treatment, the United States would be more dependent on unreliable overseas sources and would consequently be paying more for energy at an even greater negative distortion of the balance of payments. Every unit of energy not developed domestically has to be purchased from unsecure overseas sources. Aggressive domestic exploration to find new oil and gas fields is more critical today than it ever has been in the history of our Nation. Incentives for oil and gas drilling are more necessary and more needed now than ever before. Drilling activity is now down. Last year we had to line up 6 to 8 months ahead of time to get a deep drilling rig and now we have contractors in our office every day seeking business. The wisdom of past U.S. Congresses has significantly helped this Nation maintain whatever degree of self-sufficiency in energy we now have; many Congresses prior to this Congress have analyzed and debated this problem. They have all reached pretty much the same conclusion. Congress can do a lot to stimulate vitally needed domestic exploration by retaining all present incentives and developing new and additional incentives, or Congress can make this Nation more dependent on unreliable foreign energy sources by deteriorating existing incentives and ignoring additional incentives. Thank you, Mr. Chairman and the committee members. I have more in this prepared statement and I would like for it to be entered into the record. Mr. BURLESON [presiding]. Without objection, your full statement will be made a part of the record. [The prepared statement follows:] ABOUT AMERICAN QUASAR PETROLEUM Co. American Quasar Petroleum Co. is an oil and gas exploration and producing company, founded in Fort Worth, Texas in 1969 by five independent oil men. The basis of the new company resulted from reams of expert testimony before the Federal Power Commission and other classical papers by experts in the oil and gas industry indicating an energy shortage with resulting opportunities. Thus a decision was made to pool individual existing resources to take advantage of what we believed inevitable-an increase in prices-particularly in intrastate natural gas. Today 88% of our reserves are in natural gas. Our exploration concept is founded on basic ideas and the following operational premises: (1) A large portion of the remaining oil and gas reserves on the North American continent is located at depths in excess of 15,000' in the lower 48 States, Alaska and in the remote frontier regions of Canada. The odds of finding hydrocarbon reserves in these areas are substantially better than the more exploited shallow to medium depth areas of the United States. (Independents are basically precluded from offshore drilling due to the federal competitive lease bidding procedures). (2) Exploration for large hydro-carbon reserves in deep and/or remote areas is very costly; with wildcat wells costing from 1 to 10 million dollars. Adaquate exposure of this kind of exploration would require large amounts of capital and the source of this capital would have to be the public. (3) In order to prudently follow this industrial concept, experienced and proven people had to be attracted to the company to perform exploration and operational functions. The background and experience of our geologists, petroleum engineers, and geophysicists was delineated as a minimum of 15 years in a particular geologic province-men with a proven track record. American Quasar originates exploration projects, supervises drilling and completion of wells and the production of oil and gas in the United States. Quasar Petroleum Ltd., an 80.7% owned subsidiary, performs similar activities in Canada. Canadian-American resources Fund, Inc., a wholly owned subsidiary, was formed to raise large sums of public capital and manage limited partnership drilling programs for joint venture exploration and development activities conducted by the two Quasar companies. Since its inception in 1970, Can-Am has secured 141 million dollars for joint venture drilling. In 1974, Public limited partnerships from Can-Am totaled $48.6 million dollars. This was 14.7% of all public drilling programs raised in 1974 and was the largest in the Nation. The company had a net loss per share in 1970 of $0.25, in 1971 of $0.15, in 1972 of $0.15, and showed a modest profit of $0.03 per share in 1973 and $0.20 in 1974. It is abundantly apparent that the company would probably have failed had it not been for relief in the prices of hydro-carbons and prepayments by gas companies, even though the company maintained an above industry average finding new hydro-carbon reserves. According to the 1973 International Oil Scouts Association Yearbook, the industry's success ratio for new field wildcats for the years 1971 through 1974 was 11.6% while American Quasar's success ratio for new field wildcats was 26.9%. POSITIONING THE INDEPENDENT OIL COMPANIES In 1972, the oil and gas industry spent 2.73 billion dollars for for domestic drilling on and offshore. Of