Windfall Profit Tax Research Articles

The Double Inefficiency of the Windfall Profits Tax on Crude Oil

That a temporary severance tax on an exhaustible resource will shift its extraction profile toward the future is not a surprising finding in light of the theory of exhaustible resources. That such a tax, like the WPT on old oil, may also result in grossly inefficient fiscal policy is generally unrecognized. This analysis suggests that the tax rate on old oil could be substantially reduced without loss of tax revenue. The analysis also argues that, in terms of social as well as fiscal efficiency, permanent severance taxes at lower rates will be superior to temporary severance taxes at higher rates. In addition, the analysis contradicts the hypothesis that the incremental tertiary oil recovery provisions of the WPT provide an incentive for production at rates greater than in the absence of the tax. Finally, the analysis shows that, in terms of maximizing the present social value of crude oil production, a WPT rate of 0 is the most efficient policy. 19 references, 2 figures, 3 tables.

RENEWABLE ENERGY POLICY AND POLITICS: THE CASE OF THE WINDFALL PROFITS TAX

Policy Studies JournalVolume 13, Issue 2 p. 365-375 RENEWABLE ENERGY POLICY AND POLITICS: THE CASE OF THE WINDFALL PROFITS TAX Richard K. Worthington, Richard K. Worthington Rensselaer Polytechnic InstituteSearch for more papers by this author Richard K. Worthington, Richard K. Worthington Rensselaer Polytechnic InstituteSearch for more papers by this author First published: December 1984 https://doi.org/10.1111/j.1541-0072.1984.tb00348.xCitations: 2AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume13, Issue2December 1984Pages 365-375 RelatedInformation

Enhanced Oil Recovery Through the Use of Chemicals-Part I

Distinguished Author Series articles are general, descriptivere presentations that summarize the state of the art in an area of technology by describing recent developments for readers who are not specialists in the topics discussed. Written by individuals recognized as experts in the area, these articles provide key references to more definitive work and present specific details only to illustrate the technology. Purpose: to inform the general readership of recent advances in various areas of petroleumengineering. Introduction Chemical enhanced oil recovery (EOR) includes processes in which chemicals are injected to improve oil recovery. Chemical methods are one of three categories of EOR, the others being thermal and miscible. Table 1 shows the different processes in these categories as defined by the Crude Oil Windfall Profit Tax Act of 1980. A comparison of field project activity in the three categories is shown in Table 2. Thermal activity is the highest, followed by chemical. Note that the number of chemical projects more than doubled between 1980 and 1982. Miscible CO2 injection accounts for most of the miscible category. Projects in the chemical category of Table 2 are broken down further in Table 3 in terms of the three chemical EOR methods. Micellar/polymer projects are those in which surfactant is injected into the formation. Projectsare those in which surfactant is injected into the formation. Polymer projects refer to a spectrum of uses including near-wellbore Polymer projects refer to aspectrum of uses including near-wellbore treatments, complete polymer-augmented water floods, and a combination of both. Caustic refers to projects where alkaliis injected to increase pH and to produce surfactants in situ. With all three chemical EOR methods, activity has increased significantly between 1980 and1982. In Part 1, each of the three chemical methods is discussed separately. The history of each method is presented along with field projects and laboratory developments. In Part 2 (to appear next month), reservoir heterogeneities are considered in relation to their effect on process performance. Next, information is presented on chemical flooding performance. Next, information is presented on chemical flooding simulators, and procedures are described for their use. Then, U.S. government incentive programs and their effect on chemical EOR development are considered. Finally, the risk vs. reward associated with chemical EOR is illustrated by some economic calculations. Micellar/Polymer Flooding Two kinds of surfactant systems are being developed for this chemical method. Work on the first system began in the late 1920's; it involves a largePV (up to 50%) of a low concentration (less than 2.5%) active surfactant solution. This development has led to the so-called low-tension water flood process. Most often, polymer is used in the surfactant solution to increase itsviscosity, thereby giving mobility control to the system. Development of the second system began in the late 1950's. Here a small PV (5 to 15%) of a high-concentration (5 to 12%) active surfactant is used. The small-PV development led to patent processes such as Mara flood (TM) and Uniflood (TM). Both systems are followed by polymer solution for mobility control. During the1960's and early 1970's, surfactant/polymer field tests in the U.S. mostly used single-pattern well configurations. The area covered in these projects was relatively small. For example, 3/4-acre pilot tests with one injector and four producers were not uncommon. JPT p. 1581

