Oil industry got relief – and then some
Bob Dylan was right; you don’t need a weatherman to tell which way the wind blows. Just look out for oil company executives. The wind is always at their back.
Sometimes with hurricane force.
The New York Times blew the whistle on one federal initiative that has worked out fine for the industry. Because of legislation enacted in 1995, the likes of Exxon Mobil and Chevron may avoid paying $7 billion in oil and natural gas royalties over the next five years. That figure could balloon to $35 billion if Kerr-McGee Exploration and Development successfully challenges the U.S. Department of Interior’s position that the companies are not entitled to relief when oil prices exceed $35 per barrel, and gas prices $4 per 1,000 cubic feet of natural gas.
Prices for both commodities today are almost double those thresholds. Kerr-McKee argues that the Deep Water Royalty Relief Act, which was modified in 2000, did not set thresholds. The company may have a point.
The Royalty Relief Act was intended to encourage oil company exploration in the Gulf of Mexico. A barrel of crude was going for about $15 at the time. Gas was just $1.55 per 1,000 cubic feet. Developing resources outside the United States made more sense than risking equipment and money punching a hole in seabed more than 656 feet below the surface. The 1995 version of the act partially or wholly exempted from royalties wells drilled in water that deep or deeper. The 2000 version set aside that standard, substituting for it one that ordered the Minerals Management Service to determine the amount of relief according to how much risk was involved in a new well.
The incentives seemed to have worked. According to MMS, gas production from deep wells has at least quadrupled since 1994. More than half the active oil and gas leases in the gulf cover deep-water areas.
The industry has mastered ways of finding and extracting oil and gas up to five miles down. There’s not tremendous risk drilling a well today unless you are wildcatting on the moon. The oil companies have the annual reports to prove it. Exxon Mobil and Chevron reported $63 billion in profits between them for 2005. The industry is awash in cash.
They will need it if the American oil industry is going to compete with India and China for the energy the nation will need in the future.
Should we credit the Clinton Administration for kick-starting gulf exploration, or curse it for so richly lining oil company coffers? The Bush White House says it regrets the largesse, but says it is bound by terms of the leases. Rightly so. But if Kerr-McGee’s interpretation of those terms is not resisted to the utmost, the federal government will suffer mightily, with millions of shivering consumers looking on.
And the Bush administration has kicked into the kitty as well. The Energy Bill signed into law in 2005 granted the oil companies another $2.6 billion in relief, relief executives subsequently told Congress they did not need. Also included: an $18 billion loan guarantee for a pipeline that would transport Alaskan natural gas to the lower 48 states. The White House successfully resisted, as well, an effort in the Senate to impose a $5 billion windfall profits tax on the industry. The Times article suddenly has Republicans and Democrats alike trying to offset the pending damage caused by Royalty Relief Act.
This is crazy. The federal government clearly does not belong in the energy futures game. A trader in the pits at the New York Mercantile Exchange as lousy at guessing the direction of oil and gas prices would be shirtless in a week. There’s no reason to incent an industry as mature and as wealthy, directed by men and women who earn more in a day than many do in a year. We are feeding what the president accurately characterizes as an addiction.
Collect what royalties can be had. Close the loopholes. Collect the income taxes, which are substantial, and be done with it. Want to grant relief? Help the consumers. Too often, the wind is in their face.