Officials from the five largest publicly traded major oil companies may have told US senators in a Nov. 9 hearing that their firms don’t need incentives in the recently enacted energy law. But they weren’t speaking for independent producers, representatives of two leading associations quickly pointed out.
“It’s an issue we’ve always faced. I’m not trying to suggest the majors aren’t reinvesting in the United States. They are,” said Lee Fuller, vice-president of government relations at the Independent Petroleum Association of America. “But most of their exploration and production is outside the United States. Their investments also are more diversified because they include refining and marketing.”
Independent producers, on the other hand, drill 90% of the oil and gas wells in the US and account for 82% of the gas and 69% of the oil produced domestically, noted Andrew Bremner, government affairs director at the Independent Petroleum Association of Mountain States.
Heavy reinvestment
They also typically reinvest 100% or more of their cash flow in increasing domestic supplies, he observed. Attempts to recover so-called “windfall” oil profits during the 1980s “extracted $40 billion from the industry that could have been invested in domestic production,” Bremner said.
By the time it was repealed, he noted, the tax had reduced domestic oil production and increased imports.
“The basic message would be that any dollars taken away from producers are dollars that could be reinvested in producing oil and gas,” Bremner told me. “Our members are domestic, so we employ Americans and create benefits for local communities and royalty revenues for national and state governments.”
He said studies by the Tax Foundation show state and federal governments are the real beneficiaries of strong company earnings. “Total government oil and gas tax revenues have increased steadily for over 20 years, while oil company revenues have been extremely volatile, with companies producing profits far below the government’s tax revenue levels in some years,” he maintained.
One key provision
Like the majors, however, independent producers don’t directly benefit much from tax incentives in the new energy law, Fuller pointed out. “The provision dealing with geologic and geophysical expenses is the most important. It only applies domestically. It would not have as large an impact on the majors because a lot of their G&G costs are outside the United States,” he said. “This provision is important because it’s a way to encourage the recovery of largely exploratory expenditures, which get reinvested in the United States by independents.” And reinvestment to produce more domestic oil and gas takes time, Bremner emphasized. “The energy we consume to make dinner tonight is the result of investments made years ago by energy companies. Knee-jerk policies that failed in the past will discourage investment in the energy projects of the future,” he said. ✦