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Domestic Oil and Gas Incentives Legislation Update (6-13-00)

The recent increase in gasoline prices may be cause for concern among consumers, but it is welcome relief for domestic petroleum producers, particularly the smaller independents who have been hardest hit by the prolonged low-price crisis in the oil patch. It remains to be seen whether the upward trend in oil prices brought on by factors as diverse as OPEC production limits and California refinery fires will continue and what impact it will have on efforts in Congress and the states to pass legislation to assist the domestic petroleum industry.  When prices were low, Congress quickly passed legislation to establish a federal loan program for the independent oil and gas industry. At the same time, several members of Congress introduced tax incentives legislation some of which has been incorporated into more comprehensive legislation intended to provide a national energy policy.

Most Recent Action
The recently released Senate energy bill, S. 2557, includes tax incentives for marginal wells and independent petroleum producers as measures to help reduce U.S. dependence on foreign oil.  The Republican leadership in the Senate unveiled the National Energy Security Act, S. 2557, on Tuesday, May 16, 2000.  The comprehensive energy policy bill is designed to drastically reduce imports of foreign oil as well as discredit the Clinton Administration's energy policies.  The task force that drafted the plan consists of 10 Republican Senators including Majority Leader Trent Lott (R-MS), Frank Murkowski (R-AK), Larry Craig (R-ID), and Kay Bailey Hutchison (R-TX).  The bill aims to reduce the nation's dependency on foreign oil to 50% of the country's energy supply by the year 2010.  More information on S. 2557 can be found on the AGI update on the Congressional Response to Rising Oil Prices.

Action in the 106th Congress
Tax Relief Legislation
President Clinton vetoed the Financial Freedom Act of 1999 on September 23, following through on a threat he made repeatedly during the legislative process.  Many hope that the vetoed bill will be a framework for future negotiations between Republican leadership and the White House on a tax bill before the 2000 elections.  Prior to the veto, the House and Senate passed the final version of H.R. 2488 on August 5.  The final version included five oil and gas provisions: On July 30th and 23rd respectively, both the Senate and the House passed tax bills that contain language beneficial to gas and oil producers.  The details of the provisions are outlined below. On July 14, the House Ways and Means Committee passed a Republican tax bill known as the Financial Freedom Act of 1999 (H.R. 2488) by a vote of 23 to 13.  The bill contains a number of provisions of interest to the oil and gas industry.  Included in the original bill language is an extension of the current "suspension of the net income limitation provision with respect to percentage depletion" (IPAA) and a five-year carryback on net operating losses for oil and gas producers. In addition, an amendment introduced by Rep. Wes Watkins (R-OK) passed by voice vote. The Watkins amendment went beyond the above tax relief with the three following provisions: The full House voted on July 21 to begin the debate on the tax bill, which includes a $792 billion tax reduction over 10 years. The president's budget calls for about $250 billion in tax reductions over the same time period, and as such the Administration is opposed to the current House version of the bill.  As proponents of industry tax relief,  a July 19 update from IPAA acknowledges, "The future of the tax reform bill will be controversial. However, it is extremely useful to be in the bill now as it moves through the legislative process."

The Senate Finance Committee is working on their version of the bill, which contains four of the items adopted by the House Ways and Means Committee:

Many of the provisions found in both the Senate and the House versions of the tax bills mirror in part, or in full, bills introduced earlier in this Congress, including Sen Kay Bailey Hutchison's S. 325, Rep. Wes Watkins' H.R. 53, and Rep. Bill Thomas' H.R. 423.  More information on this and other legislation is found below.

The "Political Scene" column in the March 1999 issue of Geotimes reports on a Senate Energy and Natural Resources Committee hearing in January on the state of the industry at which Sen. Kay Bailey Hutchison (R-TX) unveiled S. 325, the U.S. Energy Economic Growth Act. Designed to encourage domestic oil and gas production, the bipartisan legislation provides tax credits for marginal wells -- those that produce under 15 barrels a day and hence are most vulnerable to being shut down. Although averaging only 2 barrels a day, half a million marginal wells in the US collectively produce 20 percent of the nation's oil. The bill would phase out the tax credits as prices increased. It would also would provide a tax exemption for the costs of restarting inactive wells, based on the success of a similar state program in Texas. Among the other tax incentives contained in the bill is the expensing of domestic geological and geophysical costs.

Three tax-related bills have been introduced in the House. On the first day of the new session, Rep. Wes Watkins (R-OK) re-introduced a marginal well tax credit bill (H.R. 53) similar to one that he had offered in the last Congress. Like the Hutchison bill, Watkins' proposal would phase out the credits as prices increase. Rep. Bill Thomas (R-CA) introduced H.R. 423, which would allow a 5-year net operating loss carryback for losses due to low oil prices, giving the petroleum industry the same allowance as the steel industry. Both Thomas and Watkins sit on the tax-writing House Ways and Means Committee, which held a hearing in February to give momentum to the bills. Another bill (H.R. 497), introduced by Rep. William "Mac" Thornberry (R-OK), would provide income tax exemption for the costs of reopening wells that had been inactive for greater than 60 days.

Senator Pete Domenici (R-NM) has called for additional tax law changes, including revision of the Alternative Minimum Tax, a 20 percent exploration and development tax credit for discovering and drilling new domestic wells, and increasing the percentage depletion allowance on marginal wells.

