President George W. Bush signed an economic stimulus package earlier this month designed to jump-start business investment that also gives the oil industry some targeted tax relief.
The new law extends the suspension of the net income tax limitation on percentage depletion for marginal wells through 2003, according to the Independent Petroleum Association of America. The provision expired December 2001.
Under pending comprehensive energy legislation, the provision to extend the suspension is also included but for longer periods. The energy bill also may include other domestic production incentives, but the ultimate fate of that legislation is still unknown, with consensus remaining elusive as Congress debates the measure into the spring.
The new stimulus law, meanwhile, includes a net operating loss carry-back provision and an accelerated depreciation provision that IPAA says also will benefit independent producers.
Policy changes
The president's May 2001 National Energy Policy report outlines a number of policy changes intended to encourage domestic oil and gas production and reduce foreign oil dependence. Some options to meet that goal include greater access to public lands and streamlined environmental regulations. What it does not include are tax relief measures. The White House so far has largely resisted the call by independents to dramatically change the tax code because of budget concerns.
A Mar. 13 report by the Congressional Research Service on the changing face of US oil production notes the White House recognizes the increasing role nonmajors or small oil and gas companies may play in boosting US supply.
IPAA sees the recent studies by CRS, EIA, and the exhaustive 1999 report done by the National Petroleum Council as concrete examples why US policy should encourage access to the resource base and access to capital. Industry also has a pressing need to improve technology and to develop an adequate workforce, the association said.
Oil and gas interplay
In addition, IPAA is urging US officials to be mindful of the interactions between natural gas and oil that can impact domestic energy production.
"Clearly, one issue that affects the success of domestic natural gas production is the price of oil, because of the effect it has on capital availability," said Lee Fuller, IPAA vice-president of government relations. "Correspondingly, one of the aspects of the 1998-99 oil price crisis was the strong focus on natural gas development during the 1999-2000 period as oil prices recovered. Here, what we saw was, despite strong oil prices, domestic drilling focused on natural gas," he said.
While natural gas rig counts went to record levels during 1999-2000, domestic oil rig counts—which were near 400 in 1997 and dropped to about 100 at the worst of the crisis—never exceeded 250 when oil prices recovered, Fuller said.
"This suggests that domestic-focused capital will go first toward natural gas, a North American market, rather than oil, where the prices are largely determined by a world market dominated by other countries."
