Oil Savvy: It's all about investment, stupid!

It's all about investment, stupid!

Intentionally or not, the Obama administration’s main offshore energy guy, Interior Sec. Ken Salazar, is mouthing scary things
around the country these days; which, if left unchecked, could drive U.S. industry investment into the open hands of more friendly oil nations with plenty of large, undiscovered reserves to be had.
I don’t mean to beat up on Salazar, the subject of my last column, in which the secretary blamed just about all of America’s energy ills on George W. Bush, even suggesting the former administration conspired with the “usual” companies to manufacture a 2010-2015 offshore leasing program tilted toward the oil industry.
Salazar further accused the former administration of not giving
renewable energy companies a fair shake in formulating the new lease program, while dragging its feet implementing congressional-mandated rules and regulations associated with development of offshore renewables, such as wind,wave, tidal and solar power.

Renewables are no substitute for oil and gas

Hopefully, I dispelled these Salazar myths. Don’t get me wrong. I’d love to have a windmill in my backyard to help curb my mounting electrical bill. But, Ken, a U.S. focus on wind and other renewables at the expense of oil and gas exploration and development -- especially in the 85% of the U.S. offshore that is currently off-limits to drilling -- is not going to get this country to energy independence, at least not for the next half-century, or longer, and with heavy doses of government subsidies.
I’d also like to remind the Obama administration that its hydrocarbon-spewing foe (oil companies) already have invested billions of dollars in research on renewable energy, and continue to invest sizeable amounts of cash. So, please don’t accuse industry of not doing its part.
My economics professor used to say, for obvious reasons, that the last thing government should be doing during a serious recession is to increase the financial burden on companies, as well as individuals, through taxes and other regressive measures, such as royalty rates on oil and gas produced from federal acreage, including the offshore. But this is exactly what President Obama and his Interior secretary are proposing, no doubt to help feed Obama’s insatiable spending habit, which already has saddled the United States with trillions in additional debt.

President Obama's $31.5 billion headache

Obama, as outlined in his Fiscal 2010 budget, proposed raising at least $31.5 billion over 10 years from oil and gas companies, reflecting a repeal of tax breaks for domestic production and new charges on oil and gas production in the Gulf of Mexico.
“It’s a concerning area, of course, because as you put more royalty and tax burdens on the industry, particularly a cyclical industry, you just have to be cognizant of the potential impact it has on investments,” explains Marvin Odum, the president of Royal Dutch Shell’s U.S. operations.
Salazar, in a recent speech to the American Petroleum Institute’s board of directors, reiterated Obama’s plans, noting the administration believes industry no longer needs any financial
incentives and that government royalties paid in the United States are very low compared to other companies. This is nonsense. If royalties were an offshore industry issue in other oil and gas producing countries, how do you explain the fact that U.S. companies have been flocking to them for years?
Shell’s Odum hits the nail on the head. It’s all about investment, stupid! The fact is Shell and other major oil companies -- including U.S.-- based majors ExxonMobil, Chevron and ConocoPhillips -- operate globally. In formulating their annual budgets, companies carefully allocate capital spending based on the most competitive projects, whether they are in the United States or abroad. A project with the least amount of financial burden and best chance to make money for the company, naturally tends to get the lion’s share of investment.
Consequently, one sure way to drive investment dollars out of this country is to raise taxes on oil and gas production and fiddle with royalty rates. During hard economic times, when oil prices are one-third of last summer’s all-time high, this is akin to pouring gasoline on a roaring fire. And it’s certainly no path to energy independence.