- I. The nation is running out of oil and natural gas not for lack of adequate domestic resources but rather for lack of adequate incentive for domestic exploration and drilling. --Reserve productive capacity has been grossly overestimated, and some degree of consumer rationing might prove necessary in any future foreign-supply curtailment. --There is growing recognition within both industry and government that an energy gap looms just ahead, unless domestic drilling rates are restored at least to former levels. --"End use controls," a form of consumer rationing, may soon be required for natural gas because of diminishing supply; a new FPC study, revealed by Chairman Nassikas, indicates that the supply of deliverable gas is already down to 10 years, and continuing a sharp decline. - -To attempt to fill the emerging energy gap by increasing imports would not only endanger national security but would thwart all efforts to close the nation's payments gap. --Paradoxically, the proposals before the Committee, labeled tax reform, would further depress domestic exploration and drilling at the very time when an increase is required to avert a supply crisis. II. The expensing of non-recoverable costs is absolutely vital to the domestic wildcatter, and to require that these costs be capitalized would render it impossible for most small operators to look for oil and gas. --The independent producer is not trying to escape his fair share of the nation's tax burden; he is quite willing to pay taxes on oil and gas produced and sold, but cannot be expected to drill for oil if denied the privilege of expensing intangibles. --The intangible charge-off privilege does not allow the producer to retain or pocket one cent of his income, but rather serves to encourage him to go into debt or seek outside risk capital in order to remain in the business of searching for reserves to produce. --Denying the intangible expensing privilege would be particularly injurious to independents trying to get started, while having relatively far less effect upon the large integrated companies and larger independent producers. III. The 27.5 percent factor is supportable on numerous bases. Fundamentally, if the rate were too high, there would be disproportionate concentration of resources into this enterprise, when the contrary is true. IV. The 50 percent of net limitation works a particular hardship upon the smaller operator and upon the caretakers of the nation's marginal or stripper wells so essential to America's relative self-sufficiency in energy resources. --Because of the 50 percent of net limitation, few domestic independent producers enjoy anything approaching the full 27. 5 percent depletion. --An increase in the net limitation would enable all operators to realize a more nearly uniform depletion percentage factor and serve to encourage domestic independents to become more active in the search for oil. V. Particularly injurious to independents would be the proposal to require individual producers and outside investors who derive less than 60 percent of their income from oil and gas operations to include intangible expensing and depletion income in computing their tax liability. --The LTP plan, while excluding large corporations, seems aimed directly at the independent producers, upon whom the nation historically has relied for 75 percent of domestic discoveries. --It is the independent who is aggressively searching for oil and spending every cent he takes in and can borrow who would be the principal victim of the LTP provision. VI. The mineral interest holder, or land and royalty owners, more than a half million in number, would be particularly affected by the LTP and percentage reduction proposals. -- Proposals denying land and royalty owners full participation in depletion would undermine the foundation upon which America has built her great energy industry, and would further depress domestic exploration and drilling by denying a primary investment stimulus to this nation's drilling efforts. VII. Elimination of the ABC method of financing development, elimination of carved-out production payments, and the proposed recapture rule that would require treating as ordinary income any gain or sale of mineral properties to the extent of intangible drilling costs previously deducted, all would hit hardest at the domestic wildcatter. VIII. The time is at hand to increase, not decrease, incentives to domestic independent oil and gas producers, if we are to avoid a dangerous energy gap. --Any increase in the tax burden upon the domestic producing segment of the petroleum industry will result either in curtailed drilling or an increase in consumer prices. |