« BACK  |  PRINT

RS

FRONT PAGE CONTRIBUTOR

So you thought $4.00 was a lot for a gallon of gas??

By: Steve Maley (Diary)  |  February 26th, 2009 at 08:38 PM  | 

RESIZE: AAA

Just wait.

Just wait a little while.

It’s axiomatic for conservatives, and other people with common sense, that if you want less of an activity, you tax it. If you want more, reduce the tax. Governor Jindal said that recently, but I’m sure he wasn’t the first.

The oil and gas industry is tax advantaged. Historically, the government saw a benefit in encouraging drilling; tax breaks are one way to cushion the manifold risks an operator incurs. Exploration and production firms factor tax benefits into their economics when they judge whether or not to drill. You may not agree with the rationale behind certain “tax preference items” that encourage drilling and production, but the current tax law status quo equates to a given level of activity.

Democratic tax proposals and policy changes, announced today in President Obama’s FY2010 Budget, will definitely reduce drilling activity. I’ll even go so far as to say they’re designed to curtail activity. [See p.79 and pp.122-3 for the damage.]

I’ll try to explain why it matters. And it’s not necessarily the reason you expect.

The Dems have resurrected some old ideas for taxes and fees, and thought up some new ones. The big ticket items I’ve seen so far:

  • A new excise tax to take back royalty relief the government (mistakenly?) gave certain deepwater producers to encourage deepwater technology back in the ’90s.
  • Repeal expensing of intangible drilling costs.
  • Increase rental payments on non-producing leases [the topic, btw, of one of my RS 2.0 blogs, lovingly entitled "On the Utter Stupidity of Drill It or Lose It".]
  • Repeal percentage depletion.
  • (I don’t even know what this vague language means):”Increasing the return from oil and gas production on Federal lands through administrative actions, such as reforming royalties and adjusting rates.”

    • As I said, we may disagree whether the industry “deserves” favorable tax treatment, but it would be asinine to think that by “reforming” tax policy you’re going to enhance domestic energy security. This is a measure to punish oil and gas, but you my friends are going to share the pain.

    Why? It’s all in the rig counts. Rigs drill new wells, and active rig activity means higher total deliverability: more oil and gas on the market. Baker Hughes has the most authoritative rig count statistics, and rig utilization is dropping like a stone, down to 1300 active rigs this past week, a decline of 471 rigs since a year ago. (Canada is down to 401 rigs, 246 less than a year ago.)

    What most people don’t realize is that some 80% of the domestic rig fleet is searching for natural gas. Because of prices, rig activity is way down in both sectors. But, especially for natural gas, it is important to maintain high activity.

    At current rig utilization rates, we’re probably treading water with gas deliverability. But these tax proposals will absolutely kill any desire on the part of drillers to make new wells. You, the consumer will feel the pain, if not this coming winter, then the next. There will be a shortage of natural gas.

    The real irony is that natural gas is perhaps the greenest fuel we have. And we have plentiful domestic resources, and world-leading technology to go get it. But we’ve got to be able to drill wells…

    Oil and gas companies have felt the double whammy of prices (down 75% in 8 months) and the stock market meltdown. The typical small oil and gas company’s share are down 75% from 52 week highs – many are trading for pennies on the dollar. This is clearly not the time to make independent oil and gas companies a political whipping boy.

    Owning an oil and gas company is not a license to print money. It is a highly risky, highly competitive business that, contrary to popular opinion, has few barriers to entry. Just like any other business, capital flies to an easy return. New companies start up all the time. But then others go out of business, victims of price fluctuations, or bad geologists, or bad luck, or bad decisions. Or bad tax policy.

    Tags: , ,

    COMMENTS

    POSTING RULES  |  LOGIN TO COMMENT  |  REGISTER TODAY
    • Vladimir

      Oil Rigs:

      Gas Rigs:

      • youthgrunt

        Note that the decrease in rigs coincides with the collapse in the price of oil. I guess my economics professor was right!

    • jackbenimble

      (I don?t even know what this vague language means):?Increasing the return from oil and gas production on Federal lands through administrative actions, such as reforming royalties and adjusting rates.?

      I have some guesses.

      Most Federal Mineral leases are currently at a traditional 1/8th (12.5%) royalty. In Wyoming, private mineral owners are often able to command a 1/6th royalty. The Feds want in on this better action. But what they probably don’t understand is that oil and gas companies are willing to pay higher royalties to private mineral owners BECAUSE IT IS SO MUCH EASIER to actually drill a hole and produce the minerals. With Federal minerals, getting a lease is the easy part of the process. The BLM takes their money but then makes it almost impossible to actually develop the minerals with years of studies, permits, endangered species studies, archeological studies, etc and no guarantee that they will ever be allowed to produce the minerals that they have leased if they are ever lucky enough to even be allowed to drill a hole to discover if they are even there.

