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California Independent Petroleum Association
The California Independent Petroleum Association (CIPA) is a non-profit trade association representing 470 independent crude oil and natural gas producers, royalty owners, and service and supply companies operating in California. “Independents” are non-integrated companies that simply get crude oil and natural gas out of the ground. Independent producers are not engaged in refining, marketing, or retailing.
California is the third largest oil producer and tenth largest natural gas producer in the nation. Independents account for roughly 40% of the crude produced in-state and 90% of the state’s natural gas.
Complicating the industry’s effort to protect domestic production, jobs, and the tax base it provides are proposals that would discourage new domestic drilling. The President has proposed an energy budget that allocates billions of dollars in research and development of alternative energy funded by a $36.5 billion tax increase on domestic oil and gas producers. While CIPA supports research into alternatives, this tax increase would devastate the limited resources now available for new drilling activity. Consequently, this would increase our dependence on imported foreign oil. Several of the proposals affect only small independent producers exclusively since major oil companies are excluded from many of the targeted tax provisions. Specifically, the administration’s budget:
• Eliminates Expensing of Intangible Drilling Costs (IDC)—IDC were enacted by Congress in 1913 in order to attract capital to the high risk business of oil and natural gas production. IDCs are specific drilling costs including surveying and prepping a new well site, wages, fuel, and supplies essential to drilling a new well such as cement, chemicals, etc. IDCs are generally characterized as expenditures that have no salvage value. As such, oil, natural gas, and mining operations have historically been allowed to treat these costs as expenses. The treatment allows an independent to deduct the costs in the year the expenses were incurred, rather than over the productive life of the property through a depreciation allowance. This provision would eliminate $7.8 billion available for new production.
• Eliminates Percentage Depletion—All natural resource minerals are eligible for a percentage depletion income tax deduction. Percentage depletion for oil and natural gas has been in the tax code since 1926. Unlike other resources, natural gas and oil percentage depletion is highly limited, available only to the first 1000 barrels per day of production from any one producer and limited to 65 percent of the producer’s net income. This provision will eliminate $10 billion that would have been available for new production.
• Extends Geological and Geophysical Amortization—Currently G&G costs are amortized over a two year period (for larger companies, the period is five years). Extending the amortization period would remove $1 billion from capital available for new production.
• Eliminates the Manufacturing Tax Deduction—This provision was enacted by Congress in 2004 to encourage the creation of American jobs. However, the oil and natural gas industry is restricted to a six percent deduction while other industries current enjoy a 9% deduction. Eliminating the deduction altogether would wipe out capital needed for the creation of jobs from new domestic production. The tax deduction either creates jobs or it doesn’t.
The Minerals Management Service (MMS) estimates that there are over 10 billion barrels of crude oil in federal waters off the Pacific Coast that are in currently unavailable for leasing. Given this estimate is based on 25 year old seismic data, the actual number could be much higher. Currently, 27 platforms produce crude in federal and state waters off California’s coast. These platforms, along with onshore locations, could be utilized to reach much of the known reserves off California’s coast without having to erect any new offshore platforms. CIPA encourages decision-makers to include existing infrastructure and onshore locations in eligible offshore projects. Tapping our own domestic resources creates jobs, helps the environment by reducing GHG-spewing tanker traffic, results in billions of dollars in federal royalty payments, and helps ensure our domestic energy security.
The President’s FY11 budget request to Congress recommends the repeal of Section 999 of the Energy Policy Act of 2005 (EPACT) which funds an industry led consortium to conduct R&D of cutting edge technologies to produce offshore reserves as well as unconventional onshore plays. Additionally, the budget recommends the elimination of the Department of Energy’s (DOE) Office of Fossil Energy budget related to oil and natural gas R&D.
CIPA believes these programs represent a tremendous value and benefit to America to support American jobs, expand workforce development, and increase technology development for small and independent companies. The DOE funds projects that are critical to the current and future success of America’s independent producers as domestic exploration and production continues to trend towards the development of unconventional plays from difficult reservoirs and formations. The DOE’s work on regulatory analysis and cutting edge technologies related to micro hole systems, stripper well revitalization, technology transfer, well imaging and seismic technologies, and cutting edge “smart” drilling to maximize productivity and drilling success are just some of the work that is done to keep America’s domestic energy production robust and reliably providing Americans a critical product at an affordable price. It is also important to note that many of the R&D projects funded are conducted at universities throughout the nation, utilizing and refining the talents of the next generation of engineers and geologists.
For Additional Information or Questions Contact:
CIPA Federal Advocate RJ Lyerly at (202) 822-8114
CIPA CEO Rock Zierman at (916) 447-1177