Patrick CrowThe Clinton administration is opposing legislation that would provide tax credits for U.S. producers beset by record low oil prices.
Energy Policies Editor
The tax-writing House Ways and Means Committee has legislation pending that chairman Bill Archer (R-Tex.) may include in a tax bill this spring. One bill would allow a marginal well tax credit of up to $3/bbl when oil prices are $14/bbl or less, and 50¢/Mcf when gas prices are $1.56/ Mcf or less. The credits would phase out after oil prices rose to $17/bbl and gas prices to $1.89/Mcf.
Another bill would create a special 5-year carry-back for certain eligible oil and gas losses. The carry-forward period would remain at 20 years.
At a recent Ways and Means subcommittee hearing, Assistant Treasury Sec. Donald Lubick said those bills would not help the producers who need help the most. But a panel of small producers firmly disagreed.
Tax creditsLubick said existing provisions will provide $7 billion in tax incentives for domestic oil and gas production for fiscal years 2000-04.
He said they include: $3.5 billion for nonconventional fuels production credits, $1.9 billion for the enhanced oil recovery credit, $1.4 billion for percentage depletion for independent producers and royalty owners, $190 million for the exception from the passive loss limitation for working interests in oil and gas properties, and $40 million for the expensing of intangible drilling and development costs.
Lubick also said oil and gas activities have largely been eliminated from the alternative minimum tax.
He said the oil industry's current problems are rooted in international supply and demand conditions, and most oil companies are not paying taxes now because they have no profits.
"The problems seem to be of (such) a magnitude that (they) go beyond a ready solution through changes in the tax law. When most of the people who are most adversely affected are not paying taxes, it seems to us that the solution does not rely in additional tax incentives. This is an industry that already has larger tax incentives, relative to its size, than any other industry in the country."
Lubick replied, "I have not in any way denied the problem or indicated something shouldn't be done to alleviate the distress being felt by producers.
"The problem we have with the marginal well tax credit is that it wouldn't benefit the most unprofitable firms because they have no tax liability. Over 75% of corporations in the oil and gas extraction industry did not pay any domestic corporate income tax. A more serious problem for producers is severance taxes, and I understand some states are producing some relief in that area. The basic problem is that the tax code has gone almost as far as it can go."
Producers respondA panel of independents had various suggestions for the committee, although all supported the marginal well bill.
Bill Waller, vice-president of Somerset Oil & Gas Co. Inc., Indiana, Pa., told the subcommittee that the net income limitation suspension on the use of percentage depletion (part of the 1997 Taxpayer Relief Act) expires at the end of this year: "It must be made permanent or further extended. Without this provision, the net income limitation requires percentage depletion to be calculated on a property-by-property basis. It prohibits percentage depletion to the extent it exceeds the net income from a particular property."
Waller said that, during periods of low prices, producers may not have net income from a particular marginal property, and the limitation discourages them from investing to maintain marginal wells.
He said current law also limits the use of percentage depletion to 65% of taxable income and allows the balance to be carried over to future years. He said taxpayers should be allowed to select the percentage depletion they use and to carry back percentage depletion deductions for 10 years.
Mitch Solich, president of Chandler Co., Denver, said, "Improving tax incentives for oil and natural gas independents will fall far short of their potential to help sustain domestic petroleum production, unless Congress also acts to reduce restrictions on access to federal lands.
"These lands contain a disproportionate share of the nation's best prospects for new petroleum discoveries that are needed to replace fields now in decline. The reduced access is due to a variety of actions that add up to an overall government policy grown hostile to domestic petroleum production."
Import feeDon Macpherson Jr., president of Macpherson Oil Co. and president of the California Independent Petroleum Association, said a CIPA study found that its members' capital spending plunged more than $100 million last year.
He said California production is usually the first to experience a price downturn because two-thirds of the state's production is heavy crude.
"The average price for the California benchmark Kern River crude oil has been hovering in the $7/bbl range for several months and has been under $10/bbl for over a year. At current prices, producers received less than 15¢/gal."
Glenn Picquet, executive vice-president of C.E. Jacobs Co., Albany, Tex., testified for the Texas Independent Producers and Royalty Owners Association and four Texas regional producer groups. Among other proposals, he said Congress should impose a market-stabilizing mechanism that would include a fee on each barrel of crude and product entering the U.S. by tanker or vessel.
"The American Petroleum Institute reports that, from 1980 to 1994, there were 58,159,000 gal of petroleum products spilled from tankers, barges, freighters, and other vessels, compared to only 823,000 bbl from offshore facilities.
"We believe that foreign oil and products should pay for environmental remediation, as does domestic production. In Texas alone, producers have funded their own environmental plugging and cleanup funds that have totaled more than $45 million from 1984 to 1996. Foreign oil should pay its fair share."
CooperativesPicquet and Michael Cantrell, president of Oklahoma Basic Economy Corp., both suggested Congress give independent oil and gas producers an exemption from antitrust statutes so they can form cooperatives to aggregate and market their production.
Cantrell said the federal government should investigate the true cost of imported oil, taking into consideration differences in tax treatment of foreign oil production and differences in foreign regulatory/environmental costs, and including the costs of maintaining U.S. military forces in the Persian Gulf.
John Bell, owner of Reata Resources Co., Kermit, Tex., said, "The current U.S. national energy policy is inadequate. A responsible energy policy should be implemented to help level out the price spikes on both ends. Prices that are either too high or too low hurt America's and the world's economies. The longer you wait and the more addicted America becomes to cheap oil, the more our economy will be disrupted by the correction that will inevitably occur."
Copyright 1999 Oil & Gas Journal. All Rights Reserved.