After repeated requests the Interior Department provided The New York Times with a copy of its study on the effects of governmental incentives to oil drillers; the study suggests the government is getting very little for its money. Current inducements could allow drilling companies in the Gulf of Mexico to dodge tens of billions of dollars in royalties for oil and gas produced in areas that belong to American taxpayers. Robert Speir, an energy analyst who worked on the report: “If they took that money, they could buy a whole lot more oil with it on the open market.” Analysts who compare worldwide oil policies said the U.S. was exceptionally generous, demanding a small share of revenues from companies that drill on public lands and in public waters, and has even sweetened some of its incentives in recent years, while many other countries demanded a bigger share of revenues. In principle companies are supposed to pay the full rate when oil prices climb above about $34 a barrel, but companies that signed leases in 1998 and 1999 enjoy an unintended loophole that entitles them to royalty-free oil and gas regardless of how high prices climb. Last week the Bush administration persuaded five companies to give up the loophole, but another 50-odd companies have thus far refused. Pedro Van Meurs, president of Van Meurs Associates: “The U.S. system worked fine when oil was $20 a barrel, but it wasn’t changed when prices went up." The report predicts that current incentives would lead to only 1.1% more reserves than without them. Analysts aren't surprised: The royalty incentives are small money when compared with the money at stake in changes of market prices. The cost to taxpayers? About $48 billion less in royalty payments from 2003-2042.
• Sources: New York Times
• Related commentary: Government Folds in Royalties Battle with Chevron, Division Among Oil Companies: Cling to Outdated Contracts or Share Profits?
• Potentially impacted stocks and ETFs: United States Oil Fund ETF (USO), Oil Service HOLDRs ETF (OIH), ExxonMobil Corp. (XOM), ConocoPhillips (COP), Chevron Corp. (CVX), Hess Corp. (HES), Marathon Oil Corp. (MRO), Anadarko Petroleum Corp. (APC), EnCana Corp. (ECA), iShares Dow Jones US Oil & Gas Ex Index (IEO)
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