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Experts Disagree on Whether Tax Plan Would Help Oil Output

February 11, 1989

WASHINGTON (AP) _ President Bush’s proposed tax breaks for oil drillers are winning an expected round of applause from the oil industry, but officials and analysts disagree over whether the measures will stem the decline in U.S. oil production.

″I don’t think we’re going to get that much more oil out of the United States even if these tax incentives were passed,″ said Ed Rothschild, assistant director of the Citizen-Labor Energy Coalition, an advocacy group that favors greater use of renewable energy sources as an alternative to fossil fuels.

″It’s more of a political gesture to the industry″ than a plan for revitalizing domestic oil production, Rothschild said in an interview Friday.

Industry officials said the proposed tax incentives, worth at least $350 million a year, would, if enacted, result in a measurable gain in oil and gas production.

″This is a very healthy step forward,″ said Jim Groninger, Washington director of governmental affairs for the Independent Petroleum Association of America. ″Tax incentives are an important component of a national energy policy.″

The tax breaks unveiled by Bush in his budget address Thursday to Congress were coupled with a postponement of lease sales for oil drilling off the California and Florida coasts - areas the oil companies consider prime drilling prospects.

Bush said he was seeking to balance environmental needs with a desire to revitalize the depressed oil and gas industry, which he called vital to U.S. national security.

The American Petroleum Institute, representing the nation’s major oil companies, welcomed the Bush tax incentives but said more steps would be needed, including opening up more federal lands and offshore areas to oil exploration.

″The tax incentives ... are a step in the right direction, but they alone cannot stem the serious decline in domestic petroleum production,″ said Charles J. DiBona, president of the petroleum institute.

U.S. oil production has fallen by more than 1 million barrels a day over the past three years, and last December the oil production rate was the lowest in nearly a quarter of a century. At the same time, oil demand has increased in recent years, leading to a reliance on imports that Bush says poses security risks.

Bush rejected the idea of imposing a tariff on imported oil but proposed four tax incentives aimed at boosting exploratory drilling, particularly by smaller operators. The tax breaks would be phased out if the price of oil, currently about $17 a barrel, rose above $21.

The tax package includes:

-A 10 percent credit on the first $10 million of spending, per company per year, on intangible drilling costs, those not directly associated with drilling a well, such as hauling equipment.

-A 10 percent credit for spending on all new tertiary enhanced recovery projects, those that use steam, carbon dioxide or chemical injectants to increase the production rate from oil and natural gas fields.

-Allow drillers to exclude a major part of their income from the alternative minimum tax.

-Change oil and natural gas depletion rules that the administration says discourage the transfer of marginal wells from major oil companies to independent producers and result in the premature abandonment of producing wells.

The administration said the tax package was aimed mainly at the smaller producers, which traditionally have drilled the majority of new wells in the United States.

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