      The second likely “adjustment” would be a revenue grab from the states. Traditionally, the 12.5% royalty on Federal Minerals has been split 50/50 with the states. This recognizes the fact that the states incur a lot of regulatory expense in administering/regulating the production of these minerals. It also recognizes that the Feds have retained ownership of almost half of all land in states like Wyoming and by not transferring these lands to the private sector they have deprived the states of the ability to tax these properties. Yet the state is still on the hook for law enforcement and other costs associated with these Federal lands. Most of the Western oil and gas states are Red States. It won’t surprise me to see the Feds try to adjust the 50/50 split in their favor.

      • Vladimir

        The MMS has already adjusted the royalty on new offshore leases from 16.667% to 18.75%.

        Adjusting the rate on old leases is something right out of the playbook of Hugo Chavez.

        Your royalty split, by the way, is not something that the states with offshore production benefit from. LA benefits in that production is landed here, and it’s cheaper for large industrial consumers to base here, but the state’s share of the federal pie is limited.

    • jackbenimble

      The Dems have resurrected some old ideas for taxes and fees, and thought up some new ones. The big ticket items I?ve seen so far:

      “So far” are the operative words. These are just the tip of the ice berg. In Obama’s own words from his not-a-SOTU speech here is what is coming down the pike:

      “But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. ”

      The cap and trade taxes will be massive and they will strike at the standard of living of every American who buys anything that was manufactured with or transported using energy.

      • Vladimir

        Republicans need to make it clear that Democrats are the party of expensive energy.

        • jackbenimble

          That surprises me that the States don’t get a share of offshore production because I remember something somewhat different.

          I used to do the revenue accounting for the THUMS project (THUMS stood for Texaco, Humble, Unical(?), Mobile and Sohio(?)). That was off the coast of Long Beach.

          As I recall there were two platforms. I never saw them but I was told they were like artificial islands. The Federal Government got the royalty from one and the State of California got the royalty from the other. It was very wierd accounting because they were not traditional royalty interests but rather Net Profits Interests and they (State and Feds) got about 98% of the net profit leaving 2% NET for the oil companies which was a lot of money and pure profit.

          As an interesting aside, I came up with an interpretation of the Wind Fall Profits Law that made the Feds and the State eat 98% of the cost of the Windfall Profit tax even though they were exempt. It was so devastating that Congress actually amended the Windfall Proftts Tax for that particular situation. I was fresh out of college and I’ll never forget all the attorneys from those companies and the State of California and the MMS screaming at each other but at the end of the day everybody agreed that the law said what I said it said.

          • Vladimir

            The states own 3 (LA) to 12 (TX, FL) miles offshore. That is administered just like onshore production.

            Any fields that overlap the Federal/State boundary are subject to unitization/revenue sharing in some form. I’ve never worked it, so I don’t know the details.

            Farther offshore it’s all the Feds, except for recently opened areas off FL/AL. The gulf producing states get 3/8ths of that, IIRC.

            Since there is little Federal acreage in LA, LA’s share of MMS revenue is paltry (something like $30 million vs almost $1 billion for WY, the last numbers I saw). You can google it.

            LA populists have looked at getting a bigger slice in the past by taxing gas processing (which is all done in the state, onshore) but so far industry has shut that down.

            • Vladimir

              …that it’s part CA, part Federal.

    • Vladimir

      But as an oil state senator, Landrieu is already raising objections to the president’s proposal for tax increases on the oil and gas industry, including scaling back incentives for offshore oil and gas exploration.

      “In these tough times, we must make sure that we do not disadvantage our domestic energy industry — which is critical to the nation’s security — against foreign competitors, ” Landrieu said. “This industry provides good-paying jobs and plays a critical role in helping us reduce our dependence on foreign oil.”

      Then this, from the American Petroleum Institute:

      Jack Gerard, president of the American Petroleum Institute, which represents the major oil companies, said an economic recession isn’t the time to raise taxes.

      “New taxes could mean fewer American jobs and less revenue at a time when we desperately need both, ” Gerard said. “More taxes also could reduce our nation’s energy security by discouraging new investments in domestic oil and natural gas production and refining capacity and pushing those investments — and American jobs — abroad.”

      Link.

    • Vladimir

      Independent Petroleum Association of America President Barry Russell said Obama “delivered a devastating blow to the American oil and natural gas industry today.”

      “Ninety percent of the oil and natural gas wells developed in the United States are done by small, independent businesses – not so-called ‘Big Oil’ – so tax increases hurt these companies most,” Russell said. “This budget hurts our ability to be competitive with other nations in the growing world energy marketplace.”

    • izoneguy

      Op-ed from:
      Keith Lockitch, PhD in physics, is a fellow at the Ayn Rand Center for Individual Rights, focusing on science and environmentalism. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead.

      The Green Energy Fantasy

      Will a green energy industry be an engine of economic growth? Many want us to think so, including our new President. Apparently a booming green economy with millions of new jobs is just around the corner. All we need is the right mix of government ?incentives.?

      These include a huge (de facto) tax on carbon emissions imposed through a cap-and-trade regulatory scheme, as well as huge government subsidies for ?renewable,? carbon-free sources. The hope is that these government sticks and carrots will turn today?s pitiful ?green energy? industry, which produces an insignificant fraction of American energy, into a source of abundant, affordable energy that can replace today?s fossil-fuel-dominated industry.

