The proper kind of help

Slumping prices of crude oil and natural gas warrant the type of action that producers are requesting of the U.S. government. But producers should make their case carefully.

They should, for example, avoid the words "producer relief." They should instead seek preservation of the tax base. In most cases, responses would be the same.

Producers shouldn't ask for producer relief because they won't get it. Voters are not teary with sympathy for people hurt by $12/bbl oil.

Above all, producers shouldn't ask for gifts from other parts of the economy. To justify such subsidies, they would have to argue that their business is more important than others. It's fine to think that. Producers just shouldn't expect anyone else to share the sentiment-let alone contribute money to it.

The long view

What producers have a right to expect is that their government take the long view of U.S. fiscal interests. Short-term tax relief, for example, can kick-start operations-and eventual tax revenues-that wouldn't otherwise exist.

In the Gulf of Mexico, an easing of royalty rates for deepwater production helped start a drilling boom unimaginable under the standard regime. The government gave up something in the way of royalty rates and got back much in the way of bonuses, rents, total royalties, and income taxes.

Similarly, short-term tax relief can boost government revenues over time by keeping economically threatened activities afloat. It is within this framework that producers should seek help for marginal oil and gas production. The government's proper motivation is protection of future tax revenues.

In the case of marginal oil and gas wells-about half a million of them in the U.S.-the stakes are often do or die, especially for oil. A well producing 15 b/d or less when it is shut in for economic reasons often isn't worth restarting when prices rebound. So the production stream and associated tax payments vanish forever. With them go access to a hydrocarbon deposit that might someday be amenable to enhanced recovery.

Independent Petroleum Association of America notes these relief initiatives now before Congress:

• A marginal well tax credit. Designated wells would receive tax credits of $3/bbl for the first 3 b/d of production and 50¢/Mcf for the first 18 Mcfd of gas, phasing in and out between prices of $14-18/bbl and $1.40-1.80/Mcf.

• Incentives for recovery of inactive wells. Independent producers restoring flow from wells abandoned for at least 2 years before enactment of the legislation would be exempt from associated federal income tax.

• Current expensing of geological and geophysical (G&G) costs. Instead of capitalizing and depleting G&G costs, producers would be able to charge them to expense as incurred. The tax liability doesn't change over the life of production; the producer simply gets to take advantage of the time value of money.

• Clarification that delay-rental payments are deductible expenses. Last September, the Internal Revenue Service asserted that, contrary to common practice, delay rentals should be capitalized and written down over the life of production.

• Incentives for enhanced oil recovery. Availability of a 15% tax credit for enhanced recovery costs would be extended to modern techniques.

Other forms of relief are possible. Discussion has been revived, for example, of the U.S. Petroleum Development Investment Management Corp., under which government loans would launch a publicly traded investment vehicle able to raise funds for oil and gas field development (OGJ, Apr. 27, 1998, p. 26).

Measures to pursue

Any of these measures would represent needed help to producers jeopardized by moribund oil and gas prices. Prospects for passage, however, are poor.

Producers should pursue the measures promising most convincingly to preserve the tax base. And they should focus their arguments accordingly. A familiar logic applies: Some benefit is better than none at all.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.