Testifying at the Senate energy committee hearing (left to right) were EIA Administrator Jay Hakes, Exxon Chairman Lee Raymond, John Lichtblau of the Petroleum Industry Research Foundation Inc., Rowan Cos. Chairman Bob Palmer, and North Dakota Gov. Edward Schafer.The U.S. Congress is beginning to react with legislation to help smaller producers survive the current crude oil price depression.
Rep. Wes Watkins (D-Okla.) refiled his bill that would allow marginal production a maximum $3/bbl tax credit when oil prices fall below $14/bbl, or 50¢/Mcf if gas prices fall below $1.56/Mcf.
The credit would have a 10-year carryback and apply against both regular and alternative minimum taxes. It would apply only to future production.
Sen. Kay Bailey Hutchison (R-Tex.) and 18 other senators filed a similar bill for marginal production. A tax credit would begin when oil prices dropped below $17/bbl, reaching a maximum of $3/bbl for the first 3 b/d of production when prices hit $14/bbl.
For gas, the credit would begin when prices fell below $1.89/Mcf and reach a maximum of 50¢/Mcf for the first 18 Mcfd of production when prices hit $1.56/Mcf.
Those credits also would have a 10-year carryback and apply to all regular and alternative minimum taxes.
The Hutchison bill also would give independent producers an incentive to restore shut-in wells, by exempting them from taxes on the restored production for 5 years.
The bill would allow producers to expense geological and geophysical costs. And it would update the enhanced oil recovery tax credit by making more techniques eligible.
Sponsors will seek a hearing for the Hutchison bill before a Senate tax subcommittee chaired by Sen. Don Nickles (R-Okla.)
Rep. Lamar Smith (R-Tex.) filed a bill to require the Department of Energy to buy 24 million bbl of oil for the Strategic Petroleum Reserve, for a fill rate of about 65,000 b/d over a year (see related story, p. 28). The SPR has spare capacity of about 117 million bbl.
Hearing
Sen. Frank Murkowski (R-Alas.), energy committee chairman, recently held a hearing on how the oil price depression is hurting producers.Murkowski, who had cosponsored the Hutchison bill, said even more should be done.
"I intend to work with senators from producing states to craft a series of proposals addressing regulatory and other problems.
"The federal government must not allow our marginal producers to go under. We are talking about 15% of our nation's production, over 1 million b/d. Once those wells are shut in, they are shut in forever."
He said, "Our domestic oil industry is in serious trouble. Oil companies are laying off workers in droves. Exploration and drilling budgets are way down. Drilling contractors are cutting back to the bone. Marginal and stripper wells are being shut in.
"To quote a recent report by the John S. Herold Inc. company, 1998 was 'catastrophic' for the U.S. oil industry and 'nothing short of murderous for investors.'
"The median stock price of the 279 largest oil companies fell 36%. As a result, we are seeing numerous mergers and consolidations, which has significant implications for the nation's energy security and jobs. Thirty (petroleum) companies merged or were acquired last year," Murkowski said.
Ways to help
"Congress can't repeal laws of supply and demand, but there are some things we can do to help our oil industry. For example, the oil industry could be given greater access to onshore and offshore federal lands here in the U.S."The Strategic Petroleum Reserves could be refilled-perhaps using stripper oil-to put back the 28 million bbl the administration sold.
"The Department of the Interior could give a blanket lease term extension for leases on federal lands. The Minerals Management Service could craft a fair rule for calculating federal royalties-not one that penalizes producers for producing oil.
"There are also numerous tax issues that could be considered-for example, reform of the alternative minimum tax rules. We also need to consider tax credits for marginal wells, to reactivate wells, and for environmental expenditures. We could also consider allowing the expensing of exploration costs, as well as expanding the tax credit for enhanced oil recovery."
Causes
Jay Hakes, head of the Energy Information Administration, said his agency's latest data shows regular gasoline prices recently have averaged 93.6¢/gal, about $1.33/gal less than motorists paid in 1981 (when adjusted for inflation).He said the decrease in oil prices occurred in two steps. The first $5-6/bbl represented a retreat from high prices at the end of 1996, before Iraqi crude oil returned to global markets. By spring 1997, prices settled briefly into the historical trading range of $17-21/bbl that has existed since 1986.
Hakes said the second $8-9/bbl decline began at the end of 1997 with the drop in oil demand caused by the Asian financial crisis and continued through 1998 as Iraqi production increased after U.N. Security Council limits were raised.
"Average refiners' crude oil prices have not been this low in real terms since 1972 and in nominal terms since 1978."
Oil price outlook
Hakes said a quick rebound in prices is unlikely. He said EIA predicts the price of West Texas intermediate crude oil will reach $15/bbl by the end of 1999, but it is unlikely to return to the historical $17-21/bbl range until the end of 2000 or in 2001.Lee Raymond, Exxon Corp. chairman, said, "A gradual restoration of the supply/demand balance should eventually occur, as Asian economies recover and surplus stocks are drawn down over time.
