The Last Barrel

 Vol. 233 No. 4

Greetings to all of you, our faithful readers, and welcome to a new column page in World Oil. I actually returned to World Oil in early December, but it took us just a little while to set up this new page.

Yes, for those long-time readers keeping score, this is my third tour of duty at World Oil and Gulf Publishing—a company record of some sort. But a more eloquent summation of the situation comes from that great, former New York Yankee and Hall-of-Famer, Yogi Berra. Yogi might say, “It ain’t over ‘til it’s over,” or “It’s déjà vu all over again.” In any case, it’s good to be back. This column will be a mix of topics, some technical, others analytical, political and/or regulatory, blended with my perspective from watching and working in this industry for a long time.

This column’s first topic is the Obama administration’s habit of playing fast and loose with oil and gas facts. A term for this is “intellectual dishonesty,” which means slightly different things to different people. Perhaps the most relevant definition is in the Urban Dictionary online (www.urbandictionary.com), as follows:

Intellectual dishonesty—Intellectual dishonesty is the advocacy of a position known to be false. An argument which is misused to advance an agenda or to reinforce one’s deeply held beliefs in the face of overwhelming evidence to the contrary.

This refers to a string of speeches given by President Obama and his surrogates since February. Time and again, they misstated some basic facts. For example, in a Feb. 23 speech at the University of Miami, Obama said the U.S. has “a record number of oil rigs operating right now—more working oil and gas rigs than the rest of the world combined.” Well, our industry knows that his statement’s first half is untrue. The all-time record for drilling rigs running in the U.S., according to Baker Hughes, was 4,530 units on Dec. 28, 1981. As of Feb. 24, 2012, there were only 1,971 rigs running. Even if one looks just at rigs targeting oil, more than half the figure from 1981, or more than 2,265 units, were likely drilling for oil, way more than the 1,265 drilling for oil on Feb. 24.

The second half of his statement is also false. As of Feb. 24, there were 419 rigs active in Canada, plus 1,171 units drilling in the rest of the world that Baker Hughes can count. In addition, there are probably another 1,200 to 1,500 rigs active in China and Russia, combined. Together, these numbers yield 2,790 to 3,090 rigs working outside the U.S., far beyond the 1,971 figure. Obama’s claims prompted the PolitiFact arm of the Miami Herald to contact yours truly and several other industry sources to check out the numbers.

More distortion. Another example of intellectual dishonesty is industry tax breaks. If one listens to Obama and Co., the major companies are just rolling, in many billions of dollars of federal tax break money. This is far from true—one of the largest tax breaks, Percentage Depletion, has been on the books since 1926, but as IPAA points out, it has not applied to the majors since 1975. It applies to independents for the first 1,000 bpd of production, which must be on American soil. It is limited to a property’s net income and 65% of a producer’s net taxable income. It primarily helps marginal well operators.

Similarly, Intangible Drilling and Development Cost (IDC) expensing has been in the U.S. tax code since its inception in 1913. However, only independents can fully expense IDCs. Integrated majors must capitalize 30% of their IDCs on productive wells and amortize them over 60 months. This is hardly the windfall for majors that Obama would have people believe. In fact, if one takes Obama’s own, proposed 2013 federal budget and eliminates all oil and gas tax preferences for majors AND independents, the total savings are only $4.2 billion in the first year. This amount is helpful to independents but still only a drop in the bucket (one-point-one-tenth of 1%), compared to his $3.8-trillion proposed budget. And each year after 2013, through 2022, Obama’s calculated savings from eliminating oil and gas tax preferences are progressively less.

Yet, the public doesn’t know this, because Obama doesn’t tell them. He leaves out important details that don’t help his ideological agenda. He and his minions are experts at leaving out parts of the truth in everything. Here is another example—in a March 29 speech, Obama said that “under my administration... we’ve added enough oil and gas pipeline to circle the Earth and then some.” Skeptical fact-checkers at The Washington Post found that while 27,899 mi of pipeline were built during Obama’s first two years (which is greater than the Earth’s 24,091.55-mi circumference), this total is less than 1% of the 2.38 million mi of U.S. pipelines that existed in 2008. This sounds much less impressive than “circle the Earth.” In fact, this pales in comparison to the 122,000 mi of pipelines built during the first two years of George W. Bush’s presidency, or the 60,000 mi built during the first two years of Bush’s second term.

Credit by inference. The most irritating intellectual dishonesty is whenever Obama tries to take credit for the relatively modest gain of 709,000 bpd in U.S. oil production, from the low of 4.95 million bpd in 2008 to last year’s 5.659 million bpd. In nearly every speech, Obama mentions this point, as if, by inference, he and his advisors had something to do with the increase. In fact, the U.S. industry accomplished this increase by itself, on private lands, without governmental help. Obama doesn’t mention that as recently as 1992, the U.S. produced over 7.0 million bopd, down from a record 9.637 million bopd in 1970. Again, he leaves out the context in which his remarks should be framed.

The bottom line is this—Americans need to be able to trust what their government says, and to do that, officials need to tell the truth. When it comes to oil and gas, the Obama administration fails on both counts. Perhaps the voters will notice and make a change in November.