When business conditions sour, there can never be enough relief for companies and individuals devastated by the downturn. Yet economics, as it does with everything else, sets limits on relief. It is within this framework that U.S. oil and gas producers should assess government relief implemented in response to an 18-month price slump.
If not enough, the response has at least been impressive. And it has occurred where oil price weakness did maximum damage to public treasuries-at the state level.
State measures
This year, several states created or enhanced measures to keep marginally economic oil and gas wells on stream during the price slump. Some acted to revive inactive wells.
Among examples from a tally kept for 1999 legislative sessions by the Interstate Oil & Gas Compact Commission (Iogcc), Texas waived severance tax on wells producing less than 15 b/d of oil or 90 Mcfd of gas when futures prices fall below $15/bbl for oil and $1.80/MMBTU for gas. Among other measures, the state passed a tax exemption for inactive wells returned to production.
Oklahoma enacted tiered reductions in its 7% gross production tax until July 1, 2001. The rate drops to 4% when the oil price falls to $14-17/bbl and to 1% when the price falls below $14/bbl.
In the Rocky Mountain region, Wyoming lowered the oil severance tax rate until the oil price stays above $20/bbl for 3 consecutive months. It also exempted from sales taxation the cost of electricity used in oil production. Montana excluded royalty administration fees from oil values subject to taxation, reduced production taxes, and expanded eligibility criteria for production incentives. It also cut the tax rate on stripper oil production when the oil price is below $30/bbl while raising the production threshold for "stripper" designation to 15 b/d from 10 b/d. And New Mexico extended the effective dates of severance tax exemption for restoration of wells inactive for 2 or more years and provided other tax relief, including relaxation of criteria for reduced state royalty on low-volume wells.
Among state responses elsewhere this year in the U.S., West Virginia exempted marginal production from severance taxation.
Several producing states took similar steps before this year, commonly providing tax relief for marginal wells during periods of low prices, some of them expanding criteria for wells and producers qualifying for relief.
The federal government hasn't been as helpful. The Bureau of Land Management allowed operators to suspend stripper wells on federal land without jeopardizing leases. And the Department of Energy took a series of steps to help producers survive the price crisis, most of them administrative or related to technology assistance. Tax relief for marginal production has been proposed in Congress but, especially now that oil and gas prices have rebounded, doesn't look promising.
Economics explains much of the contrast between federal and state willingness to help producers. Politics explains the rest.
Contrast of effects
State governments depend more heavily on revenues from oil and gas than the federal government does. According to a March Iogcc survey, declines from production-related state levies last year included $133 million in Wyoming, $155 million in Louisiana, $73.5 million in Texas, and $65 million in Oklahoma. The states hurt financially because of oil and gas price weakness. They acted. Washington, D.C., hardly noticed the effect on its finances and, as usual, received little political pressure to act except from outnumbered producing states.
Tax relief enacted this year can't do much about last year's bankruptcies. What it can do is take some of the sting out of future price crises. It may not be enough. But some relief is better than none at all. And official recognition that economically marginal production represents value worth preserving deserves applause, whenever and at whatever level it occurs.