"In the foreseeable future, supplies should be adequate to meet this resumption in demand growth. Organization of Petroleum Exporting Countries members have reserve production capacity clearly sufficient to meet any likely short-range demand scenario.
"In addition, new non-OPEC sources under development (e.g., deepwater U.S. Gulf of Mexico, West Africa, the Caspian, Brazil, Colombia) will offset natural declines in more mature regions, even if exploration and development budgets are temporarily reduced as a result of the weak price environment."
John Lichtblau, Petroleum Industry Research Foundation Inc. chairman, warned that "while the present price collapse is temporary, it may last long enough to do permanent damage to the oil industry, if no action is taken now."
He said buying oil for the SPR would have "an immediate short-term effect on prices."
Iraqi influence
Steve Layton, Equinox Oil Co. president and CEO, testified for the Independent Petroleum Association of America."I have never seen the domestic petroleum industry facing a more complicated and potentially devastating set of problems than it now does. The industry has faced a low oil price crisis for the past year, but today's problems are very different and far more threatening than the ones that began the problem."
He said IPAA soon would give Congress a list of regulatory and legislative actions that could reduce costs for oil wells on onshore federal lands.
He said Congress and the administration also need to grapple with the issue globally.
"Last year, this country discouraged the efforts of Venezuela, Mexico, and Saudi Arabia to respond to low oil prices. The result has been to turn the international market over to Saddam Hussein."
Layton said Iraq now controls world oil prices. He explained that world oil prices are essentially set by the last barrel sold.
"A year ago, Iraq exported about 700,000 b/d. In December 1998, it exported about 2.3 million b/d. By March, it will have another 500,000 b/d of capacity on line.
"Iraq was the only OPEC country to boost its oil revenue in 1998. As other OPEC countries have reduced production to stabilize oil prices, Iraq has become the swing producer of world oil. The swing producer sets the price."
Layton said, "We must recognize that the current U.N. sanctions policy must be revisited and restructured. We must find a way to truly supply suffering Iraqi citizens with the humanitarian support they need. At the same time, we cannot continue a system that hands Saddam Hussein control of our future and that of his Arab neighbors."
Layton stressed the White House should make "a statement to the country and the world that we will not stand by and watch the domestic industry be destroyed."
Other independents
Dewey Bartlett Jr., president of Keener Oil & Gas Co., Tulsa, detailed how low oil prices have hurt his company."In early 1997, our company was selling its crude oil for $25/bbl, the price of gasoline was about 50¢/gal higher, and our economy was booming. Our company was spending $1.3 million/year to explore for new oil or gas production, and our debt was minimal.
"This year, we sell that same oil for $8/bbl, and we anticipate spending less than $100,000 for exploration expenses. For decades, we have averaged drilling 7-10 wells/year. This year, we plan to drill one well. We simply cannot afford to spend the money that is vital for our long-term ability to stay in business."
Gary Fonay, a co-owner of Lynx Petroleum Co., Hobbs, N.M., said the oil price drop has cast southeastern New Mexico into a depression.
For instance, his firm has laid off three employees, and a large well-service company in the area has reduced its staff to 92 from 175.
Fonay said area schools have seen enrollment drop about 7% as people leave town looking for work elsewhere.
He said tax relief wouldn't help most producers, because they will have no profits to tax. He said the 10-year carryback provision of the marginal well tax credit bill would help producers recoup taxes previously paid.
Service and supply
Robert Palmer, Rowan Cos. chairman, president, and CEO, said that, just last year, major oil companies were encouraging drilling contractors to expand as rapidly as possible."To enable drilling contractors to finance this massive expansion, many oil companies were willing to enter into long-term contracts, each valued at several hundred million dollars.
"During 1998, the total value of rigs under construction, or undergoing major upgrades, approached $14 billion. Thousands of new employees were being hired and trained.
"What a difference a year makes. No one today is contemplating new capital expenditures for expansion. The current relationship between many oil companies and their contractors is not good. Long-term contracts are being challenged by the customers, often on the narrowest of technical or legal issues, in an effort to cancel or renegotiate the contracts at lower prices."
Palmer said that, a year ago, there were 170 mobile offshore rigs active, and now there are 121, nearly a 30% drop.
He said the federal government should provide industry with a consistent Outer Continental Shelf policy that results in a reliable, predictable leasing schedule.
And he said, "Congress needs better oversight of the regulatory agencies that tend to frustrate the industry's effort to explore and develop leases."
Danny Biggs, vice president and co-owner of Pickrell Drilling Co. Inc., Great Bend, Kan., testified as president of the National Stripper Well Association.
He said Congress should add oil to the SPR by appropriating funds on the upcoming emergency supplemental appropriations bill, and in the fiscal year 2000 appropriations bill.
"We also support the investigation of an initiative to fill the SPR by involving a federal royalty in-kind program and possible forward purchases of oil made on the futures market."
Biggs said, "DOE should let the consumers know what the real cost of gasoline is, adding the military cost" (of protecting Middle East oil supplies) and other costs."
Copyright 1999 Oil & Gas Journal. All Rights Reserved.
