The American Petroleum Institute opposes the Gang of Sixteen’s bill because it is “light on production and heavy on new taxes” and that it “falls short of providing necessary access to domestic supplies of oil and natural gas” [read their letter]. Its concerns, however, should be placed in perspective.

Based on data from the U.S. Minerals Management Service (MMS), the G-16 proposal would provide industry with new access to areas that are estimated to contain 40 trillion cubic feet (tcf) of natural gas and 6 billion barrels of oil. Access to those resources would save the U.S. economy billions of dollars in imported oil costs over the next two decades and could substantially reduce the need for U.S. imports of natural gas—40 tcf is the equivalent of 10 years of net U.S. gas imports at today’s levels. Moreover, given historical rates of reserve appreciation and the fact that most moratoria areas have never been surveyed with modern 3-D seismic technologies, ultimate recovery from these areas is likely to be even greater than MMS estimates imply.

API also expresses significant concern about the bill’s tax provisions. These concerns are not to be taken lightly, as any provisions that could cool the oil companies’ interest in developing the new areas could theoretically be counterproductive to the goal of increasing domestic supply. But it is important to understand these provisions for what they are. The Deepwater Royalty Relief Act allowed for the issuance of royalty-free leases for specified volumes of oil production to spur production in deep water where it is more expensive to produce than elsewhere. From the beginning, the Department of Interior, consistent with Congress’ intent, limited the waiver of royalties when oil and gas prices rose above a specified threshold. Two problems then arose. First, in 1998 and 1999, DOI forgot to include the threshold price in its leases. Second, Kerr-McGee, a leaseholder, has argued that DOI had no authority to include threshold prices in any of its leases. The royalty provisions in the Gang of 16 bill aim to address these two problems, one a simple mistake and the other, though certainly open to debate on its merits, almost certainly reflective of Congress’ intent and therefore appropriate national policy.

API also argues against a scaling back of the Section 199 tax credit as it applies to domestic oil and gas production activities. The Gang of Sixteen proposal would modify the existing deduction to deny the deduction to large integrated oil companies and to reduce it by 3 percent for all other oil companies. The EIA has estimated that while the loss of the deduction would cost the industry approximately $1.1 billion a year between 2008 and 2017, it would represent only 1 to 4 percent of after-tax income earned by producing oil and natural gas and refining between 2001 and 2006.

These tax provisions are not ideal, and API raises legitimately debatable points, but they are not enough to outweigh the significant new access to resources included in this bill. We must be cautious, however, that this legislation does not set a precedent of discriminatory taxation against oil companies; we cannot treat them as piggy banks and expect production to continue to rise.

There is perhaps another, more central issue here: API and other domestic supply advocates need to be cautious about cutting of their noses to spite their faces. This bill is not perfect, but on balance, there is little doubt that it would dramatically increase our domestic production of oil and natural gas. And while it would be preferable to open up even more areas of the OCS to responsible production, the reality is that this not insignificant offshore production could easily open the door to further moratoria being lifted, particularly as states begin to realize new revenue streams, and as it becomes clear that exploration and production can be undertaken in an environmentally sound way.

We also must consider the realities of the political situation. Who could have imagined six months ago that Democrats and Republicans could join together and agree on a bill that includes access to 40 trillion cubic feet of new natural gas and six billion barrels of oil? This bill is a compromise, and no one is ever completely happy with a compromise, but pro-supply advocates may want to consider when they might ever get closer to that kind of domestic supply expansion.

 

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