An Engineering Look at the Government Programs and Incentives Offered for Tertiary Projects

Summary In the last 10 years, many people within the oil industry and academia have been studying additional ways to recover more of the known oil in place left after reservoirs have reached their economic limit with conventional primary and secondary techniques. These ways commonly are called enhanced or tertiary methods, and early studies emphasized technical concerns-e.g., how much oil remains for tertiary recovery, incremental displacement efficiency, reservoir data, model and field performance calculations, operating procedures. special equipment required. etc. With more and more data indicating that enhanced oil recovery (EOR) processes are technically feasible, the last few years' research has turned toward determining if EOR carries the necessary economic incentives. The U.S. government has placed a key role in this matter. Two former programs of the U.S. DOE gave economic incentives for undertaking EOR projects. These were the Tertiary Incentive and Tertiary Incremental Programs. Respectively, they allowed up to $20 million recoupment of specified expenses per property through decontrolling oil prices, and gave world-market oil prices for incremental oil produced using specified tertiary techniques. Because of present decontrolled oil prices, these programs are no longer viable. However, one government program remains that may result in economic incentives for EOR projects. This is the Windfall Profit Tax Act applied to tertiary projects. In this paper. the 1981 SPE Permian Basin Enhanced Oil Recovery Symposium Technical Program Committee clarifies what EOR incentive exists in the Windfall Profit Tax Act of 1980 and how to use it. We show the relevant portions of the regulations, consolidating this information in an easy-to-use question-and-answer format for reference. The material appearing in this paper was compiled by practicing engineers as a general guideline. We accept no legal responsibility as to the accuracy or completeness of the contents. With this common ground, some questions concerning compliance should be answered. This knowledge will enable u% to take a more timely approach in beginning actual field programs. This leads directly to recovery of additional reserves available with improved technology in EOR processes. Crude Oil Windfall Profit Tax Act of 1980 Of the government programs designed to encourage tertiary recovery projects, the tertiary incentives that are a part of the Windfall Profit Tax Act will have the greatest economic incentive in the long run. Since this program is a tax incentive, it is administered by the U.S. Internal Revenue Service (IRS) and not the DOE. However, the Windfall Profit Tax Act does rely heavily on the terminology of definitions set forth in the DOE programs; thus, understanding them is important. A simple explanation of the act's tertiary incentive is that the windfall profit tax rate is reduced from 70, 60, or 50% on existing Tier 1 and 2 properties to 30% for incremental tertiary oil produced (Tier 3). The what, how, and why of doing this are much more complicated. We have tried to simplify this program for you. The answers in this paper are excerpts taken directly from IRS regulations published in the Federal Register as of Jan. 1981 and from Internal Revenue Cumulative Bulletin, 1980–3. JPT P. 445^

Effect of Economic Recovery Tax Act of 1981 on Oil and Gas Industry: ABSTRACT

The Economic Recovery Tax Act of 1981 provides many new concepts affecting taxpayers in the oil and gas industry. Of primary importance is the reduction in the windfall profit tax on newly discovered oil. The law also modifies the royalty credit, replacing the dollar exemption with a more liberal barrel exemption. It also provides for an exemption of windfall profit tax on independent stripper oil. The new law also provides for a new concept in recovering capital cost in fixed assets. Depreciation is replaced with the new accelerated cost recovery system. Many other changes were made in reduction in tax rates and the addition of saving incentives. The law is very complex and its provisions have various effective dates. Also, many of the changes are phased in over a period of time. End_of_Article - Last_Page 243------------

Comment on “An Assessment of the Effects of the Windfall Profits Tax on Crude Oil Supply”

Comment on “An Assessment of the Effects of the Windfall Profits Tax on Crude Oil Supply”

Will Oil Prices Collapse?

