U.S. MUST REPAIR ITS OIL, GAS FOUNDATION

The U.S. oil and gas producing industry's miseries have attracted token attention in Washington, D.C. That's something. Now the industry must persuade the government to act constructively on behalf of domestic production and related jobs.

Token attention won't help. What producers need from government is restoration of their industry's foundations, which have been corroded by years of official mistakes to the point that the business collapses whenever oil and gas markets slump.

Those foundations are access to the petroleum resource and the chance for capital to generate returns commensurate with the risks of exploration and drilling. By official act, the U.S. has blocked access to its most promising resources. And through the alternative minimum tax (AMT) it penalizes drilling investments.

With limited access to the resource and a deadly disadvantage in the competition for capital, producers in the current market slump are going broke or leaving the country. The industry is hemorrhaging jobs. U.S. crude oil production is falling at a rate exceeding 300,000 b/d each year.

DOLLOP OF HELP

This month, the Senate finance committee added a dollop of AMT assistance to an election year tax relief bill. At least it acknowledged the problem and the role of AMT in it. So much for the good news.

The finance committee's version of AMT would broaden the special energy deduction that Congress made available to independent AMT payers in 1990, eliminate an adjusted current earnings complexity for intangible drilling costs, and increase the IDC deduction limit to 70% of income from 65%. In view of what the government has done to drilling cost and capital recovery over the years, this is like stealing a dollar, returning a quarter, and calling things even. It offers little help to producers. President Bush will veto the bill anyway.

Industry can only hope that Bush will demand thorough AMT repair. In recent campaign speeches the President has supported the principle of AMT relief for producers without saying much about the form it might take. Producers should offer some advice before the President, in one of his characteristic legislative compromises, settles for something as diluted as the Senate offering. To have meaningful effects on U.S. drilling, production, and jobs, a relief measure must exclude all IDCs and percentage depletion from the AMT bite and do so for all types of producers.

Bush has not made clear that he would go this far. What he has done is trumpet a series of ideas and initiatives that aim mainly at broadening markets for natural gas. The measures have merit. To the extent of their success in raising gas demand they would indeed help producers and other sectors of the gas business.

REASONS FOR SKEPTICISM

But what about those foundations of the producing business?

Just a month ago, the Senate passed an energy bill that neither fixed the AMT drilling penalty nor approved leasing of the Arctic National Wildlife Refuge Coastal Plain. And earlier in his administration, the President suspended most federal offshore leasing to avoid conflict with environmentalists.

U.S. producers thus have reason to be skeptical about this new attention to their problems. No one in or aspiring to high elective office has yet shown sufficient appreciation for domestic production or alarm over the producing industry's collapse. The government must reverse course. It must quit taxing drilling expenditures and foreclosing resource development on federal land. Anything less is political tokenism.