"...If we don't slow abandonments and improve production rates in this decade, there won't be much of a domestic industry left in the next one to benefit from basic research. "
That statement comes not from independent producers, who have been saying similar things for some time, but from U.S. Deputy Energy Sec. W. Henson Moore. It correctly recognizes a serious problem-a "sobering reality"-and accompanies fitting remedies.
Moore proposes a major emphasis shift for the Department of Energy's petroleum research and development. DOE realizes that its traditional, long range, basic research into enhanced oil recovery is in jeopardy. For immediate economic reasons, industry is permanently plugging wells that future EOR will need. DOE says nearly 60% of the known crude remaining in the Lower 48 might be in abandoned or inactive oil fields by 2000 if crude prices reach $30/bbl. If prices remain at current levels as much as 70% of the resource base might be abandoned.
DOE seeks $54 million in fiscal 1991 for oil and gas R&D, twice what it requested and $10 million more than what Congress approved for fiscal 1990. Priority will go to projects promising results within 5 years.
Two cheers. The urgency is appropriate, the R&D emphasis shift sound. Industry should support the initiative.
But 54 million research dollars won't do much for an abandonment rate rooted in the ruins of post-1986 production economics and U.S. tax law. DOE can't fix what's wrong with oil prices. It can make a stronger appeal for better tax treatment of marginal production.
DOE calls for repeal of the "transfer rule," which denies percentage depletion for production that independents buy from major companies. That would help-but not enough. To meaningfully slow the abandonment rate, Congress must relax alternative minimum tax (AMT) provisions now ravaging economics of marginal wells.
A bill by Sen. Robert Dole (R-Kan.) and Rep. William Clinger Jr. (R-Pa.) makes the attempt. It would repeal the transfer rule, increase the property net income percentage depletion limit to 1 00% from 50%, and for marginal production eliminate percentage depletion as a preference item subject to AMT, repeal the 65% taxpayer income limitation, and drop the 1,000 b/d limit.
The bill faces tough odds. Many members of Congress don't want to tamper with the Tax Reform Act of 1986, which put the heavy AMT bite on oil and gas producers. But if they agree that abandonments and production declines constitute a "sobering reality," they must both approve DOE's research budget and dismantle harmful tax provisions. Without AMT relief, research aimed at salvaging marginal production is just a welcome gesture.
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