Pending congressional energy bills focus on deepwater incentives

Deepwater drilling in the US Gulf of Mexico would get a huge boost under pending Republican energy proposals before Congress. Two House committees this week sent legislation to the House floor designed to keep producers drilling in the US instead of moving to overseas plays.


By Maureen Lorenzetti
OGJ Online

WASHINGTON, DC, July 19 -- Deepwater drilling in the Gulf of Mexico would get a huge boost under pending Republican energy proposals before Congress.

Two House committees this week sent legislation to the House floor designed to keep producers drilling in the US instead of moving to overseas plays. The deepwater provisions are part of a larger push by leaders from the Republican-led House to have the full chamber consider broad energy legislation next week that addresses key parts of the White House's energy blueprint. Democrats from oil producing states also support expanding deepwater incentives.

Most of the media attention has been focused on controversial attempts by the House Committee on Resources to open a portion of the coastal plain of the Arctic National Wildlife Refuge for exploration. But deepwater production incentives are equally, if not more important, to producers because they would be a more realistic policy victory.

Along with ANWR, the Resources bill that the full House will consider directs the National Academy of Sciences to study whether the government should further expand production incentives for marginally economic Gulf of Mexico fields.

NAS would conduct an analysis and review of Gulf of Mexico oil and natural gas resource assessments made by industry and government. The nonpartisan group would compare the financial incentives offered in the US and "recommend what level of incentives for all water depths are appropriate in order to ensure that the US optimizes the domestic supply of oil and natural gas from the offshore areas of the Gulf of Mexico that are not subject to current leasing moratoria."

The Resources bill also would revive a Clinton administration-era program that provided deepwater royalty relief for western and central Gulf of Mexico leases.

For economically marginal fields, it would suspend royalties for the first 17.5 million boe for fields in water of 200 to 400 m, 52.5 million boe for those in 400 to 800 m of water, 9 million boe for those in 800 to 1,600 m of water, and 12 million boe for those in more than 1,600 m of water.

White House reservations
Interior Sec. Gale Norton has said her department supports incentives for "ultra" deepwater fields in more than 800 m of water but indicated the White House has reservations about supporting relief at lower levels.

During his campaign, President George W. Bush had criticized prolonging the Clinton program, saying it "would extend a multimillion tax break for oil companies currently conducting deep oil drilling in the Gulf Coast. I believe that the royalty moratorium ought to happen when the price declines. We ought not to have moratoriums when the prices are high."

However, Norton has not ruled out the possibility the administration may accept a compromise, such as allowing deepwater royalty relief when oil and gas prices fall below a certain level.

Supporters of the deepwater royalty relief program, administered by the Minerals Management Service, argue it has increased and accelerated domestic oil and gas production and royalty payments to the Treasury. They say if Congress fails to renew or replace the program, US production could face a serious decline.

Former Sen. Bennett Johnston (D-La.), the author of the 1995 legislation, told the Senate Committee on Energy and Natural Resources, "Should the Congress fail to renew the deepwater royalty relief program, the US risks compromising its most promising oil and gas province."

Sen. Frank Murkowski (R-Alas.), the ranking Republican on the committee, proposed an extension of the royalty relief program in a comprehensive bill he introduced in February.

Support for deepwater also has extended to other committees.

The House Committee on Science has urged congressional budget leaders to allocate $1 billion over 10 years to help industry develop deepwater gas drilling technology for waters of 800 m or greater.

For fossil energy research (including fuel cells but not coal) the Science committee recommended $282 million in fiscal 2002, $293 million in fiscal 2003, and $305 million in fiscal 2004. Along with deepwater technology, a portion of those funds would go for research on reservoir management, pipeline infrastructure, and environmental protection.

Industry officials generally praised the Science committee action, although it is unclear how much of the funds will be allocated. Lawmakers who control the budget are seeking to fund the Department of Energy's fossil fuel program at historical levels, which are considerably smaller than the Science's committee's wish list.

A pending spending bill would give DOE's fossil energy office $56 million for oil research and development, up $26 million from the White House's request and $1 million above fiscal 2001 funding. For gas R&D, $40 million is earmarked, $19 million over the White House request but $5 million below last year's levels (OGJ Online, April 9, 2001).

Tax initiatives
Another issue which enjoys more support on Capitol Hill than at the White House is expanded tax breaks for marginal production.

The House Ways and Means Committee sent to the floor a broad energy tax bill that would include provisions not endorsed by the White House. Budget estimates are that the marginal well incentives could cost $8 billion over 10 years. White House officials say that price tag is too high. Under the administration's energy plan, there would be a study of marginal production but not direct relief.

Nevertheless, House lawmakers appear undaunted. Among the expanded tax breaks are a new $3/bbl credit for the production of oil and 50¢/Mcf for gas from marginal wells. The maximum amount of production on which credits could be claimed would be 1,095 bbl/year or the equivalent. The credits would phase in when prices fell below $18/bbl or $2/Mcf.

Other tax items would allow producers to deduct delay rental payments, change the limit on percentage depletion for independent producers to no more than 65% of the taxpayer's overall taxable income, and extend the suspension of the 100% net-income limitation for marginal wells another 5 years.

The Ways and Means committee also approved the expensing of geological and geophysical costs, allowed net operating losses from oil and gas properties to be carried back for up to 5 years, allowed "business energy credits" to be applied against the alternative minimum tax , repealed the AMT preference for intangible drilling costs, and repealed the minimum tax limitation on enhanced oil recovery credits.

In the Senate, Kay Bailey Hutchison (R-Tex.) and 20 other senators Thursday proposed a marginal relief bill similar to the House measure. Hutchison said the bill would encourage operators to reopen 75,000 oil wells capable of producing 250,000 b/d.

The bill also would allow operators to deduct geological and geophysical expenses and delay rental costs as ordinary business expenses.

The Democratic-controlled Senate is not expected to vote on broad energy legislation until early fall, although some narrow pieces of legislation may be considered before the August recess, congressional sources predict. Deepwater incentives and tax issues are expected to be items of contention.

Conservation issues
The House Committee on Energy and Commerce reported energy legislation this week to encourage conservation and streamline gasoline rules. Although those measures have broad support, they also may be changed on the floor.

The Energy Advancement and Conservation Act of 2001 would reduce light truck fuel consumption by 5 billion gal over 6 years, provide incentives for cleaner fuels and alternative fueled vehicles, promote clean coal technologies, and simplify regulation of nuclear and hydroelectric power.

The committee voted to retain an Environmental Protection Agency rulemaking to phase-in low sulfur diesel fuel. The panel rejected calls to allow states to sidestep oxygenate requirements for reformulated gasoline.

Oil industry officials predicted the battle over RFG formulas, like ANWR exploration, likely would resurface on the House floor.

California plans to ban the fuel oxygenate methyl tertiary butyl ether from gasoline but does not want to be forced to use fuel ethanol to meet the standard. Fuel ethanol is the most prevalent and commercially available alternative to MTBE. However, California officials question whether ethanol supplies are sufficient.

Contact Maureen Lorenzetti at Maureenl@ogjonline.com.

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