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Congress is Planning to Correct MIstakes in Old Oil Comapny Contracts

January 7, 2007 - by Donny Shaw

Congress will be considering a new Energy package on January 18. The big thing that’s going to be up for vote in the bill is some incentives that American oil companies get for drilling in publicly-owned property. These incentives were brought to the public’s attention through a New York Times article from late December. The Times got their hands on a report from the Interior Department that suggests that the incentives are not paying off.

Here is some text from the unlinkable article:

The Interior Department study, commissioned to analyze the costs of royalty incentives and their effectiveness at increasing energy supplies, was completed in fall 2005. But the study was not released until last month because senior officials said they considered it incomplete.

After repeated requests, the department provided a copy to The New York Times with a ‘’note to readers’’ that said the report did not show the ‘’actual effects’’ of incentives. Indeed, Interior officials contended that the cost of the incentives would turn out to be far less than the study concluded.

The report predicted that the current incentives would lead to the discovery of only 1.1 percent more reserves than if there had been no incentives at all. Total oil production from 2003 to 2042 would be about 300 million barrels more, or less than 1 percent, than it would have been anyway. Natural gas production would be 0.6 percent greater than it would have been otherwise.

But the cost of those royalty incentives would be high: about $48 billion less in royalty payments over the 40-year period. That loss would be offset by a slight increase in the prices that companies pay when bidding for leases in government auctions, but analysts said the net cost would still be above $40 billion."

…industry analysts who compare oil policies around the world said the United States was much more generous to oil companies than most other countries, demanding a smaller share of revenues than others that let private companies drill on public lands and in public waters. In addition, they said, the United States has sweetened some of its incentives in recent years, while dozens of other countries demanded a bigger share of revenue.

In the United States, the federal government’s take — royalties as well as corporate taxes — is about 40 percent of revenue from oil and gas produced on federal property, according to Van Meurs Associates, an industry consulting firm that compares the taxes of all oil-producing countries.

By contrast, according to Van Meurs, the worldwide average ‘’government take’’ is about 60 to 65 percent. And that figure, of course, excludes countries that do not allow any private ownership in oil production.

The problem stems from a mistake that was made in the contracts that oil companies signed in the late 90s. The contracts were supposed to include language that ended incentives to the companies when oil prices reached $34 a barrel. Prices right now are about double that.

The Independent Petroleum Association of America see the potential rule changes as simply a means for other ends:

First of all, remember that this discussion is really not about oil and gas profits. It is simply about money. The new party in power has an agenda which includes such things as a heavy emphasis on subsidized renewable energy, and under the new “Pay As You Go (PayGo)” system they must find offsetting sources of revenue. To them it is logical that one segment of the energy industry should “pay” to subsidize the development of another.

The amount of oil to be drilled in the U.S. is limited, and the Democratic majority in Congress is planning on investing in energy sources that we can sustainably produce in order to decrease our dependence on foreign oil.

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