speaker of the House J.Dennis Hastert (R-IL) to “coordinate our efforts.”

At the crux of the bill, S. 2557, is a proposal for EnergySecretary Bill Richardson to set up an Interagency Work Group onNatural Gas within the National Economic Council. The aim of thegroup would be to develop a “strategy and comprehensive policy forthe use of natural gas” for ensuring energy security, economicgrowth and environmental protection. The group would includerepresentatives from each federal agency that has a “significantrole” in developing and implementing gas policy, resourceassessment or technologies for gas exploration, production,transportation and use.

The legislation calls for the group to prepare and submit to theEnergy Secretary its recommendations on a comprehensive gas policywithin six months after the bill is enacted. “The policy shallrecognize the significant lead times required for the developmentof additional natural gas supplies and the delivery infrastructurerequired to transport those supplies,” the bill said. The energysecretary then has three months to review the report and submit italong with his “recommendations for administrative or legislativeactions” to the president and Congress.

On June 1, 2000, and every two years afterward, the group willbe required to file a progress report with the president andCongress.

Another key provision of the legislation proposes that theEnergy Secretary “establish, maintain and operate” a home heatingoil reserve in the Northeast, which if realized would eliminate theurgency for additional gas pipelines to that region. The Departmentof Energy (DOE) would authorize releases from the reserve only inthe event of severe supply disruption or price increase or anotheremergency.

Within 45 days from the enactment, the energy secretary wouldsubmit a plan to the president and, if he approves, to Congressdescribing how DOE will acquire storage and reserves and theestimated costs.

The legislation further authorizes the Interior secretary toestablish and implement a “competitive oil and gas leasing program”that will lead to “environmentally sound” exploration, developmentand production of oil and gas in the Arctic Coastal Plain, whichencompasses 1.5 million acres of the controversial Arctic NationalWildlife Refuge (ANWR). Murkowski has been trying for years to openup ANWR to drilling for years, but has been defeated byenvironmentalists.

“I’ve always maintained if the senators and congressmen fromAlaska want to do it [open up ANWR], then it surely is safe,” Lottsaid. The initial Arctic lease sale would be held within 20 monthsfollowing the enactment, and would be for between 200,000 and300,000 acres.

To assess the supply situation, the legislation directs theInterior secretary, in consultation with the director of the U.S.Geological Survey, to publish a “science-based national inventory”of all oil and gas reserves and potential resources underlyingfederal lands and the OCS.

In an effort to speed up the permitting process, the legislationwould give the states the authority to take over the regulation ofoil and gas leases on federal lands. Their authority would includethe processing and approving of drilling permits, productionoperations, well testing, well completion, well spacing, wellabandonment procedures, inspections, enforcement activities, andsite security. Interior would retain authority over issuance ofleases and of surface use and environmental analyses.

In an effort to stimulate development of federal lands and theOCS when energy prices dip, the legislation would require theInterior secretary to give producers a royalty credit for oil andgas production when the cash price of West Texas Intermediate crudeoil drops to less than $18 per barrel for 90 consecutive pricingdays or when the price for gas delivered at Henry Hub, LA, fallsbelow $2.30 MMBtu for 90 consecutive days. The credit would beequal to 20% of a producer’s capital expenditures on explorationand development (E&P) activities on federal leases.

In Alaska, the bill requires the Interior secretary to reduce aproducer’s “future royalty or rental obligation” on any federallease by an amount equal to a) 10% of the qualified costs ofexploratory wells drilled or geophysical work performed, whicheveris greater, in Arctic areas; and b) an additional 10% of thequalified costs of any exploratory wells that are located 10 ormore miles from another oil or gas well.

The legislation also incorporates a proposal by Sen. Kay BaileyHutchison (R-TX) that calls for tax credits for low-producingmarginal oil and natural gas wells. The bill would offer a $3 abarrel tax credit for oil that is triggered when prices fall tobetween $14-$17 per barrel. The credit would apply only to thefirst three barrels of daily oil production. Marginal gas producerswould be eligible for a tax credit of 50 cents when prices nosedivebelow $1.59.

Moreover, the legislation would allow producers to treatgeological and geophysical costs that are incurred in connectionwith the exploration or development of oil or gas as expenses,which are not chargeable to capital account. The expenses treatedas such would be allowed as a deduction in the taxable year inwhich they were paid or incurred, according to the bill.

Producers also could amortize the “suspended portion” of suchexpenses over a 36-month period beginning with the date of thebill’s enactment. Additionally, they could treat “delay rentalpayments” incurred in developing domestic oil or gas as paymentsthat aren’t chargeable to capital accounts. As a result, the”delay rental payments,” which are made by producers so they candefer drilling of a lease, could be deducted in the taxable yearsin which they were paid or incurred.

The bill also seeks to offer tax credits for electricityproduced from renewable sources, such as wind and biomass. Thecredits would apply to wind facilities placed in service after Dec.31, 1993 and before July 1, 2004, and biomass facilities placed inservice prior to July 1, 2004. The credit would not apply toelectricity sold to utilities under certain contracts, such as acontract entered into before Jan. 1, 1987.

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