Texas Attorney Blog

An experienced oil and gas lawyer understands how politics influences the rules and regulations placed upon those working in the energy industry. Unfortunately, that political influence means that decisions about how the industry is regulated are often not guided by common sense, logic, and fair-minded decision-making. Instead, oil and gas regulations are frequently spurred by knee-jerk, reactionary administrators who are more concerned with appeasing loud public voices than making choices that are necessary and reasonable in light of all the information.

One is hard pressed to turn on a television news channel or flip open a newspaper without hearing or reading some story vilifying oil and gas companies and calling for new measures to control their activities. A cruel caricature is often painted of those who work in the energy industry which ignores the fact that these individuals are regular citizens working each day in a business that remains vital to national productivity. The unflattering and inaccurate public portrayal of the industry often causes appointed bureaucrats to impose new regulation after new regulation on these businesses. To make matter worse, those making these regulatory decisions are rarely knowledgeable about the day-to-day activities of those working in this field, and they usually ignore the effect that their arbitrary rules have on the business.

For example, the US Department of Interior (DOI) and Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) announced a spate of new workplace regulations recently for all offshore oil and gas producers. As reported last week in the Oil and Gas Journal, these new regulations will require certain actions be performed on these rigs in an apparent effort to improve workplace safety. These include guidelines for reporting unsafe work conditions, stop-work action procedures, safety audit requirements, and a variety of other mandates. While everyone can agree that safety should always be prioritized, heaping new requirements on the industry is rarely the best way to achieve that goal.

If history is any indication, these new rules from federal regulators will likely do little to address the actual safety goals and instead only stifle each company’s ability to respond on its own to the unique safety challenges that it faces on the ground. As those working in the field of oil and gas law know, when push comes to shove it almost always makes more sense for those actually working in these environments to decide the ideal safety protocols instead of regulations being handed down on high from those walking the halls in Washington D.C.

When announcing the new regulations, BOEMRE Director Michael R. Bromwich also took the time to attack those who have asked questions about the bureau’s slow-walking of permits. He cited the total number of overtime hours worked by employees in his office as proof that the agency was working as quickly as possible to evaluate plans. Of course, the fact that employees are logging a certain number of hours in no way exonerates the bureau from serious concerns that it is unfairly managing the application process. There remain persistent criticisms by legitimate sources that BOEMRE is sitting on permits.

After decades of experience as a Texas oil and gas lawyer helping owners and lessors on a variety of issues, I have come to appreciate the hard work conducted day in and day out by those running these industries. It is disappointing to learn of new regulations that are continually thrown upon these businesses, and are usually drafted by those who have little understanding of how the industry actually operates. In the end, these regulations are likely to do more harm than good.

See Our Related Blog Posts:

A Texas Oil and Gas Attorney Reviews Proposed New Onshore Drilling Regulations

Texas Oil and Gas Operator Obtained Deepwater Drilling Permit After Federal Drilling Moratorium

Texas oil and gas attorneys are watching with trepidation as Obama seeks to cripple domestic mineral production with his ill-conceived policies. In our previous post, we discussed the Obama administration's push to eliminate some of the tax subsidies that oil and gas producers in the United States currently enjoy. One of the subsidies that will be cut -- if the President's Fiscal Year 2012 Budget is approved -- is percentage depletion for oil and gas wells, or the "oil depletion allowance" as Speaker Boehner recently called it. According to an article on Texas Insider, the Office of Management and Budget (OMB) estimates that repealing percentage depletion would generate 607 million dollars in 2012, and 11.2 billion dollars over the next decade, in additional tax revenue. While that extra income would surely help the federal government's bottom line, it is not a smart policy due to the adverse affects it will have on oil and gas exploration and ultimately, retail gas prices. Before we can address these potential effects, however, it is helpful to have an understanding of what the "oil depletion allowance" is.

Depletion allowances let the owner of an asset account for the portion of that product as it is used up. Depletion allowances are similar to depreciation in that they provide cost recovery for capital investments -- it is a tax structure to ensure that the financial burden of using resources is not borne by businesses in a lump sum. There are two types of depletion allowances available to oil and gas producers: cost depletion and percentage depletion. Cost depletion allows a taxpayer to recover the actual capital investment through the period of income production of the oil and/or gas reserves, and the cumulative amount recovered through cost depletion cannot exceed the taxpayer's original capital investment. The other form of depletion is percentage depletion, which allows oil and gas producers and mineral rights owners to recover a portion of the mineral that is used up, or depleted, at a rate of fifteen percent of the average daily gross income from their operation each year. Unlike cost depletion, cumulative depletion deductions under the percentage model can be greater than the original capital investment made to exploit those resources.

The White House's 2012 budget seeks to eliminate percentage depletion for oil and gas wells, leaving only cost depletion as a means for recovering such capital investment costs for the domestic independent oil and gas industry. The effects of such a change would be substantial. According to the Independent Petroleum Association of America (IPAA), removing percentage depletion as an option for small oil producers would force these companies to reduce their drilling budgets anywhere from twenty to thirty-five percent. The IPAA goes on to say that the independent oil industry accounts for almost four million jobs in the United States, and that the elimination of percentage depletion will increase taxes and result in fewer employment opportunities for Americans. Furthermore, the IPAA asserts that the elimination of percentage depletion will increase our nation's dependence on foreign oil and result in less governmental revenue going forward.

This is yet another example of short-sightedness on the part of the current administration. Yes, eliminating percentage depletion might raise additional revenue in the short run, but at the cost of American jobs and independence from foreign oil, two things that are in short supply these days. It is likewise disheartening to hear Obama decry the depletion allowance as some kind of tax break that only benefits "big oil" (whoever that is), when the largest portion of our domestic oil and gas production comes from small, independent companies.