At last, the U.S. oil and gas producing industry has a pattern for political success. Learning as it went along, the industry late last year won relaxation of the federal royalty bite on production from deep waters of the Gulf of Mexico. A special report beginning on p. 45 describes the 31/2 year legislative quest for this important incentive.
The effort was notably understated on usual industry creeds, such as national security, suppression of imports, and preservation of the U.S. capacity to explore for and produce oil and gas. Those are important values. They just don't score much attention in Washington, D.C.
The push for deepwater royalty relief instead focused on practical economic interests and the business of government. Implicit in it was the idea that royalty relief represented not a costly gift to producers but an investment from which the government would reap benefits.
Benefits of production
Backers of the relief measure had to answer charges that it amounted to "corporate welfare." And they had to navigate their proposal through narrowly drawn budget rules to show that it wouldn't cut federal revenues. By adhering to the rules, responding vigorously to opposition, and shaping the campaign to accommodate federal priorities, they prevailed. In victory, they reaffirmed an important tenet: Production generates economic benefits beyond the profits of individual producers.
Producing-state governments know this. Since the oil price collapse of 1986, many state houses have enacted production incentives to preserve vital sources of revenue.
Texas, for example, began waiving severance taxes on high-cost gas wells in 1989 and combined the incentive with a federal tax credit in 1991. Texas Railroad Commission Chairman Carole Keeton Rylander says $570 million in forgone severance taxes led to production worth more than $22 billion since 1989 from 7,938 wells, which probably wouldn't have been drilled without the incentive. Her estimate of the tax benefit to state and local governments: more than $1 billion.
Texas and other states have shown that, properly fashioned, production incentives can help everyone at no net cost to consumers or taxpayers. Now Congress and the Clinton administration have acted on the concept.
Producers should seize the moment. They should look for other ways the government can make money and create jobs by relaxing its front-end take on production or otherwise encouraging development of the hydrocarbon resource.
A place to start is access to federal land. This doesn't mean just offering land for lease, although that's obviously needed where leasing doesn't now occur. Leases must convey clear rights to occupy acreage and perform work. And federal land managers must be willing to issue drilling and other permits.
Production also would receive a lift if the government allowed producers to immediately deduct all geological and geophysical (G&G) expenses for tax purposes. The incentive would apply to activities upon which companies increasingly rely for additions to reserves and production. Immediate expensing means the government collects some taxes on production income later rather than sooner. It also means more production, a larger tax base, and higher revenues overall.
Business sense
Similar cases can be made for incentives for secondary and tertiary recovery and for preservation of production from stripper and other marginally economic wells. As always, the incentives can and should be structured so as not to raise costs to oil consumers or taxpayers. They can and should be aimed at stimulating economic activity and thereby expanding the base of taxable incomes.
From the government's point of view, incentives for production where production would not otherwise occur makes good business sense. It is from that simple notion that the upstream oil and gas industry should pursue its political goals.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.
