to the independent would be the Administration's new proposal requiring non-incorporated individuals to include income derived from percentage depletion application in computation of income tax liability.

4. Retention of capital gains tax treatment for total value of oil and gas property sales. Independents must maintain at least the current economic incentive to sell discovered petroleum so that they can be in position to conduct expensive exploration activities. Otherwise, further reduction in already inadequate drilling effort will result causing further reduction in secure domestic reserves.

5. A positive tax incentive program applied directly to domestic exploration efforts. Recognized even by authors of the percentage depletion study submitted by the Treasury Department to this Committee is the increasing need for further attention to the problem of strengthening economic incentive to search for domestic oil reserves. It is in the best interest of the consuming public and the nation's security, as well as the domestic oil producing industry, to seek the most plausible means for achieving this objective. Governmental oil policies can play an important role in this effort.

INDEPENDENT OIL AND GAS PRODUCERS OF CALIFORNIA

BEFORE THE

SENATE COMMITTEE ON FINANCE

WASHINGTON, D.C.

OCT. 1, 1969

Mr. Chairman and Members of the Committee:

My name is Stark Fox. I am executive vice president of Independent Oil and Gas Producers of California, a consolidation of two independent oil and gas producer associations both of which dated back to the early thirties. We are the only statewide association of producers in California.

At the outset, let me say that we join in the statement of the Independent Petroleum Association of America and will, therefore, confine our remarks to a description of conditions among California independents, and the impact the proposed changes in oil tax policy will have upon them.

Their sum

Let me further say that we are opposed to all the proposed changes. total effect is to lessen oil industry incentives to find and develop the more than 80 billion barrels of oil needed between now and 1980, according to the Chase Manhattan Bank and the Department of the Interior. The Congress and the Administration be considering ways to add to those incentives, rather than reduce them.

should

Conditions In the California Oil Industry

A 10-year record, 1957-1967, of the California oil industry unveils a gloomy picture, particularly for the smaller independent. The reason we use a 10-year period ended

1967 is that complete statistics for the succeeding period are unavailable. We believe that no significant changes in trends occurred during 1968 or thus far in 1969.

Here are some of the facts:

The total number of companies in the state in 1957 was 1465; in 1967 it was 1044, according to the Annual Review of California Oil and Gas Production compiled by the Conservation Committee of California Oil Producers. The net loss in number of

companies was 421, a drop of 29%.

Total employment in oil and gas extraction dropped from 26,000 in December, 1957

to 21,800 in December, 1967, the California Department of Industrial Relations reports in its Labor Statistics Bulletin. earnings in the same months of the same years were $1.07 and $146.64, respectively. (Currently, they are $173.43).

The Bulletin also reports that average weekly

The State Franchise Tax Board reports that 1039 companies filed Bank and Corporation Franchise (state income) Tax returns for calendar 1957; only 658 did so for 1967.

Of the 1039 filing companies in 1957, 428 reported taxable income, on which they were assessed $8,263,214.00. Of the 658 filing companies in 1967, 330 reported taxable income, on which they were assessed $16,074,343.00. (Production in 1957 was

928,971 B/D; in 1967 it was 984,722 B/D. Thus the state income tax per barrel of oil produced nearly doubled).

Conditions Among Independent Producers

The foregoing data apply to the California industry as a whole, but there is one group, the smaller independent producer, who was hardest hit during the period.

Conservation Committee tabulations show the varying patterns within the industry. Between 1957 and 1967, the major companies increased their share of total California production from 45% to 53%; the 43 principal minor companies slightly, from 28% to 291; the independents dropped from 9% to 3.7%. These percentages do not include production from unit operations, in which the small companies have little or no interest.

Figures covering oilfield development show the same trends. In 1957, the majors completed 44.6% of all wells; in 1967, they completed 53.8%. Principal minor companies increased their completions from 24.5% to 37.0%; independents dropped from 30.0% to 8.3%. Again, unit operations are excluded.

In 1957; major companies were credited with 45.5% of all wells; this figure had increased to 53.4% by 1967.

Principal minor companies increased their share of all wells from 25.0% in 1957 to 27.4% in 1967; independents dropped from 22.7% to 10.3%.

Disincentives

In spite of this obvious deterioration in the independent's position, and in spite of the fact that District V (Alaska, Arizona, California, Hawaii, Nevada, Oregon, and Washington) does not produce enough oil to fill its own needs, there are those who would further dampen the incentive to explore for and produce oil. They are the ones who would eliminate, reduce, or otherwise "adjust" the depletion provision in the Internal Revenue Code, as well as change other industry tax provisions. Up to this point they have succeeded in doing so. According to press reports, the so-called

Tax Reform Bill passed by the House, coupled with the recommendations of the Treasury Department, would burden the oil industry with additional annual Federal taxes of

$600 million.

We do not pretend that the ratio of oil production to taxes is direct; however, using that ratio as a rough guide, the District V producing industry's share of that added annual tax load would approximate $84 million, based upon its current 14% share of total production.

We make no effort to determine how much of the added tax burden would fall upon independent and principal minor companies. It would be a significant sum, however, because together they account for 47% of total California oil production.

And whatever the amount, it would come directly out of their pockets.

Producers Have No "Ultimate Consumer"

They cannot pass it on; they are not integrated companies; they cannot offset a tax increase by charging the ultimate consumer higher prices for their product. They have no "ultimate consumer" in the classical sense. It is common knowledge that, in the oil producing industry, the buyer, not the seller, determines the price that will be paid for crude oil. Hence, the producer has no way of shifting the burden of any added expense, be it taxes, higher wages, or any other.

The impact of such added expenses is particularly severe for the California producer.

California is the only oil producing region in the nation where average crude prices are less than they were in 1959 - 10 years ago. According to the current Statistical Release of the Independent Petroleum Association of America, crude oil prices east of the Rockies average $3.17 per barrel today; in 1959 they averaged $2.95 per barrel.

California crude prices, on the other hand, average $2.51 per barrel today,

whereas in 1959, the average was $2.55.

Thus, compared with 10 years ago, producers in the rest of the nation have had per barrel price increases totalling 22 cents; California producers have suffered a loss of four cents per barrel.

This is disincentive enough for the California producer, but the 'tax reform" bill passed by the House and the Treasury Department's recommendations would further curtail his ability to maintain his present none-too-enviable position.

And why did all this come about?

"Pressures"

Because of 'pressures" Treasury Secretary Kennedy is reported as saying.

The Chairman of the House Committee on Ways and Means was quoted to a similar effect, during that Committee's deliberations on the bill.

It seems to us that, in saying that the recommended changes in Federal oil tax policy and particularly in the depletion provision - were brought about by pressures, those who sponsor them (or acquiesce in them) tacitly admit that no thought has been given to the merits of the case.

The Wall Street Journal no "friend" of the oil industry, as witness its frequent highly critical editorials about the oil import program - supports that opinion.

In speaking of the House action on the so-called Tax Reform Act, it had this to say: