COMMENT DEVELOPING PLOWBACK CAPITAL FOR U.S. ENERGY DEVELOPMENT

Frank M. Burke Jr.
Executive Consultant
Coopers & Lybrand
Dallas

As Congress considers changes in U.S. national energy policy, it must keep in sight the goal of reversing America's trend toward increased dependence on imported oil.

It would not be difficult to create revenue neutral or revenue positive tax provisions that will produce the capital formation necessary to expand U.S. exploration and development.

Certainly, the situation calls for far more than one tax provision.

America is the most drilled country in the world, and if we are going to create significant new reserves we'll have to explore federal lands that currently are off limits.

But solving the environmental considerations involved will take time, while the need for capital can be addressed immediately.

Ideally, Congress and the petroleum industry would work together to create a new system of petroleum taxation that would have the required capital formation characteristics.

Percentage depletion and intangible drilling costs, the main tax incentives for U.S. drilling for many years, are of practically no use in encouraging investors to sink their money into U.S. oil wells.

In fact, as long as the present energy tax system continues, with its political liabilities and ingrained opposition, the U.S. petroleum industry will never achieve the level of capital required to do the necessary job.

PLOWBACK FEATURE

Congress is not positioned to design and enact a new petroleum tax system now.

Instead, it should immediately pass a tax provision allowing oil and gas producers to sell reserves--U.S. or non--U.S. and pay no tax on the proceeds as long as they are reinvested, or "plowed back," into U.S. exploration or development within a reasonable time-as long as 3 years.

Such a provision would be much like the current law regarding plowing back the gain on the sale of a personal residence into a new home. It also would be similar to current laws governing the sale of radio and television stations in certain situations, as well as for sales of stock to employee stock ownership plans.

Certainly, a provision encouraging reinvestment in U.S. petroleum development should have at least the same importance as existing laws for plowback.

THE BENEFIT

Benefits of an energy plowback provision go beyond increasing production. Such a measure would encourage sales of reserves that otherwise would not occur, bringing non-U.S. capital into the U.S. energy market and attracting public utilities and industrial users seeking stable supplies.

A logical argument can easily be made that development of new production would increase tax revenues.

Our energy problem requires increased U.S. exploration, significant improvements in our transportation and refining capabilities, and development of alternative sources of energy.

Thus, qualified plowback investments could include not only spending for geological and geophysical costs, intangible drilling costs, and equipment costs, but also expenditures for certain alternative energy, refining, and transportation projects. Outlays for new secondary and tertiary recovery projects also must be included.

To preclude tax free investment in undeveloped oil and gas leases without further activity, the allowable amount of new undeveloped leasehold costs qualifying for plowback treatment should be limited to a percentage of the total amount of other qualified investments.

If producers have the choice between paying taxes on the proceeds of selling reserves or investing the money tax free in new development projects of the types we have cited, they can afford to look at sources of production that currently aren't feasible.

They will be more inclined to sell, and new classes of investors will be more inclined to buy.

THE CURRENT PICTURE

The alternative of doing nothing has put us in our current situation.

U.S. energy consumption increased significantly during the past several years. Production continues to decline. Our refining and energy transportation infrastructure needs significant improvements.

Meantime, America's increasing dependence on imported oil is making us a debtor nation. Capital to create new U.S. energy sources is a key ingredient in attacking our energy crisis.

Congress must act immediately.