At a time when all oil producing countries are increasing their tax take to capture some of the increased value of the oil production (even the UK has recently increased the main tax rate from 40 to 50%), the Bush administration is busy doing the opposite. Recent executive decisions, and smart use by oil companies in lawsuits of ambiguous wording of the applicable laws, threaten to leave up to two thirds of Gulf of Mexico gas production paying no taxes, at a loss to taxpayers of $28 billion, according to the New York Times.

Let me summarise the main points of that fairly long and complex article.

– in 1995, the Clinton administration gave its support to a new programme exempting from royalty payments (usually, 12%) new offshore drilling for oil or gas in deep water, up to a given volume.

– One mistake was made – that of not capping the hydrocarbon price for which such incentive was available (but at least the Clinton administration had the partial excuse that oil prices were then low and not expected to go up).

– A deceptive evaluation of the cost of that measure was made, as it counted only the first 5 years of exemption in the cost, when fields usually take that long, if not longer to be developed. The cost of the exemption was thus counted as almost zero instead of its real cost over the years.

That’s the Clinton legacy. The cost of that is not assessed by the NYT, but they mention that it applies to one sixth of Gulf of Mexico production, which would mean, in the current environment, about 100m$/year. But we now move on to the Bush years:

– in early 2001 (not wasting any time), new incentives were provided for shallow water producers (i.e. something easier to do). Gale Horton did put a threshhold limit, but it was then seen as an extremely high prices (5$/mbtu limit, compared to the 2-3$/mbtu wholesale price then prevalent in the North American market). And in 2004, when gas prices had increased, the threshhold level was also increased, to an extravagant 9.34$/mbtu;

– in 2003, the oil industry successfully sued the administration about an interpretation of the law: the volume limit was deemed to apply per lease, and not per hydrocarbon field. Knowing that you typically have 3 leases per field, that decision immediately tripled the cost in lost royalties. Now the Bush administration cannot be blamed for the poorly worded 1995 law, but it then did nothing to change it;

– the most recent Energy Bill, passed last summer, extended and confirmed all the royalty exemptions, and added a few other sweeteners.

And now, some oil companies are trying to get rid of some of the caps on royalty relief that still exist on the rest of the offshore oil&gas production (the article is not clear on what these caps are, I’ll try to investagate further). That would allow up to two thirds of oil&gas production in the Gulf of Mexico to be tax exempt…

And yet production is down, shortages loom, and prices have skyrocketed. And we all know where oil profits are. I don’t buy accusations of price gouging, but this is waaay far more effective for the oil companies, and much more discreet.

Hey, it’s only a couple of months of War in Iraq, so it’s not that much.