this amount, the major integrated oil companies spent 919.6 million dollars and the independent segment of the industry spent 1.81 billion dollars. Included in the 1.81 billion dollars spent by independent oil and gas companies is 316 million provided by non-oil-related investors in 80 public oil and gas drilling programs. There are approximately 10,000 independent oil entities and probably at least two dollars is invested in private drilling ventures with these independent companies and operators for every dollar invested in public drilling programs. The probable breakdown of capital sources for 1972 domestic drilling is: Major oil companies--- Independent oil companies__. Million $869 860 1,000 The independent oil company and his non-oil-related investor partner have been largely responsible for whatever degree of self-sufficiency in energy the United States has today. In 1972 the independent segment of the industry made 87% of the new field discoveries. The United States Congress is responsible for a great deal of the capital that goes into oil and gas drilling because of the tax treatment of the industry. It is obvious that large amounts of outside-the-industry capital are attracted to oil and gas drilling because of the tax treatment. Because of this and because the tax treatments afford the major and independent companies more capital to help get the job of oil and gas exploration done, the tax laws relating to the industry have and are serving a vital and necessary purpose. Without the existing tax treatment, the United States would be more dependent on unreliable overseas sources and would consequently be paying much more for energy at an even greater negative distortion of the balance of payments. For several reasons, the term tax shelter is misapplied when associated with drilling programs. From the Federal Government's point of view, the term tax generator is probably more accurate. When high tax bracket money is invested in drilling programs, the investment results in dry holes or productive wells. In the case of dry holes, which occur about 9 out of 10 times in exploratory drilling, jobs are created and salaries taxed, profits are made and taxed by service companies, drilling companies, steel companies, equipment manufacturers and lawyers and other professional people. It is not as if all the high tax bracket investors' tax saving is lost by government. In the case of productive wells, and counting field development wells, about 50% of all wells drilled are productive, not only are jobs and salaries and companies and professional profits created and taxed, but new wealth is created and taxed. Heretofore nonproduced oil and gas is now produced and sold and tax. Pipelines are constructed and taxed. Refineries are constructed and taxed. The manufactured product is marketed and taxed. There is more tax on gasoline than profit and then the profit is taxed. In the long run, it is possible that the Federal Government has realized more revenue because of the tax treatment afforded the oil and gas industry than they lost in tax savings to investors and oil companies. To illustrate this, the limited partner investors in Can-Am have deducted from their ordinary income through December 31, 1973, $80 million resulting in a tax savings to them of $40 million assuming an average 50% bracket. This money was paid to drilling contractors, mud companies, oil field service companies, etc. It created salaries and profits which were taxed. It also created to date approximately 212 billion cublic feet of proven gas reserves and 2 million barrels of proven oil reserves with future net revenues of $116 million to these limited partner investors net interest in proven reserves which after the depletion allowance will result in taxes to the Federal Government of approximately $44 million again at the 50% bracket, or 10% more taxes to the Government that would have been the case if the investment had not been made. In addition, this exploration resulted in the Quasar companies' proven reserves increasing by 126 bcf. and 1,3900,000 bbls. of oil with future net revenues of approximately $89 million. Other partners and royalty owners increased proven reserves of oil and gas from the exploration effort that will generate future net revenues of an estimated $411 million. The limited partner's dollars used for drilling exploratory wells created or helped to create total proven future net revenues of $620 million. Assuming full development of these existing fields, the total amount of future net revenues could increase to $2 billion $140 million. After depletion the tax to Federal Government on income alone will amount to approximately $797 million assuming the 50% tax bracket. This tax figure makes no provision for other costs and expenses not related directly to the oil and gas properties. These numbers are estimates but are made on our best efforts. Many aspects could change these results but the fact remains, the Federal Government will receive