The recent decline in oil prices may mean that a combination of market forces and increased production in Iran and Iraq will make it impossible for OPEC to maintain high prices and present industry and government with a new set of energy issues. The present situation is the result of reduced world demand following the 1979 to 1980 price increase, while long-term contracts doubled in price because of lower production levels and world stocks grew in anticipation of another supply disruption. This review of the world market since 1972 cautions that the Persian Gulf remains an area of political instability. It concludes that a real price decline will lower inflationary pressures, revenues from the Windfall Profit Tax, the gap between oil and natural-gas prices, and the cost of filling the Strategic Petroleum Reserve. The government will then need to determine the optimum level of dependence on Persian Gulf imports. 3 tables. (DCK)

The Public Choice of Price Control and Rationing of Oil

The Buchanan and Tideman (B/T) geometric analysis (Atlantic Economic J., 2 (1974)) is shown to overestimate consumer surplus resulting from price control because of subsequent shifts in supply. An extension of the model reduces the surplus even more when it considers the voter's costs of subsidizing imported oil and conducting a rationing program. The effects of the Windfall Profits Tax are also overestimated by the B/T analysis because voters will not support policies that will ultimately injure them. Voters will support controls only until they become aware of how supplies respond to price. 5 references. (DCK)

Implications of Evolving U.S. Oil Pricing Policy for Domestic Reserve Values

Summary U.S. oil reserve values have been affected significantly by recent changes in government pricing regulations and taxation. This paper presents a discounted cash flow model for the valuation of a hypothetical, though representative, producing property. The analysis addresses changes in present values for various major categories of oil (i.e. lower-tier, upper-tier, stripper, newly discovered, and qualified tertiary recovery oil). In addition, we examine the differences in a property's value attributable to varying windfall profit tax treatment of major oil companies vs. that of independent producers. Introduction Recent modifications of U.S. energy pricing policies have important implications for the value of both existing and undiscovered conventional oil reserves. The key changes examined in this paper include the following.In April 1979, the Carter administration decided to phase out gradually price controls on domestic crude oil classified as lower and upper tier. Under this program, oil in the lower-tier category is being released to upper-tier status at the rate of 3% per month. In addition, upper-tier oil is being released to the free market price at the rate of 4.6% per month. As a result of these measures, all domestic oil will be selling at free market prices as of Oct. 1, 1981. These changes are summarized in Figs. 1 and 2 and Tables 1 and 2. Under the Crude Oil Windfall Profit Tax of 1980, the price benefits of this decontrol program over a prescribed base price are subject to an excise tax (after partial adjustment for severance taxes). In the case of independent producers, the excise tax rate is 50% on the first 1,000 bbl of daily output and 70% thereafter. For major oil companies, the rate on lower- and upper-tier oil (Tier 1) is 70% on the increment over a base price of $12.81/bbl adjusted for inflation subsequent to June 1979. In reality, the economic effect of the windfall tax on lower- and upper-tier oil is not unlike the continuation of price controls at a significantly higher price and with improved escalation provisions.In its final version of the windfall profit tax, Congress also decided to apply the excise tax to stripper oil (Tier 2), with independent producers subject to a reduced 30% levy (again up to a total 1,000-B/D limit) and majors and other producers subject to a 60% tax on the realized price increment above a $15.20/bbl base adjusted for inflation after June 1979. In the case of stripper oil, which already was decontrolled, the imposition of the windfall tax has had the effect of a price rollback on the producer.Effective June 1, 1979, the Carter administration began to allow newly discovered oil to receive an uncontrolled market price instead of an upper-tier price. At the same time, newly discovered oil also was redefined to be oil from an onshore property from which there was no production in 1978 or from an offshore property leased after Dec. 31, 1978, from which there was no 1978 production. The excise tax rate on this oil is 30% for all producers, and the base price was set at $16.55/bbl with an adjustment provision for inflation plus an additional 2% incentive escalation subsequent to June 1979. Escalation adjustments to base prices reflect the GNP deflator as a measure of inflation and are posted with a two-quarter lag.

