Alarmed by the U.S. appetite for foreign oil, key SenateRepublicans last week introduced a broad-based legislative packagethat would open up areas that have been closed to drilling in thepast, as well as offer tax measures and other incentives tostimulate the production of crude oil, natural gas and alternativeenergy in the Lower 48 states and Alaska.

The legislation, which was the product of a ten-member taskforce led by Senate Energy Committee Chairman Frank Murkowski(S-AK), seeks to open up for the first time the Arctic CoastalPlain to oil and gas development, turn over regulation of oil andgas leases on federal lands to the states, provide royalty relieffor producers in remote Outer Continental Shelf (OCS) areas, offertax incentives for marginal oil and gas producers, allow theexpensing of exploration costs and the delay of rental payments,expand the tax credit for renewable energy sources, establish aNortheast home heating oil reserve and a number of other measures.

Independent producers praised the bill, calling it a “blueprintfor a coherent [domestic] energy policy,” but Energy Secretary BillRichardson knocked the measure for allowing drilling in the ArcticCoastal Plain and for its absence of investment in energyefficiency. Public Citizen, a Washington, D.C.-based consumeradvocacy group, denounced the initiative as “yet another example ofindustry-written legislation.” It especially was critical of theprovision on Arctic Coastal Plain drilling, saying it was a”phenomenally poor idea.”

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” last 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” to lessen U.S.reliance on foreign oil.

Because only a short time remains 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 before Congress recesses for the year. “We did set itup in such a way,” he said, but added that taking such action wouldbe a last resort. Lott noted he intends to discuss the bill withthe House Speaker J. Dennis Hastert (R-IL) to “coordinate ourefforts,” as well as with key Democrats in Congress to winbi-partisan support.

The cornerstone 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” to ensure energy security, economic growthand environmental protection. The group would includerepresentatives from every 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 a report outlining its recommendations on acomprehensive gas policy within six months after the bill isenacted. The secretary then would have three months to review thereport and submit it along with his own “recommendations foradministrative or legislative actions” to 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 built could reduce theimmediate demand for natural gas and additional gas pipelines tothat region. The Department of Energy (DOE) would authorizereleases of petroleum distillate from the reserve only in the eventof severe energy supply disruption, severe price increase oranother emergency affecting the Northeast, according to the bill.

In a move that already has evoked controversy, the billauthorizes the Interior Secretary to take the necessary steps toestablish and implement a “competitive oil and gas leasing program”for drilling in the Arctic Coastal Plain, which is part of theArctic National Wildlife Refuge (ANWR). Sen. Murkowski has beentrying for years to open up ANWR to drilling, but has been foughtevery step of the way by environmentalists.

“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 of the legislation, and would be for noless than 200,000 acres and not more than 300,000 acres, accordingto the energy bill.

Additionally, the Senate initiative directs the InteriorSecretary, in consultation with the director of the U.S. GeologicalSurvey. to publish a “science-based national inventory” of all theoil and gas reserves and potential resources underlying federallands and the OCS. It also proposes a number of initiatives toencourage the exploration, development and production of thesereserves.

For starters, the legislation would give the states the go-aheadto regulate oil and gas leases on federal lands in an effort tospeed up the permitting process. States first would have to notifythe Interior Secretary 180 days after the bill is enacted of theirintention to accept this responsibility. Interior would retainauthority over issuance of leases, approval of surface-use plans ofoperations and project environmental analyses.

In an effort to stimulate development of federal lands and theOCS during times of depressed energy, the legislation would giveproducers a royalty credit for oil and gas production when the cashprice of West Texas Intermediate crude oil drops to less than $18per barrel for 90 consecutive pricing days or when the price forgas delivered at Henry Hub, LA, falls below $2.30 MMBtu for 90consecutive days. The credit would be equal to 20% of a producer’scapital expenditures on exploration and development (E&P)activities on federal leases.

Similar royalty credits are proposed to enhance production fromonshore and offshore marginal oil and gas wells when prices aredepressed. It also incorporates a proposal by Sen. Kay BaileyHutchison (R-TX) that calls for tax credits for low-volume marginaloil and natural gas wells. The bill would offer a $3 a barrel taxcredit for oil that is triggered when prices fall to between$14-$17 per barrel. The credit would apply only to the first threebarrels of daily oil production. Marginal gas producers would beeligible for a tax credit of 50 cents/Mcf for the first 18 Mcf ofdaily production when prices fall to between $1.56/Mcf and$1.89/Mcf.

In the Arctic Alaska region, the bill would reduce a producer’s”future royalty or rental obligation” on any federal lease by anamount equal to 1) 10% of the qualified costs of exploratory wellsdrilled or geophysical work performed, whichever is greater; and 2)an by additional 10% of the qualified costs of any exploratorywells that are located 10 or more miles from another oil or gaswell.

Moreover, producers would be able to deduct geological andgeophysical costs related to the exploration or development of oilor gas. The deduction would be made in the taxable year in whichthe expenses were paid or incurred, according to the bill. Onlyexpenses that were incurred or paid after the date of the enactmentof this legislation would be eligible for this treatment.

Susan Parker

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