Oil crisis on horizon?

by

Published: March 8,1999

The U.S. is in danger of losing 25% of its domestic production due to continuing depressed oil prices, and such a drastic drop in production would increase reliance on foreign oil while also jacking up the foreign trade deficit, said Howard Baker, past president of the Mississippi Independent Producers and Royalty Organization.

“This needs to be brought to the attention of the public because the average person out there has no idea the adverse situation the domestic oil and gas business is in today,” Baker said.

There isn’t a great deal of public sympathy for domestic oil producers in part because they have a fat-cat image such as the one projected by the television series of a few years ago called Dallas. (Remember who shot J.R.?) Baker said people don’t realize how adversely the U.S. economy, and severance tax revenues, are being affected by the continuing slump in oil prices.

Baker said after paying severance taxes, royalty interests and operating costs, the average operator in Mississippi is netting less than five dollars per barrel.

“In Mississippi 60% of the oil wells are probably operating on a negative cash flow basis,” Baker said. “What’s going to happen? We’re going to have to shut those wells down. When production goes down, the amount of severance tax the state collects is drastically reduced, too. And all that is doing is making you more and more dependent on foreign oil. We have no idea what the price of foreign oil is. We don’t have the slightest idea. There is no severance tax on the foreign oil, and no one is benefitting from any of it.

“And I think the worst thing I can tell you is that, as far as I’m concerned, we are at war with Iraq. We are dropping bombs on them. They are shooting at our planes. But every day we pay Iraq $15 million for the oil we buy from them. And President Clinton wants to increase the amount of oil they can produce.”

Baker said it costs the U.S. government billions to keep oil supply lines open to the Middle East, and those costs should be figured into the real cost of foreign crude.

It is estimated that there are about 450,000 wells in the U.S. that produce two barrels a day or less. Those wells cannot make money at the current price. Baker said that means many of those wells will be shut down permanently; it won’t be cost effective to redrill those wells when prices go back up.

“You’re going to lose one million barrels a day in production when they shut down those wells,” Baker said. “Where’s the oil going to come from to replace that? Imported oil. It is making your import deficit increase every day. It could represent $10 million per day.”

Jack Moody, director of the energy and coastal division, of the Mississippi Department of Environmental Quality, Office of Geology, said losing domestic oil production not only increases the foreign trade deficit, it directly affects the state’s severance tax income.

“I believe right now the national rig count is the lowest in history since they started keeping records,” Moody said. “Besides affecting marginal wells, it is also going to affect the incentive side for further exploration and development. People will not drill.”

Moody said it is sad to think that 25% of the national production of oil could be lost forever, especially since that amount of production will have to be made up from foreign oil. Under favorable circumstances, those wells might have been able to produce for 15 to 20 years. But instead of getting the benefit of production all that time, the resource is lost due to price swings.

“We have already had an 18% drop in production, and we’re just kind of getting into this thing,” Moody said. “I read the other day in the Oil and Gas Journal that the surplus of oil has actually grown in the past year, which is an absolute disaster. What that means is that the price of oil is going to go lower. And the sad thing is that the surplus only amounts to an eight-day world supply of oil. The irony of the whole deal is that you are going to have a tremendous effect on the domestic oil industry because of a very small, eight-day surplus.

“The party is going to end sometime. This is going to come home to roost. And when it does, we will be subject to prices set by others out of our control.”

The domestic oil industry is seeing a large number of job layoffs. States like Oklahoma and Louisiana have been more drastically affected than Mississippi. For example, Shell Oil Co. in New Orleans is considering relocating its 1,050-employee work force to Houston as it plans more job cuts. The work force has already been reduced from the level of 1,400 this past fall. A number of Shell Oil employees in the New Orleans office live in south Mississippi.

There have also been some layoffs at shipyards that produce offshore oil drilling rigs. Halter Marine recently announced that it was laying off 40 administrative workers in Gulfport, cuts that were expected to save the company $15 million in the fiscal year 2000. The company’s top three executives took 20% pay reductions.

Baker and other oil industry representatives contacted expressed discouragement that state and national political leaders aren’t attune to the serious problems in the domestic oil industry.

“The government has already put environmental restrictions on the domestic operators so he can’t be in competition with the imported oil,” Baker said. “Through the years the government has done away with all the incentives we had for domestic exploration. We used to have 27.5% depletion allowance. They cut that to 15%. And they imposed what they call an alternative minimum tax which greatly reduced the amount of tax write offs you could have for exploration. And when you combine all of these, it was just an absolute slap at the domestic oil business. There is really no incentive for anyone to go out here and drill a wildcat or exploratory well. It is something I assure you the American public is not aware of, and most of them don’t care. They don’t realize that we are now getting approximately 60% of our oil as imports.”

Baker said he knows elected officials aren’t going to do anything that will increase the price of oil or natural gas to the consumer. But what the oil producer advocate is reinstating the 27.5% depletion allowance, and doing away with the alternative minimum tax. Baker said they also favor a tax credit for all new oil discovered and produced after Jan. 1, 1999. He said this would given an incentive to drill new wells without affecting the price of oil and gas.

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