Energy Industry Fears Impact of Economic Downturn

It has been a bumpy road for independent crude oil and natural gas producers the past year.
Crude oil prices plunged from $147 a barrel to $40 a barrel in just weeks 13 months ago. Natural gas prices also tumbled, dropping to levels not seen since the early 1990s.
Despite the economic turmoil, companies have not been clogging bankruptcy court.
Elizabeth Powell, managing partner of Tulsa-based The Resource Group, said the companies are playing it close to the vest. A large asset sell-off has not materialized. Many, puzzled by events, are left scratching their heads that the expected upheaval of properties being sold has not developed, Powell said.
“Perhaps some assets are on the (auction) block, but companies are waiting to see if they can get more for them,” she said.

Worries
The oil and gas industry remains the keystone to Oklahoma’s economy. With more than 80,000 active oil wells in Oklahoma, there are more than 76,000 people directly employed by the oil and natural gas industry. There are another 245,000 jobs indirectly related to the energy segment, which generated more than $40 billion of revenue in 2007, the most recent year for which statistics are available. The industry pays the highest average salaries and shows no signs of diminishing.
Among oil producers’ top concerns today is what’s happening in Cushing and Washington, D.C.
Thousands of barrels of crude oil are flooding the Cushing market, depressing prices that state producers get for their commodity. Crude oil, the world’s most actively traded commodity, is traded on the New York Stock Exchange. The price is set at Cushing, which is accessible to spot markets via pipelines. Producers are worried about a pipeline, TransCanada’s Keystone, being built to Cushing. The line will bring 180,000 barrels a day of crude from Canada.
The problem is the oil has nowhere to go, said Mike Cantrell, president of the Domestic Energy Producers Alliance. He is also chairman of Ada-based Cantrell Energy Corp., an oil production operating company.
“We see the influx of Canadian crude into our market trap state producers because they have no other place to sell their product,” he said.
The DEPA is working on ways to keep the domestic market from being at a disadvantage. Earlier this year, alliance members organized a hearing before the Oklahoma Corp. Commission in an attempt to shine a light on the situation.
“We just asked them to take a look at it, which is what they have done,” Cantrell said.
The commission has the power to prevent waste of oil and gas, he said.
“And it is a waste to sell state product below its value,” Cantrell said.
The state of Oklahoma has a huge stake in the oil and gas industry, collecting up to 7 percent tax on all product sold. The oil and gas industry in Oklahoma generated more than $1 billion in gross production taxes in the last fiscal year. Lower prices cut into the state budget.
The alliance is also asking state Attorney General Ed Edmondson to see if any state dumping statutes are being violated.
“We are still investigating that possibility,” he said. “If Canadian companies are dumping crude oil from Canada into our market, we might have an action.”
Disconnect
The industry also feels a disconnect with what is occurring in the U.S. Congress. Producers feel they are being singled out by Washington.
Industry owners and executives are frustrated by the overwhelming sense they are being punished for no other reason than they produce a fossil fuel, said Mike Terry, president of the Oklahoma Independent Petroleum Association. The OIPA is the state’s largest oil and natural gas advocacy group. It represents more than 2,000 member companies in the crude oil and natural gas exploration and production industry or affiliated businesses.
“They resent the notion they are identical to ‘Big Oil,’” Terry said.
The challenge has always been to educate Washington politicians that these small- to medium-sized companies drill 90 percent of the wells in the U.S. In Oklahoma, marginal or stripper wells produce 10 barrels of oil or 60 thousand cubic feet of natural gas per day. Collectively, those wells pump more than one million barrels a day, according to the National Stripper Well Association.
The industry feels it is under attack on two tax fronts. The Obama Administration is looking at eliminating favorable tax laws that allow exploration and production companies to earn a profit in the first place.
The business remains high risk, Terry said. Losing tax incentives really means a tax increase.
The other concern is over the so-called cap-and-trade legislation. It would place a substantial tax on any energy business.
“It seems unfair to small business and producers that they will have to learn a new business — becoming experts on emissions trading and auctions,” Terry said.
For example, one proposal calls for the repeal of a law that allows producers to expense intangible drilling costs. It would disallow normal business costs, such as fuel, repairs or hauling supplies, making it more difficult to attract capital for high-risk, cost-intensive operations like drilling.
Tax items in the budget include three tax increases and the repeal of five tax credits. If implemented, the taxes would equal $34 billion over 10 years, according to the NSWA. The incentives have been on the books for decades. But the administration wants to do away with them to shift the focus to alternative fuel sources, according to industry sources.
In spite of the challenges on the national front, producers have won state regulatory and tax battles.
In the recently concluded session, the legislature passed an extension on the horizontal drilling incentives. Even as the legislature faced an estimated $900 million budget gap in May, lawmakers voted to extend oil and gas tax exemptions that totaled $340 million, going back to 2004, according to the OIPA.
Other energy legislation targets incentives for the use of compressed natural gas cars and tax credits to help filling stations include natural gas options. Some think Oklahoma has an opportunity to shine with alternative fuels, due to the state’s high potential for wind energy along with an abundant reserve of natural gas. ?



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