During the first few weeks of 1992, the U.S. rig count has set a modern record low, crude oil production has lagged year-earlier levels by about 100,000 b/d, and natural gas producers have announced a new round of sales constraints. Layoffs continue in U.S. oil and gas companies, service firms, and oil field suppliers. Last week a large drilling contractor announced plans to mothball 29 land rigs and trim 200 jobs.
Also last week, the Senate energy and natural resources committee reintroduced generally reasonable energy policy legislation that fails for what it omits. In the context of the producing industry's advanced crisis, the bill looks absurd.
TWO BASIC PROBLEMS
When the rig count plunged to its record low 653 the week of Jan. 31, analysts blamed heavy rains in Texas. They also noted that new technologies enable producers to accomplish more with fewer wells and fewer active rigs. True enough. But rainfall and technology do not fully explain the layoffs, the production slides, the dismantling of the producing industry's infrastructure. Neither does a natural gas price collapse, devastating as it has been. A healthy business can struggle through the slumps that visit any market; for U.S. producers, slumps too frequently prove fatal.
The U.S. producing business has two basic problems that have nothing to do with weather or market cycles. Both result from governmental mistakes that energy legislation must correct. Companies by law and regulation cannot explore the country's best geologic prospects. And those subject to the alternative minimum tax (AMT) cannot fully recover drilling costs and capital. Legislation that fails to pull these poison arrows from the producing industry's heart simply misses the point in energy policy.
Oil and gas account for nearly 65% of the energy consumed in the U.S. On that basis alone, oil and gas production should command priority energy policy attention. To have any meaning at all, energy legislation must at least allow leasing of the Arctic National Wildlife Refuge Coastal Plain and exclude intangible drilling costs and percentage depletion from the AMT.
The government must demonstrate that domestic oil and gas production matters to energy policy. It can do so only by leasing the most prospective parts of the federal petroleum resource and by repealing tax code perversions that penalize drilling investments. Anything less would enable politicians to crow about their energy legislation triumph while independent producers go broke and major companies flee to opportunities abroad. The U.S. must not base energy policy on such a damaging paradox.
ACKNOWLEDGING PROBLEMS
The Bush administration at least acknowledges producing industry problems. It recently has started or proposed programs to promote enhanced recovery, boost gas research and use, and ease royalties on stripper wells on federal leases. Those measures help. More than anything, however, producers need top quality leases and freedom to invest without penalty.
Administration officials also continue to support ANWR leasing, whether it comes via an energy policy bill or in separate legislation. But ANWR leasing stands little chance as stand-alone legislation; it must be part of a broad energy bill.
Similarly, a bill by Sen. David Boren (D-Okla.) to grant AMT relief to independents should become a central part of the energy policy package.
Producers should urge Congress to do more than nibble at the edges of energy policy. And President Bush should veto any energy bill that does less than the whole job.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
