Incentives on Oil Barely Help U.S., Study Suggests

[ProSense]

Incentives on Oil Barely Help U.S., Study Suggests

By EDMUND L. ANDREWS
Published: December 22, 2006

WASHINGTON, Dec. 21 — The United States offers some of the most lucrative incentives in the world to companies that drill for oil in publicly owned coastal waters, but a newly released study suggests that the government is getting very little for its money.

The study, which the Interior Department refused to release for more than a year, estimates that current inducements could allow drilling companies in the Gulf of Mexico to escape tens of billions of dollars in royalties that they would otherwise pay the government for oil and gas produced in areas that belong to American taxpayers.

But the study predicts that the inducements would cause only a tiny increase in production even if they were offered without some of the limitations now in place.

It also suggests that the cost of that additional oil could be as much as $80 a barrel, far more than the government would have to pay if it simply bought the oil on its own.

“They are giving up a lot of money and not getting much in return,” said Robert A. Speir, a former analyst at the Energy Department who worked on the report. “If they took that money, they could buy a whole lot more oil with it on the open market.”

Oil closed Thursday at $62.66 a barrel in regular trading.

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In the United States, the federal government’s take — royalties as well as corporate taxes — is about 40 percent of revenue from oil and gas produced on federal property, according to Van Meurs Associates, an industry consulting firm that compares the taxes of all oil-producing countries.

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April:

Kerry Introduces Bill to Repeal Wasteful Tax Giveaways for Oil Companies

[lostinacause]

1. There is actually good reason to reduce royalties on developments of this type.

If it is done right reducing the royalties encourages investment in new areas of development. This allows companies the ability to gain expertise in extraction processes and eventually become sufficiently profitable that the royalties can be placed at the typical level. The taxation process on the oilsands in Alberta, Canada is a good example of how this works in practice. Alberta has one of the best royalty systems and part of it is because they are effectively able to properly implements policies to acquire optimal royalties.