DPC chairman warns against tax, royalty increases

Increasing oil and gas producers' tax and royalty costs to fund future conservation and alternative energy efforts would also have near-term supply impacts damaging to consumers, the chairman of the Domestic Petroleum Council warned on Jan. 16.

Jan. 17, 2007

3 min read

Nick Snow
Washington Correspondent

WASHINGTON, DC, Jan. 17 -- Increasing oil and gas producers' tax and royalty costs to fund future conservation and alternative energy efforts would also have near-term supply impacts damaging to consumers, the chairman of the Domestic Petroleum Council warned on Jan. 16.

Charles Davidson, who also is chairman, president, and chief executive of Noble Energy Inc., Houston, made that point in response to provisions in HR 6, which House Ways and Means Committee Chairman Charles B. Rangel (D-NY) and Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.) introduced 4 days earlier.

The largest US independent oil and gas producers, represented by DPC, "invest more than they earn each year—over the past 5 years, twice their earnings—to apply leading-edge technology to find and develop energy supplies that are essential for our economy and our consumers," Davidson said in a letter to House members. "The good news is that especially with respect to natural gas, we have abundant resources in North America. With access to them, and with stable tax and other policies, we can approach self-sufficiency."

Drilling is at record levels, reserves are growing, and production is essentially steady, according to Davidson.

"There is movement toward accessing more-promising areas that will make substantial improvements in our energy outlook (including the offshore as a result of the Gulf of Mexico Energy Security Act passed by Congress and signed into law late last year). And our energy permitting and related processes are becoming more efficient," he said.

"We must do more in all these areas, not slow our progress or reverse it."

Delicate balance
Recently mild weather has masked a delicate gas supply-demand balance while allowing producers to increase reserves, he continued. Denial of access to promising areas has forced producers to focus their efforts on smaller reservoirs and formations that are more difficult to produce.

"The result is that well decline rates are 32%/year and accelerating. That means we must drill more wells every year just to maintain production levels," Davidson said.

DPC members and other US independent producers are face rising drilling and service costs as they pursue these projects, he added. Meanwhile, earnings, which had reached a level that produced adequate returns after years of underperformance relative to other businesses, are heading downward with falling oil and gas prices.

"Increasing taxes and royalties on these companies now will almost certainly force reductions in drilling budgets. That will quickly lead to falling production and higher prices for all gas consumers," Davidson warned.

In its latest short-term energy outlook, issued on Jan. 9, the US Energy Information Administration said warm weather in December reduced space-heating demand and kept gas prices from rising. "With about 16% fewer heating degree days than normal in December, the Henry Hub spot natural gas price average $6.97/Mcf for the month," it said.

In the longer term, the federal energy forecasting and analysis service expects Henry Hub spot prices to increase from an average $6.94/Mcf in 2006 to $7.06/Mcf in 2007 and $7.72/Mcf in 2008.

EIA currently expects domestic gas consumption to grow 2.4% in 2007 from 2006, when demand was 1.3% lower than in 2005. US gas production, which grew 2.4% in 2006 from 2005, is forecast to increase by a more moderate 1.9% during 2007, according to the January 2007 Short-Term Energy Outlook.

Contact Nick Snow at [email protected].