Ways and Means Hearing on Domestic Oil and Gas Production (2/25/99)

House Oversight Hearing on the Incentives of Domestic Oil and Gas Production and Status of the Industry
House Committee on Ways and Means
Subcommittee on Oversight
February 25, 1999

Witnesses
Panel 1
Honorable Donald C. Lubick, Assistant Secretary for Tax Policy, U.S. Dept. of Treasury

Panel 2
Honorable Jay Hakes, Administrator, Energy Information Admin., U.S. DOE
Constantine Fliakos, Managing Director, Securities Research Division, Merrill Lynch

Panel 3
Julia A. Short, Member, National Association of Royalty Owners, Oklahoma
Bill Waller, V. Pres. of Business Development, Somerset Oil and Gas Co, NY & PA
Mitchell Solich, President, Chandler Co., Colorado
Don Macpherson, Jr., President Macpherson Oil Company, CA
S. Michael Cantrell, President Oklahoma Basic Economy Corporation, OK
John D. Bell, Owner, dba Reata Resources, TX
Glenn Piquet, Executive V. Pres., C.E. Jacobs Co., TX

Representatives Present
Chairman Amo Houghton (R-NY)
Rep. Jim McCrery (R-LA)
Rep. William Thomas (R-CA)
Rep. Frank D. Lucas (R-OK)
Rep. Scott McInnis (R-CO)
Rep. Wes Watkins (R-OK)
Rep. Jennifer Dunn (R-WA)
Ranking Member William Coyne (D-PA)
Rep. Jim McDermott (D-WA)
Rep. Charles Stenholm (D-TX)
 
 
 
 

Background
In the face of current stress placed on the oil and gas industry in the United States by low market prices, Chairman Amo Houghton (R-NY) convened this hearing to clarify the industry's status. Further, Houghton wished to review the current tax laws on the domestic production of oil and gas in an effort to substantiate claims that the current tax laws are ineffective in dealing with and compensating the failing industry. Also influencing the review is the introduction of  H.R. 53 , H.R. 423 , and H.R. 497  by representatives Wes Watkins (R-OK), William Thomas (R-CA) and Mac Thornberry (R-TX), respectively, of whom, Rep. Watkins and Rep. Thomas were at the hearing. H.R. 53 would introduce a tax credit for marginal well production. H.R. 423, would increase the carry back for net operating losses to five years from the current three year carry back. H.R. 497 would amend the Internal Revenue Code of 1986 "to exclude from gross income, gain from oil and gas produced from certain recovered inactive wells."

Witness list and testimonies are available from the House Ways and Means Committee Website.

Testimony
Mr. Lubick, in his testimony, seemed to imply that the relief the oil and gas companies seek should not come from further tax incentives or credits. Mr. Lubick believes that the incentives in present laws already address the most significant problems facing the industry. He challenges that the real problems to face are domestic oil price decline since the 1980's, increased consumption of oil, which is a change from the decreasing trend in the 1970's and 1980's, and an increase in this nation's dependence on foreign oil. Further, Mr. Lubick claims that 75% of the oil industry already receives so much in tax relief and credits that they currently have no tax liability. Therefore, Mr. Lubick claims, further credits from the Department of Treasury would not have a significant enough impact.

In response to questioning by Representative Watkins and Ranking Member Coyne (D-PA), Mr. Lubick re-iterated his wish to explore alternative solutions to tax incentives, claiming the problems seem to be of a magnitude beyond what can be helped by a change in tax law. Lubick mentioned a helpful program administered by the DOI, that allows companies drilling (or mining) on public lands to keep their leases for up to two years of inactivity. And, also mentioned the additional money added to Fossil Energy Research and Development by the DOE's budget, which does include placing 28 million barrels of oil into SPRO.

Rep. Lucas brought up the issue of carry-back on net operating loss (NOL). The agricultural industry has a carry back on NOL of five years. Proposed legislation may afford the same to the steel industry. Currently, the tax rules allow the oil and gas industry a carry back of only three years. Mr. Lubick commented that the situation for the Steel Industry was somewhat different in that the carry back would be established for the relief of the consequences of foreign dumping of steel into the U.S. market. When asked by Mr. Lucas if there wasn't some evidence of dumping going on in the Oil and Gas Industry, Mr. Lubick replied he wasn't aware that it was a dumping problem. Most importantly, Mr. Lubick's post-testimony answers seemed to stress his above-mentioned opinion that the current problems afflicting the Oil and Gas Industry would not be significantly helped by further tax incentives.

Mr. Jay Hakes' testimony called attention to the consequences, good and bad, of low oil prices. The benefits are a lower rate of inflation and, redundantly, lower fuel prices. The overall negative in this situation is that the oil industry in the United States is suffering and this crisis is driving up the percentage of imported oil which enhances the United State's dependence on foreign, oil-producing countries. Mr. Hakes highlighted "four main reasons behind the oversupply (of oil) and weak prices:" -"The return of Iraq to oil markets in Jan. 97, without OPEC or other producers reducing production to make room for the extra supply."
-"The economic collapse and reduction in demand from Asia."
-"Two warm winters worldwide in a row."
-"Non-OPEC supply growth and other OPEC supply growth on top of Iraq."
Mr. Fliakos' testimony mirrored that of Mr. Hakes, however, Mr. Fliakos stressed the crucial nature of this crisis and its possible consequences for national security.

The third panel of witnesses consisted of seven persons, all closely connected to the oil industry. Altogether, six oil companies were represented. Separately, each oil company representative voiced support for H.R. 53 and H.R. 423. Each has a vital interest in overcoming this crisis and each feels that tax incentives and credits are important steps towards finding a solution. The faces and presence of the third panel may have added to the hearing what some feel should be the most crucial factor in any decision-making, the human factor. All present emphasized the community and social impact of the current oil patch crisis. Mr. Bell's community faces losing their hospital and possibly some schools as a result of the decline in oil-related profits. Mr. Picquet gave the committee small biographies of the 15 people he was forced to lay off because of his company's substantial drop in income. Those 15 people included his exploration/contract geologist that had been employed by his company for four "successful" decades. The closing commentary was given by Ms. Short. She touched once again on a large undercurrent of fear held by a majority of the persons present. The fear is for the national security of the United States. Low prices are driving domestic production down in the U.S. Increasing demand from consumers consequently forces the U.S. to depend more heavily on foreign import for our oil supply. This fact leaves the United States in a vulnerable economic situation, dependent on warring, oil-producing countries for the lifeblood of our energy supply.


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

Contributed by Christi Snedegar, AGI Government Affairs Intern

Last updated March 25, 1999


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