CONTENTS PART A-WITNESSES Natural Resources: Depletion Allowances, Exploration Expenses, Emilio G. Collado, Executive Vice President, Standard Oil Company Robert G. Dunlop, President, Sun Oil Company. William I. Spencer, Executive Vice President, First National City George V. Myers, Executive Vice President, Standard Oil Company COORDINATED TESTIMONY OF INDEPENDENT PRODUCERS: Independent Petroleum Association of America; Independent Oil Producers and Land Owners Association, Tri-State Kansas Independent Oil and Gas Association; Oklahoma Independent Petroleum Association; Panhandle Producers and Royalty Owners Association; Texas Independent Producers and Royalty Owners Association; and Tom Schwinn, B.S., L.L.D., J.D., Executive Vice President and Counsel, Kansas Independent Oil and Gas Association---. William B. Cleary, President, Oklahoma Independent Petroleum Associa- 199 C. H. Hinton, Petroleum Consultant, Panhandle Producers and Royalty William J. Murray, Jr., President, Texas Independent Producers and Royalty Owners Association____ A. V. Jones, Jr., President, West Central Texas Oil and Gas Association__ (III) 213 Page Eberhard P. Deutsch, Permian Basin Petroleum Association___ 263 277 Walter E. Rogers, President, Independent Natural Gas Association of 289 William Jackman, President, Investors League, Inc. 305 Morton M. Winston, Executive Vice President, the Oil Shale Corporation_ 313 319 345 347 PART B-ADDITIONAL STATEMENTS Robert V. Moss, Jr., President, United Church of Christ, submitted by David W. Richmond, Miller & Chevalier, Washington, D.C‒‒‒‒ (IV) 369 379 Senator John Tower Mr. Chairman: October 1, 1969 I have asked to come before this distinguished committee this morning because I am fearful that proposed changes in our tax laws, as set forth in H.R. 13270, will strike a particularly heavy blow to the oil and gas industry of this country, and in turn to our nation's defense capability. As a member of the Senate Armed Services Committee, I am well aware of the vital role a healthy oil and gas industry plays in maintaining a strong defense posture. In Southeast Asia today, for example, one half of the military tonnage imported from the free world consists of petroleum products. About 10 per cent of the petroleum required to support the military effort there is supplied by the United States, with about 65 per cent imported from the Arabian Gulf and 25 per cent from the Caribbean and other localities. I believe it is crucial for our nation's defense that there be maintained in this country the capability to supply our own petroleum needs in case foreign oil resources are denied as they were for a short time during the Middle East crisis of 1967. Even within the past 30 days we have heard threats of boycott from the Arab nations. Mobilization studies of the Defense Department show that any type of extended emergency involving the United States and its allies could not be adequately fueled by the United States alone. Therefore, reliance must be placed upon other free world sources in the Western Hemisphere such as Canada and the Caribbean area. The target date for any appreciable amount of oil production from the Northerr Slope of Alaska is estimated to be 1972, so we cannot depend on that resource now. Our national security dictates that we have in existence petroleum resources capable of satisfying our needs. Petroleum cannot be stockpiled like hardware. The only way of insuring an adequate domestic petroleum supply is through a healthy domestic oil and gas industry. A healthy oil and gas industry requires continual exploration, continual employment of a labor force and continual access to risk capital. The Defense mobilization studies to which I just referred indicate that we need a petroleum industry in our own country which is capable os producing even more oil and gas than it is now. I am fearful that if Congress approves the tax changes now proposed for the petroleum industry, it will gravely reduce the industry's production capability precisely at a time when there is need for even greater production. It is imperative that our domestic oil industry be capable of sustaining this country's requirements under any conditions. This strategic material is one of the items absolutely essential to defense and thus it is foremost in the minds of military commanders. The difference between military success or failure could easily hinge on the availability of enough petroleum products at a given particular time. In the petroleum industry, production hinges on the availability of capital. The importance of capital to our oil industry and in turn to our defense posture, our national economy and the well-being of all Americans, cannot be overemphasized. Over 90 per cent of all the work done in this country is done by machinery. This machinery is lubricated and often powered by petroleum products. The use of machinery has contributed heavily to the high wages and high standard of living possible for the people of this country. The accumulation of capital to finance growth in our business economy has been historically successful promoting and maintaining our position as the greatest industrial nation of the world. In order for our private enterprise system to function successfully, it must have a steady and continuous supply of new private capital. One of the world's serious problems today is the shortage of investment capital. In spite of the great benefits our American system has brought us, I fear it is in danger of being severely damaged through an unreasonable system of taxation. There is a great difference between capital and income. Our federal tax system is based on income and should remain so. Taxation of capital results in a draining away of that capital and in turn less and less income for all. As you know, I have firmly advocated the continuation of the 27 1/2 per cent depletion allowance for oil. I continue to do so. This allowance, together with the ability to deduct intangible drilling costs and associated exploration expenses from oil and gas income, is the prime source of generating new capital within the oil and gas industry itself. That generation of new capital must be maintained In order to encourage continued health in our petroleum industry and continued overall economic benefits for all Americans. Today, you will hear excellent testimony of a highly technical nature to substantiate the vital importance of finding and using our domestic oil and gas reserves. Various forms of production payments have been successful in the past as a means of consolidating and transferring newly discovered reserves to skilled oil and gas operators, resulting in greater efficiency in production. I urge you to consider carefully, ways of updating and refining the methods of sale and purchase of these unproduced natural resources, not eliminating this avenue of financing. In summary, I would stress the need for a system of taxation of our oil and gas industry which will encourage continued health within that industry. I urge this because of our nation's dependency on the industry economically and because of its dependency for an adequate defense operation. I know you are anxious to hear other witnesses who are capable of providing more expert testimony and so I have tried to keep my remarks brief. Thank you for your kind attention. |