      This view is a fantasy–one that could devastate America?s economy. The reality is that ?green energy? is at best a sophisticated make-work program.

      Read the rest here:

      http://www.aynrand.org/site/News2?page=NewsArticle&id=22651&news_iv_ctrl=1021

    • dennism

      …that the tax incentives don’t really benefit the majors. Those are for independents. You’re independent if you have less than 1000 barrels per day of production or if you don’t own a refinery. Look, Ma, I’m independent!

      I’m wanting to see if the roll back of depletion is slated for oil & gas only, or if it’s rolled back for molebdynum too. Or uranium. Or iron ore, clay, sulphur or gold.

      If it’s only oil & gas – WHICH I’M WILLING TO BET IT IS – then I’m not going to any Tea Parties with Vladimir. He’s a target.

    • dennism

      There it is, right there on p123 of the budget. They’re only wanting to repeal the deduction for oil & gas percentage depletion.

      Clam and oyster shell percentage depletion is safe for the time being!

      • jano4

        Come to mind when I contemplate these taxes on our energy industry.
        Is it that Democrats are so in bed with the environmentalists that they have bought into their idea of destroying the economy to save the planet nonsense.
        Obama is at the end of day a Muslim, and he is increasing our dependency on foreign oil, thus transferring even more wealth and power to the middle east.
        Raise the price of oil and then go after the Majors for windfall profits tax.

        • youthgrunt

          But you are dead on that the policies talked about here will increase oil imports. It just makes domestic production more expensive compared to foreign. This is exactly what happened when Carter implemented the Windfall Profit Tax. The tax didn’t raise as much money as they expected and imports increased.

          No reason to start learning from history now. Let’s just repeat it.

    • Cheetah772

      Soon? Distant future?

      Whatever it is, I hope we get to say to Obama, “I told you so!”

      And unfortunately for us, Obama won’t listen to us.

    • falsehood

      All of the companies that got huge investments and capital when gas was going up last summer are now in trouble because they aren’t economically viable anymore.

    • Vladimir

      Of course owners of reserves want higher prices.

      But Obama & the Dems want higher prices, judging by their actions.

      Uncle Sam is a big oil company, too.

      Plus, the economics of wind, solar, ethanol, & electric cars depend on expensive oil.

    • nod90

      The bottom line is that the easy domestic oil and gas has gone. If you raise taxes, you will have less domestic energy and more imports. Natural gas production is a competitive industry and the tax breaks get passed onto consumers in the form of lower heating bills.

      Bottom line is that the Dems are going to make us more dependent on foreign gas and raise people’s heating bills.

    • Vladimir

      …one thing that differentiates oil from natural gas is that natural gas is a 98% domestic business (if you include Canada as domestic). The stuff can be liquified & moved about in ships, but for the most part it is a pipeline product.

      Hence, if we fall short, prices spike up dramatically, and the market determines who gets it (i.e., he who is willing to pay the most), and everybody else is S.O.L.

      Natural gas prices have fallen from $14 per thousand cubic feet to less than $4, in less than a year.

    • jackbenimble

      I’m in the coal bed natural gas business in the Powder River Basin of Wyoming. We extract methane associated with the State’s extensive coal reserves.

      First, I think the imported share of the natural gas market is closer to 6% and growing. The growth may now be on hold because I have heard the break even price for LNG is betwen $4 and $6 per mmbtu or MCF. Last I payed attention, there were lots of LNG tankers under construction and talk of opening new terminals.

      It is true that the price has fallen from $14 to $4. But $4 is a lot closer to the historical norm. The spike to $14 was an unsustainable bubble and I think everybody knew it.

      I would be a lot happier at $6. The price in Wyoming is discounted at least $1 and sometimes considerably more from the Henry Hub Lousisana or NYNEX price because of distance from market and pipeline capacity issues. The nature of coal bed methane extraction technology is such that if you shut in the wells you run the risk of damaging the reserve so you pretty much have to keep producing and take the price you get even if it is below the cost of production.

    • Vladimir

      I don’t disagree with anything you said. As to LNG imports, everyone expected them to drive down the domestic price, when in fact they have had a hard time competing. Their market share is disappointing, to say the least, to those who borrowed & invested heavily in new terminals.

      The main point I’m making is that a high percentage of current deliverability comes from newly drilled wells. If the rig utilization rate falls below some number (and the number I’ve heard is 1100 rigs), there’s no way that new wells can keep up with depletion of old ones.

      We can always import more oil (not that that’s a good thing). But importing more gas when our own supplies fall short will probably be expensive.

    • Achance

      (and hers) on a 48″ gas line, the most expensive project in history. Not only is throwing all that gas on the US market going to put the price in the toilet, it is going to reduce our oil production. Gas is re-injected to maintain field pressure on the North Slope. There are other ways, but they cost more and have environmental risks that the gas doesn’t. Frankly, I’d rather sell expensive oil than cheap gas.