Independents ask US Congress to keep marginal tax break

Maureen Lorenzetti
OGJ Online

WASHINGTON, DC, May 3 -- Independent oil producers want the US Congress to continue a marginal tax credit due to expire this year, industry told a House Subcommittee on Select Revenue Measures Thursday.

"Tax incentives can and will help create an environment that will offer the possibility of a profit through spending of risk capital," Dan Wallace, owner of the Seminole, Okla., independent Columbus Oil Co., told the subcommittee. "Let us not forget all wells become marginal at some point. Marginal production is the foundation the independent producer works from to finance their operations."

The Bush administration 2002 budget plan, now before Congress, proposes a 1-year extension of a provision suspending the 100% of net income limitation for marginal oil and gas wells, Joseph Mikrut, tax legislative counsel of the Department of the Treasury told the subcommittee.

Support to continue the incentive is also expected from Capitol Hill. In 1997, Rep. Wes Watkins (R-Okla.) added language in a tax bill that suspended the net income limitation. Final legislation made the tax break temporary, and it is due to expire this year.

Mikrut's remarks were similar to testimony he gave the House Committee on Ways and Means in March (OGJ, March 12, 2001, p. 31). Treasury noted that total incentives for oil and gas production total $9.8 billion for fiscal years 2002-2006. Most drilling incentives are aimed at small independents and not integrated companies.

The White House has so far resisted calls by independents to make permanent the net income limitation allowance or to dramatically expand tax relief measures aimed at boosting marginal wells.

However, a pending White House energy task force report is expected to direct the secretaries of Energy and Interior departments to seek regulatory reforms that encourage domestic production. Initiatives widely expected include expanding access to federal lands, encouraging the government to take oil in-kind instead of demanding cash royalty payments, and buying oil from marginal wells for the Strategic Petroleum Reserve.

Pending Senate energy bills offered by both Democrats and Republicans also offer counter-cyclical tax incentives designed to boost production when market prices discourage capital investment.

In separate testimony, an official with the Energy Information Administration told the subcommittee that through 2020, continuing growth in the US economy is expected to stimulate more energy demand, with fossil fuels remaining the dominant source of energy.

"As a result, our dependence on foreign sources of petroleum is expected to increase and domestic natural gas production and natural gas imports are expected to grow significantly," said Mary Hutzler, director, Office of Integrated Analysis and Forecasting of EIA.

Contact Maureen Lorenzetti at

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