The U.S. Congress set a landmark of sorts last month when it approved royalty relief for economically marginal oil and gas production in deep water of the Outer Continental Shelf. The only possible justification for this move, which President Bill Clinton signed into law, is to increase production within U.S. borders. Congress passed the measure anyway. Celebration is in order.
Opponents of the measure said the likely production gains wouldnt significantly improve the U.S. trade balance in petroleum. They were right. Supporters of the measure said any gain in domestic production is worth pursuing. They were right, too.
Important distinction
The government thus seems to have made an important distinction and seen that oil and gas production has inherent value that accrues to the public good. New production represents economic growth. It turns a natural resource into money. It creates wealth for the governments two sources of tax revenue: individuals and corporations. These domestic economic and fiscal advantages need no context in international trade, however valid that context may be.
Deepwater royalty relief represented an opportunity for the government to encourage production and collect production-related revenues where otherwise there would be none. For the government, it made good business sense. The Congressional Budget Office earlier estimated that the bill would generate $130 million in federal royalties despite the early-production royalty holidays. The amount wont balance the federal budget. But it compares handsomely with what the government could have hoped to collect if it had not granted relief: nothing.
As other countries have shown, good economic things happen when governments relax fiscal terms in order to stimulate oil and gas production.
But this, like all hopeful developments, has its drawbacks. The industry will have to resist charges that deepwater royalty relief amounts to a subsidy. It wont be easy.
The subsidy charge was common in the years Congress took to pass the relief measure. Rep. George Miller (D-Calif.) made it often. To him and other industry detractors, the public has now given oil companies something and received nothing of value in return.
The mischaracterization comes at a time when a grab bag of tax mechanisms called corporate welfare has come under attack from many sides. The issue casts suspicious attention on tax accounting methods peculiar to the oil and gas and other extractive industries. It doesnt help to have fuel ethanol makers, who will say anything to defend their products 54/gal federal tax credit, depicting oil and gas accounting as a network of subsidies.
And now deepwater royalty relief.
For producers, therefore, the fight may not be over. Producers will have to continue to defend the measure as good business for government that costs taxpayers nothing and that represents sound strategy in a world where competition for upstream capital is intense. At the same time, they should refresh their defenses of accounting procedures that aim not at putting unearned money into their pockets but at enabling them, like other businesses, to deduct expenses as they make them and avoid paying taxes on invested capital.
A step forward
Enactment of deepwater royalty relief recognizes not just competitive realities of the international upstream business but also the stake that the U.S. government and its taxpayers have in it. Energy policy thus moves a small but very important step forward. Another such step would establish a trend. In the current administration, approval of leasing of the Arctic National Wildlife Refuge coastal plain may be too much to ask. But the federal government owns other land for which terms and permitting conditions might be improved.
Meanwhile, Congress could assure producers and other investors that it knows a subsidy when it sees one by repealing the ethanol credit.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.