On May 13th, Senate Energy and Natural Resources Committee Chairman Frank Murkowski (R-AK) introduced S. 1049, the Federal Oil and Gas Lease Management Improvement Act of 1999, a broad package to help the struggling domestic oil and gas industry. The legislation includes a number of proposals made in earlier bills, including tax incentives from S. 325 (introduced by Sen. Kay Bailey Hutchison, R-TX) and oil valuation methodology from S. 924 (introduced by Sen. Don Nickles, R-OK), and combines them with new provisions to simplify oil leasing procedures and transfer greater responsibilities to the states.  Also, on February 25, 1999, the House Ways and Means Subcommittee on oversight held a hearing on on the incentives of domestic oil and gas production and status of the industry.

An earlier AGI update reports on petroleum industry relief legislation that failed to pass in the last Congress.

Loan Program
On October 18th, the Department of Commerce issued detailed regulations for the new $500 million guaranteed loan program mandated by H.R. 1664, the Emergency Steel Loan Guarantee and Emergency Oil and Gas Guaranteed Loan Act of 1999.  Loan guarantees will be issued to private banking or investment institutions for loans given to qualified oil and gas companies or oil field service companies.  Individual companies would be allowed to borrow up to $10 million.  The Loan Board announced the appointment of Charles E. Hall as the new Executive Director of the Board.  Hall formally worked as senior vice-president of the energy finance group at Den Norske Bank in Houston.  The announcement was coupled with a release of four changes to the loan program regulations:

Information about the program can be found on the Department of Commerce web page for the The Emergency Steel Loan Guarantee and the Emergency Oil and Gas Guaranteed Loan Act of 1999.

Starting early in 1999, Senators Pete Domenici (R-NM) and Robert Byrd (D-WV) began pushing to develop a loan guarantee program for the oil and gas and steel industries.  After being forced to drop the loan proposal from an earlier supplemental spending bill for Kosovo, the senators were able to attach the loan language to a defense supplemental appropriations bill, H.R. 1664, that was signed into law.  The bill survived a filibuster by a 71-28 vote on June 15th.  The House passed the bill on August 4th, and President Clinton signed H.R. 1664 into law on August 17th.

Administration Action
The lack of movement in the last two Congresses may seem surprising given that oil and gas producing states boast an array of influential representatives and senators, including top leadership in both houses. Texans Dick Armey (R) and Tom Delay (R) hold the number two and three spots in the House Republican leadership, and Houston Rep. Bill Archer (R) chairs the tax-writing House Ways and Means Committee. In the Senate, Alaskans Ted Stevens (R) and Frank Murkowski (R) chair the Senate Appropriations and Energy and Natural Resources Committees, respectively. Those legislators, however, do not have the votes to over-ride presidential veto threats, and without Administration support for tax incentives, tax-related bills in Congress face an uphill climb to make it into law.

The Administration has yet to signal any willingness to lend its support for tax legislation. At the House Ways and Means Committee hearing, a Treasury Department official stated that the problem was too big for tax law changes to significantly help the domestic petroleum industry, pointing out that three-quarters of producers currently have no tax liability.

Meanwhile, the Department of Energy has taken a number of actions directed at helping domestic producers. Following repeated calls from Senators Murkowski and Jeff Bingaman (D-NM) to purchase oil for the Strategic Petroleum Reserve (SPR), Energy Secretary Bill Richardson announced that starting in April DOE would obtain oil for the SPR as in-kind royalty payment from offshore Gulf of Mexico leases. The oil would replace 25 million barrels of oil sold from the SPR in recent years for deficit reduction and other purposes. The SPR currently holds 561 million barrels, well below its maximum capacity of 680 million barrels. Richardson also offered to use some of that unused capacity to provide commercial storage for up to 70 million barrels in order to keep that oil off the market.

The President's budget request includes $19 million for DOE fossil energy research and development directed at creating improved, lower cost technologies that would help prevent domestic oil reserves from being prematurely abandoned by increasing recovery efficiency. In late February, DOE signed a memorandum of understanding with the Small Business Administration (SBA) to help small producers and service companies take advantage of SBA loan guarantees and other assistance programs.

For producers on federal lands, the Bureau of Land Management has announced a two-year moratorium on mandatory shut-ins of non-producing stripper wells. The announcement was widely perceived in industry as an olive branch to the industry following Babbitt's strong remarks at a budget briefing on the ongoing negotiations between the Minerals Management Service and the petroleum industry on a proposed oil valuation rule. Despite last year's opening of the National Petroleum Reserve Alaska, Babbitt has made clear that he does not support increased access for production on federal lands.

In February, Energy Secretary Richardson announced the Administration's "Initiatives for Energy Security" based on recommendations from the Department's Oil Emergency Task Force. The initiatives include:

More information is available from the DOE web site at Richardson, a former representative from the oil-producing state of New Mexico, has won praise from many in the oil patch for his attention to the problem.

Industry Reaction
The oil and gas industry has made clear that their top priority is tax breaks and incentives to help marginal wells in production. Other priorities include a shift to an in-kind system of royalty payment for oil produced on federal lands, refilling the Strategic Petroleum Reserve, and increased access to federal lands. Although industry has welcomed the Administration's measures, groups like the Independent Petroleum Association of America remain focused on tax relief as their top priority.

For further information on legislation to assist the domestic petroleum industry, see articles by AGI staff in the April and May 1999 issues of AAPG Explorer focusing at the federal and state levels, respectively.

Sources: Library of Congress, Department of the Interior, Department of Energy, Environment & Energy Weekly, Independent Petroleum Association of America, Washington Post, and Department of Commerce.

Please send any comments or requests for information to the AGI Government Affairs Program.

Contributed by David Applegate and Margaret Baker, AGI Government Affairs; AGI/AIPG Science Policy intern Scott Broadwell, and AAPG/AGI Intern Alison Alcott

Posted April 17, 1999; Last Updated June 13, 2000

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