April 2009

DanPedrottiBlueOur worst nightmare has come true. President Obama and the Democratic Congress have proposed tax increases on the American Oil & Gas Industry that could very possibly spell the end for us who are in the independent exploration business. The President along with the liberal oil industry haters have finally gotten the clout that could allow these punitive measures to pass.

Among the proposals that primarily affect us are:

Repeal Expensing of Intangible Drilling Costs
Repeal of Percentage Depletion
Increase Amortization Schedule for Geological and Geophysical Costs
Repeal Marginal Well Tax Credit, and
Repeal Enhanced Oil Recovery Credit

Of course the first three are the proposals that could be most damaging to us as independents. Without depletion allowance, expensing of intangible drilling costs and amortization of G & G costs, exploration capital could become our dinosaur. With product prices, especially natural gas, headed for levels not seen since the early 90’s and with tax incentives no longer available who is going to invest in the development of reserves much less want to wildcat?

It appears to me that this Administration and Congress have embarked on a plan that will wipe out the last vestiges of Capitalism in this country. At the present time the Oil Industry is one of the very few viable industries, along with the small businesses, that are not on their heels asking for bail outs from the Federal Government. This illogical approach appears destined to destroy what is left of the engines of progress that have made this country great by using the successful enterprises, through exorbitant taxes, to fund the redistribution of wealth that they have envisioned. Where else can they get the funds?

Are these proposals due to ignorance of the outcome or as I tend to believe, a devious attempt to destroy the last vestiges of Capitalism here in North America? With the last viable industry and the small businesses (we are all small businesses) forced to join the huge reservoir of bankrupt companies or go out of business, there will be only one way out – the Federal Government. Is this what our Founding Fathers envisioned and fought the revolution to accomplish? Unfortunately many of our more prestigious universities have taught a whole generation not to appreciate what has made this country great, and these are the voters who helped elect this anti capitalist President and Congress.

Public sentiment favoring such dramatic punishment for our industry is fueled by the huge profits reported by all the Major Oil Companies last year while gasoline and diesel fuel reached $4.00 plus per gallon through our country. This situation was parlayed by the media into a frenzied backlash. We all agreed that $140.00 oil and $15.00 natural gas was bad for the economy, but it was brought on by greedy speculators not our industry leaders. Unfortunately this fact was not reported by the national media.

I along with Owen Hopkins and a number of local business leaders concerned with energy matters were privileged to attend a luncheon recently and enjoy a discussion on world wide energy policy by Amy Meyers Jaffe, The Wallace S. Wilson Fellow in Energy Studies at the Baker Institute for Public Policy at Rice University. Ms. Jaffe is also the Associate Director, Rice University Energy Program. Her speech “The Global Energy Market: Geopolitical and Financial Risks” was extremely enlightening. Among her many global observations is the premise that Saudi Arabia preferred world oil prices in $40.00 to $45.00 range and had the reserves to insure this price deck.

Another succinct observation regarding Russian – Iranian relations, deals with the fact that part of the huge Qatar gas field is in Iran. Iran desperately wants help from Russia to enable exportation of this gas to Europe in order to get their share when the huge LNG program gets underway. Russia is not inclined to help with this as it would compete with Russian dominance of the European gas market.

During the Q & A session after the speech I posed my thesis regarding the intent of the anti industry tax proposals before the Congress, that they are an attempt to destroy capitalism. Ms. Jaffe found my observations intriguing but disagreed. Her response was that we were the only possible source of the monetary resources needed to fund the massive welfare programs contained in the stimulus package and the new fiscal budget. I am still not convinced, however Ms. Jaffe is much more experienced and informed than I could possibly think.

According to an IPAA (Independent Petroleum Association of America) News Release the Obama Energy Budget could shut down thousands of American oil and gas wells, increase imports, cause massive layoffs and destroy a huge revenue source to the Federal Government. According to IPAA, American independent natural gas and oil producers develop 90 percent of US wells; produce 82 percent of US natural gas and 68 percent of US oil. The tax changes proposed in the Obama Energy Budget would strip over $30 billion from US natural gas and oil production investment. This huge loss of risk capital would primarily impact the independent oil operators – us.

It is the sense in Congress and the public citizens that the Major Oil is the primary villain and unfortunately we get lumped in with it. It is obvious that we, the independents, must separate ourselves from the Majors and let the Administration, Congress and the Public know the facts contained in the IPAA news release. If the public perception is that they have not invested sufficiently in domestic exploration and are hoarding vast piles of profits instead of promoting energy self sufficiency it must be pointed out that this is not the case for Independents.

Without a doubt we are back to the 70s and the President Carter economic policies. We can’t afford another disaster such as we endured then. It is up to each and everyone to spread the word of this impending destruction of our industry and make all our representatives aware that we intend to fight to the bitter end with our entire wherewithal in order not only to save our way of life, but to prevent further dependence on foreign sources of energy.

I remember the battles we had with congress in the 70’s. We came out addled but still survived. Remember we can live on $3.00 natural gas and $30 to $40.00 oil but cannot survive the exorbitant and punitive tax revisions proposed by our President.

Daniel A. Pedrotti
CCGS President