Any Texas oil and gas attorney who has practiced for any length of time has been through the cycle many times: oil prices go up, and leasing and drilling activity increases. Oil and gas prices decline, and many oil and gas companies pull back on their leasing and drilling efforts. The past year has seen an especially extreme example of this cycle. Last summer, according to WTRG Economics, the price the operator received for oil in some areas of Texas reached $150.00 per barrel or more. According to the Energy Information Administration (a division of the Department of Energy), gas was going for $8.00 per mcf at the wellhead in some places. Leasing was going on at a frantic, almost giddy, pace and substantial primary term payments and royalty percentages were the norm. Then prices declined sharply, to less than $30.00 per barrel of oil and $3.00 per mcf for gas at the wellhead in many areas of Texas. Most operators pulled way back, some walking away from signed leases and others signing leases only at substantially reduced bonus and royalty levels.
Now the price of oil and gas is increasing, and phoenix-like, the Texas energy industry begins to rise from the ashes. This time, there are some dark clouds on the horizon, coming in from our nation’s capitol, that do not bode well for the energy industry. President Obama, while proclaiming that he wants to achieve independence from foreign oil sources, is considering two things that would cripple our domestic oil and gas industry. Specifically, he wants to eliminate intangible drilling costs and depletion allowance as deductions for oil and gas operators on their federal income tax. He wrongly calls these “subsidies”, in an attempt to gain support for this policy.
The deduction for intangible drilling costs allows oil and gas companies to deduct the cost of exploring for oil and gas from later oil and gas income. These costs include such things as seismic tests, surveys, engineering fees, wages, etc. The intangible drilling cost deduction encourages oil and gas companies to explore for new energy sources. The depletion allowance allows oil and gas companies to deduct a portion of the value of their mineral deposits as those deposits are used up, just as the owner of a machine used to produce goods is allowed to depreciate his machine.
It took decades for the domestic energy industry to recover from the ill-conceived, poorly timed and wrongly executed policies of Jimmy Carter. President Carter’s policies drove many smaller companies out of business, and encouraged other producers and refiners to move outside of the United States. When we experience those times of high gasoline prices in the United States, it is primarily Carter that we have to thank. Unfortunately, we now seem to have another President headed down this same irresponsible path.The announced policies of Obama are bad policy policy for at least four reasons: 1) most energy production in this country comes from small, independent companies, not “big guys” like Exxon or Mobil, and these small companies are going to be hurt badly by this policy; 2) these policies will result in much higher prices at the pump for consumers, who are having a hard enough time already; 3) Carter’s policies drove the “big guys” overseas, and now Obama’s policy would diminish the remaining independents; and 4) the higher energy prices will contribute in a big way to inflation. Is this really the way to achieve energy independence? I think not!