About $2.5 billion in energy tax incentives approved by Congress will do little to correct growing U.S. dependence on imported oil, contends Coopers & Lybrand.
To reverse the growth of oil imports and move the U.S. toward energy independence would take "substantially more," perhaps $15-20 billion, said John Swords, Coopers & Lybrand's national director of energy taxation.
Swords noted that most incentives included in the budget deficit reduction package Congress recently passed (OGJ, Nov. 5, p. 20) are "woefully inadequate" to stimulate significant exploration and development of U.S. oil.
He also cited Department of Energy projections that if the current trend of stripper well abandonment is not halted, the U.S. will lose 80% of its production within a few decades.
"Nevertheless," Swords said, "the energy provisions passed by Congress do not provide adequate incentives to stop this trend.
"Few operators are willing to continually maintain marginal wells based on expected pricing scenarios. Yet the incentives for marginal wells are not structured to yield significant benefits."
INCENTIVES TARGET GAS
Much of the incentive allotment targets a 2 year extension of Section 29 credit for tight sands and other gas instead of targeting possible increases in crude oil reserves, Swords said.
"At best, the tax credits in Section 29 will keep several hundred rigs going that otherwise would cease operation sometime after the first of the year."
Coopers & Lybrand figures 20-40% of the 1,000-plus rigs active in the U.S. are operating because of Section 29 incentives.
"Unfortunately, natural gas production cannot significantly help our foreign crude dependence until we have a large scale conversion to gas usage-and that's not going to happen quickly," Swords said.
Meantime, the only incentive for exploratory drilling in the U.S. is a deduction against the alternative minimum tax "which becomes available only if the producer escapes numerous other limitations that are imposed in the new tax law."
MORE INCENTIVES URGED
Swords calls for expanded tax incentives to boost U.S. crude reserves that include:
- A tax credit for qualified outlays for tertiary enhanced oil recovery.
- Repeal of the property transfer rule to allow independents to maintain percentage depletion allowances after acquiring producing wells.
- Doubling net income limitation for percentage depletion to 100%.
- Increasing percentage depletion on marginal properties phased in below $20/bbl.
- Partial alternative minimum tax relief for intangible drilling costs and depletion, with no effect on the environmental tax for corporations.
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