tax revenues far in excess of the taxes saved in the original exploration effort. Without existing tax treatment this activity and resulting productivity would not have happened. From the investor or oil companies' point of view, high risks are taken that usually result in failure. There is no economic benefit in drilling dry holes. The drilling of dry holes is a business loss that would be deductible in any business. When a productive well is drilled and intangible drilling costs are deducted in the year expended, only the timing is changed from other businesses. The only real tax shelter aspect is the 22% depletion allowance and this exists only if oil and gas are found. Basically, from the investor's point of view, there is no tax shelter in an unusuccessful drilling program. The investor is taking a risk that he may create a tax shelter. There are three areas of proposed legislation that will, without a doubt, affect the degree of self-sufficiency in hydrocarbon energy that this country maintains. A. THE DEPLETION ALLOWANCE 1. If the depletion allowance is deteriorated any further, less money from investors will be available for domestic exploration. 2. The independents will have less capital for exploration and development to compete with the majors. 3. More independents will be forced to sell out to majors. 4. The majors will be able to pass on the capital erosion to the consumer by increasing the price of the refined product. 5. The consumer will make up the majors' loss and pay more for gasoline. 6. It will hurt the independent and the consumer. B. PRICE ROLL BACK 1. If the price of crude oil is rolled back there will be less money available from investors for domestic exploration. 2. The industry will have less money for exploration overall. 3. The independents lose control of their oil and gas at the wellhead and have no other way to profit. The majors can profit by refining, processing, and marketing the product. They could care less what the price of crude oil is so long as the price of gasoline is not affected. If prices of crude oil are rolled back the independents suffer and the majors make more profits. C. INTANGIBLE DEDUCTIONS 1. Change of the intangible deduction would be a major deterrent of outside risk capital for domestic oil and gas exploration because American oil investors plan in calander year time frames. 2. The independent segment of the industry would cease to exist as viable industry. 3. More concentration would be put in the hands of the majors. 4. This is a very important factor in the independent segment of the industry. 5. It would not create that much more revenues to the Government for only the timing would be changed on productive wells for the deduction. The oil and gas industry does not exist to shelter taxes, it exists to help supply the demand for energy. Historically, any company that has done a reasonable job of helping supply this demand has to be rewarded. Anyone investing in a drilling program should believe that he has a chance to profit commensurate with the risks taken irregardless of tax treatment. USE OF OIL AND GAS DRILLING PROGRAMS An oil and gas drilling program should be an intelligent, legal, fair and prudent attempt to convert dollars into barrels of oil and cubic feet of gas and reconvert the oil and gas into more dollars while taking full advantage of all legitimate favorable tax treatment. MISUSE OF OIL AND GAS DRILLING PROGRAMS Oil and gas drilling programs are misused when they are projected as risk-free tax shelters. Most of the time in such instances, tax deductions in excess of the investment are created by sham transactions. Oil and gas drilling programs are also misused when they are structured as licenses for the program sponsoring company to steal from the limited partner investor. AMERICAN QUASAR PETROLEUM'S CONTRIBUTION TO THE NATIONAL ENERGY As evaluated by Cawley, Harrington & Gillespie, third party consulting engineers, a copy of whose references have been submitted to you, through the company's exploration efforts we have participated in the discovery of a total of 1.105 trillion cubic feet of proven gas reserves. Of this, 150 billion cubic feet are held by the company's interest, 225 billion cubic feet by the limited partnership investors and 730 billion cubic feet by outside partners and royalty owners. Based on company estimates and assuming full development of our existing fields, but no additional discoveries, this total would amount to 3.96 trillion cubic feet. The total of this gas discovered should deliver approximately an average of 535 million cubic feet per day over a 20 year period. In addition, we have participated in the discovery of 12,000,000 barrels of oil. Thus, according to the lone Star Gas Company, on a daily average use basis, the proven gas reserves will supply metropolitan Fort Worth, Texas, which now has approximately 1 million people, for 30 years and 3 months. This includes both residential and industrial users. It will convert