US tax bill's incentives help small producers

Oct 12, 2004 02:00 AM

The sprawling corporate tax bill being sent to the White House for the president's signature provides incentives to keep smaller oil and gas wells pumping if energy prices nosedive. The provision approved by the Senate and the House would grant operators of the nation's 650,000 "marginal" or "stripper" oil and gas wells a tax credit of up to $ 9 per well per day.
A typical marginal well pumps 15 barrels of crude or 90 thousand cfpd of gas. While small, these marginal wells provide as much as 25 % of the nation's crude supply -- on par with Saudi Arabia -- and about 10 % of gas stocks, according to the Independent Petroleum Association of America, a Washington-based lobbying group for oil and gas producers.

The idea is to keep as many smaller wells producing as possible, to help slow the nation's growing dependence on foreign oil. In 2002 alone, for instance, 13,600 oil wells and another 3,900 gas wells were shut in, the Independent Petroleum Association reported. Proponents of the measure hailed its inclusion in the corporate tax bill.
"The overwhelming majority of producing wells in Texas are marginal wells," said Sen. Kay Bailey Hutchison, R-Texas. "These provisions will keep small, West Texas producers competitive, encourage investment and keep jobs in America.”
“This tax relief will help these businesses stay afloat when prices fall, boosting domestic supply and holding prices down," Hutchison said. "It has taken years of work, but this common-sense proposal is finally becoming a reality."

Sen. Jeff Bingaman, D-N.M., who had championed the provision, called it "an important backstop to ensure that we will not lose existing domestic production in the future simply because of the boom-and-bust nature of the industry."
Lee Fuller, the Petroleum Association of America's vice president for government relations, said this safety net for small producers is an issue for which his trade group has been lobbying for the last 10 years.
"We're absolutely delighted," Fuller said.

The tax credit phases in if the average crude price for a year is less than $ 18 a barrel or $ 2 per thousand cf of gas. The maximum tax credit is $ 3 a barrel for the first three barrels of crude produced if prices plunge below $ 15 a barrel, and 50 cents per thousand cf if gas prices average less than $ 1.67 per thousand cf.
With crude oil trading above $ 53 a barrel on the New York Mercantile Exchange and gas futures near $ 7 per thousand cf, the prospects of these tax credits may seem remote. But back in 1999, the average price paid by the initial customer -- the benchmark used in the legislation -- was $ 15.56 a barrel, according to the Energy Information Administration. Gas prices averaged $ 1.95 a thousand cf in 1998. In fact, crude prices have averaged less than $ 18 a barrel, under this measure, 12 of the last 20 years.

Source: Houston Chronicle
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