US independent producers still have a fair chance of getting tax relief measures from Congress next year, speakers told attendees at the recent Independent Petroleum Association of America annual meeting in Dallas. But more controversial measures, such as an extension of the ban blocking a controversial federal royalty rule, are in trouble.
Sen. Kay Bailey Hutchison (R-Tex.) led the effort to delay the US Minerals Management Service royalty rule this fall (OGJ, Oct. 4, 1999, p. 40). The regulation would revise the method by which oil companies calculate royalties for oil production from federal lands.
A House-Senate conference committee amended her amendment for a 12-month deferral to a provision delaying the regulation for 6 months so that the congressional General Accounting Office can study the issue. Hutchison told the IPAA audience that the oil industry has lost the public relations battle on the royalty issue, showing that industry supporters "need to do a better job of telling our story."
Hutchison and Sen. Pete Domenici (R-NM) say they are optimistic that independents could see some tax relief next year.
Hutchison says senators have a chance of getting tax issues including geological and geophysical cost expensing, alternative minimum tax relief, marginal-well tax credits, and an expansion of depletion allowances-in addition to more general measures such as capital gains and inheritance tax relief.
Several of the oil and gas tax provisions made it through a recent omnibus tax bill (OGJ, Aug. 2, 1999, p. 30), but President Clinton vetoed it.
Domenici, the Senate budget committee chairman, agrees. He said the oil and gas provisions will be revived and, "I believe they will be included in any bill that eventually gets approved."
Leslie Belcher, chief of staff for Rep. Wes Watkins (R-Okla.), echoed that view. She said that, although the Clinton administration opposes the oil tax measures, the fact that Congress inserted them in the tax bill this year "makes it easier to come back next year with these provisions."
Domenici said he soon would introduce legislation to create the Petroleum Development Investment Management Corp. (Paddie Mac). It would be a federal corporation to create secondary markets for oil and gas loans (OGJ, Apr. 27, 1998, p. 26).
Domenici said, "Big oil companies can take advantage of new risk-reducing financing techniques that lower the cost of investment capital. If Congress approves Paddie Mac, independent producers would have a similar access to more capital and an ability to spread the risk more on par with the majors."
He said the bill could lower the cost of capital by 5%, which in turn could increase US oil and gas reserves by as much as 30%.
"Paddie Mac would help bring some stability to the market and viability to the domestic oil and gas industry."
Meanwhile, delegates were told they face several hurdles to participating in another federal program.
A bill was enacted this year to allow independents and small service companies to apply for federally guaranteed emergency loans (OGJ, Apr. 23, 1999, p. 36).
Jonathan Orszag, acting executive director of the Emergency Oil & Gas Guaranteed Loan Board, said the program is limited to $10 million per company, or up to $500 million for the industry.
Applicants must file by Dec. 30. The loans can't be used for refinancing; applicants must be financially sound, but they must have been refused loans before.
Lee Fuller, IPAA government affairs vice-president, said the US Department of Commerce is expected to issue a formal finding soon on whether oil imports are a threat to national security.
Independents requested the investigation, conducted under Sec. 232 of the Trade Expansion Act (OGJ, June 14, 1999, p. 33).
Fuller said DOC has finished the report, and other federal agencies are reviewing it. He said IPAA expects the report to contain some recommendations for oil tax reform and other elements "to improve and maintain domestic oil and gas production."
Fuller said the report also may address what IPAA calls the problem of poor "market transparency."
On IPAA's recommendation, he said the US Department of Energy plans to hold a conference in December on market transparency.
Fuller said, "We thought it was essential to understand what was happening in the world [oil market], and therefore what should be done in response to it."
The meeting would explore what oil supply is needed to meet world demand, how to maintain the necessary production capacity, and how to obtain and disseminate accurate supply and demand data, he said.
On the latter point, IPAA has urged an increasing role for the US Energy Information Administration "to offset some of the inconsistencies and inaccuracies" of the International Energy Agency data.
Outgoing IPAA Chairman George Yates said the rejection of an oil dumping petition earlier this year wasn't a total defeat for independents (OGJ, Aug. 16, 1999, p. 31).
He said that, although a coalition of independents failed to convince DOC that a majority of the industry supported the petition, which alleged foreign nations had "dumped" oil in the US, the effort "drew attention to the independent industry...and may have helped us succeed in other areas."
Yates predicted, "[Oil] supply will not be taken for granted in the future to the degree it has been in the past. The importance of this industry will be better understood.
"Concerns about supply will translate into higher relative prices, particularly for natural gas. Our biggest challenge over the next decade will be in meeting natural gas demand given [the industry's] lack of access to public lands and damage to our critical infrastructure due to low prices.
"Exploration, which has for more than a decade been the caboose rather than the engine of growth, will gain new respect. We may, in fact, be at the beginning of a new cycle of opportunity for independents that can successfully explore and create value."
Yates made a plea for oil industry unity. "That doesn't mean that small producers and major companies will always agree on policy priorities. It does mean, however, that we should attempt to build a consensus on priorities and work together when we can."
Sen. Domenici predicted, "The shrinkage in the oil and gas industry is a sleeping economic crisis in waiting." He said analysts have predicted that the US will lose an additional 1 million b/d of domestic production as a result of the latest price collapse.
"Depressed oil prices have been the most obvious cause of pain for the oil industry, but to make matters worse, the cost of finding a barrel of oil in the ground in the US almost doubled last year to $12.60/bbl from $6.21. Technology can be a blessing, but at the same time, it can be a very heavy, capital-intense curse."