into 6,000 tons of anhydrous ammonia per day, enough to fertilize 88,000 acres of corn in Iowa with 112 lbs. to the acre per day. This is in addition to producing 10,000 tons of urea per day for use in solid fertilizer and animal feeds. One years supply of urea would fertilize the forests of california, Oregon and Washington for 7 years. In addition to the limited partnership money, another $32 million in investment was generated, the sources of these funds were (1) a banking consortium consisting of the United California Bank, Los Angeles, California; the Royal Bank of Canada, Calgary, Canada; Royal Bank of Canada Agency, San Francisco, California; the Bank of New York, the Fort Worth National Bank and the Continental National Bank of Fort Worth, Texas; (2) gas prepayments, (3) financial arrangements with suppliers and (4) cash flow. In addition to developing the aforementioned reserves, the company has grown from 3 employees in 1969 to approximately 140 to date with a total annual payroll of $2,275,000. The great majority of these personnel are by the nature of the business technical: geologists, geophysicists, engineers, professional landmen and financial executives. The company is the largest user of tubular goods from one of the major oil supply companies. There are approximately 35 rigs drilling at any given time employing approximately 455 people directly. The company and its limited partners have also generated a large amount of professional fees related to the industry and has purchased services and goods from virtually every state in the United States. All of these monies, funded by the public, and the company have provided thousands of jobs which have generated taxation to schools, city, county, state and federal government. During the history of our individual drilling programs, through December 31, 1973, the average investor in the 50% bracket, has received tax benefits including the deduction of intangibles to the extent of 40.5 million dollars. Based on the results of the programs, if all the investors liquidated today, the U.S. Government would receive $8,450,000 in tax revenues, and the properties would throw off future income that would be taxed to the new owners as we have previously discussed. The northern hemisphere has benefited by the discovery of a total of 1.105 trillion cubic feet of proven gas reserves and 12.9 million barrels of proven oil reserves as previously pointed out. At present our activities indicate many attractive exploration prospects that are now being drilled in the United States. We are drilling quite a number of wells in promising deep sedimentary basins in North America, looking for substantial reserves of both oil and gas. We intend to continue to pursue an aggressive exploratory program in the future, the same as we have in the past. If our exploratory success ratio remains the same, we hope to do well. We expect it to be possible to expend 50 million dollars each year for the foreseeable future, providing existing tax incentives are available and the improved economic climate continues. CONCLUSION Gentlemen, I submit to you that the wisdom of past U.S. Congresses has sugnificantly helped this nation maintain whatever degree of self-sufficiency in energy we now have. Many Congresses prior to this congress have analyzed and debated this problem. They have all reached pretty much the same conclusion. This country today needs domestic exploration more than ever in the history of the nation and Congress can do a lot to stimulate vitally needed exploration or they can do a lot to slow it down. We have confidence that this Congress will demonstrate the necessary wisdom to solve the energy problem. FACTS ON DOMESTIC EXPLORATION In 1972, 66 percent of drilling expenditures were by "smaller" operators: (1) A. Total of 2 billion spent. (1) B. C.M. companies spent 919.6 million. (1) C. Independents spnet 1.8 billion, or twice as much: (1) 1. $350 million from public drilling funds. (2) 2. $700 million from private joint ventures. (3) 3. $760 million equipping producers, testing, etc., through the Christmas tree. (3) Independents drill more than 80 percent of U.S. wells: A. C. M. group drilled 4,833 wells, or 17.50 percent. (4) B. Independents drilled 22,782 wells, or 82.50 percent. (4) Independents completed 7.25 times the number of wells as C. M. group: A. C. M. group drilled 1,000 exploratory tests. (4) B. 272 wells, or 27.2 percent were productive. (4) C. Independents drilled 8,024 exploratory tests. (4) D. 1,972 wells, or 24.57 percent were productive. (4) It should be noted at this point that the oil and gas journal uses a 75 percent exploratory figure by "smaller" firms, but uses a different base of differentiating independents and majors. CONCLUSION Independent explorations account for between 75 percent and 82 percent of exploration discoveries. In Canada, where price relief has not been afforded, the number of drilling rigs has decreased from 195 in 1971 to 185 in December, 1973. (6) |