DEEPWATER WAIVER WELCOME BUT WEIRD

Energy legislation in the U.S. gets weirder all the time. Out of the election year blue comes a bill from Sen. Bennett Johnston (D-La.) to waive initial royalties for production from the deepwater Outer Continental Shelf. Johnston wants to attach the measure to the omnibus energy legislation now in a House-Senate conference committee.

It's a good idea. It deserves the quick support oil companies have given it. As part of the omnibus energy legislation, however, the initiative just looks a little-well, weird is the only word for it.

AN UNFORTUNATE PATTERN

The measure fits a political mold that has given energy legislation its current, unfortunate shape. The omnibus legislation offers select categories of producers just enough to win their support. But it fails to offer the country any hope for significantly higher oil and gas--especially oil--production.

The legislation promises independent producers partial relief from the alternative minimum tax (AMT) provisions that have sapped drilling capital since 1986. So independents mostly support the energy bill. And well they should. The AMT is one of their biggest problems. Independent Petroleum Association of America estimates the relief on offer would boost capital available for drilling by 17-25%. For independents, that's definitely a goal worth pursuing.

And Johnston's bill would help companies inclined to drill in water more than 200 m deep--majors, in other words. Here again, help is help. Current oil prices make development projects in that much water marginal at best. Not many such projects are in progress; few are likely to start until economic parameters improve. Royalty relief certainly would make things better. It would give majors something to cheer in the energy legislation.

Something for majors. Something for independents. Everybody ought to be happy now. But what about domestic production?

So 25% more drilling capital becomes available, and the rig count lurches to 860--or even 900. If confined to mature areas, that's not going to alter the U.S. oil production slide much. And so half a dozen deepwater rigs return to the gulf because of the royalty break. In one scenario, resulting new production amounts to 260,000 b/d by 2000--impressive, yes, but still below U.S. losses to natural decline in the average year.

The weird part of Johnston's proper effort to stimulate deepwater Gulf of Mexico activity is that it would attach to legislation forestalling OCS leasing nearly everywhere else and denying access to the biggest prospects onshore. Lockup of so much federal land amounts to refusal to address one of the country's greatest energy, trade, and environmental challenges: a domestic oil production decline averaging 300,000 b/d/year and consequent need for imports.

FISCAL CONCERNS

Official concerns about Johnston's measure focus on the chance it would cost the government money. Yet fiscal concerns don't seem nearly as important in leasing policy. The government forgoes bonuses, royalties, and corporate income taxes when it refuses to lease federal land. It spends money and yields revenues when it buys back controversial OCS leases, as the energy legislation requires. And it can't collect income taxes from people it won't let work.

U.S. producers should support whatever survival rations Congress offers them. But the country needs more than healthy producers. It needs significant new production, which requires healthy producers exploring and developing the most promising parts of the petroleum resource. With or without the Johnston measure, current energy legislation doesn't do the job.