The Windfall Profit Tax and Vertical Integration in the Petroleum Industry

An analysis of the combined influence of the corporate income tax and a percentage depletion allowance on the decision to integrate vertically in the petroleum industry was presented in a recent issue of this Journal. In that paper it was shown that the combined effect of these two aspects of the corporate tax structure was the encouragement of downstream integration into refining and marketing for the crude-oil producer. A logical conclusion of that earlier analysis was that the repeal of the percentage-depletion allowance for large oil and gas producers (e.g., the tax reform which disallowed percentage-depletion tax deductions for tax years subsequent to 1974) would have the effect of slowing, and ultimately reversing, the trend toward vertical integration in the petroleum industry. The purpose of this note is to demonstrate that the effect of the combination of the corporate income tax and the windfall profit tax may be to encourage vertical integration, depending upon the interpretation and viability of the constructive sales clause of the windfall profit tax bill.

Enhanced Oil-recovery and Its Environmental and Economic Implications in the United States

This survey has described the foreseeable environmental and economic impacts of enhanced oil-recovery (EOR) on U.S. oil production between 1980 and 2000. It has indicated that EOR production may be expected to rise from the approximately 4% of total U.S. oil production in 1980, to the projected approximations of 10.5% in 1985, 18.5% in 1990, 23% in 1995, and perhaps 30% in 2000. These percentages are substantial, particularly as this form of oil production has been, up until recently, quite limited. Many of the processes are still in the laboratory stage of development—particularly chemical and microbiological processes. With continued laboratory experimentation and field research, it is possible that the percentages could be even greater than the above suggestions as we reach into the 21st Century.The potential for EOR is very considerable and probably great, as it could involve some two-thirds of all the oil already identified in the United States and assumed to be unrecoverable by primary or secondary means. The U.S. Department of Energy (DOE) has given important incentives to the EOR industry to make such increased production worth while through raising prices to compensate for the cost of equipment, and deducting expenditure on such equipment from a new ‘Windfall Profit Tax’.Along with EOR's economic potential, there are two major ecological dangers: air pollution through thermal processes, and ground-water pollution through chemical processes. It is essential to the well-being of the United States that clean air standards be adhered to, and that the equipment necessary to purify the air (particularly in California) be available and operate to reduce emissions.A great deal more research needs to be undertaken towards developing safeguards to ensure that drinkingwater is not contaminated by dangerous chemicals which may be used in ‘chemical flooding’ of depleted oil-wells. Many of these chemicals have merely ‘come out of the laboratory’ and are sold by chemical companies without sufficient field-testing. How far these chemicals could travel underground must still be determined. It is also important to ensure that carbon dioxide, fed into a geological formation, can be recaptured and re-injected without escaping into the atmosphere, where there is the potential danger of a global ‘greenhouse effect’ upon the world's temperature. Finally, it is important to safeguard the Earth against microbes which could be injected into its geological strata without sufficient knowledge of their impact on the ecology of the Earth. Thus, much environmental research will be called for with these new methods of producing oil for Man's use.This study has reviewed the four major methods of EOR that are currently being utilized or proposed— thermal processes, miscible and semi-miscible processes, chemical processes, and microbiological processes, and found that they could all have ongoing possibilities.Given appropriate environmental safeguards, EOR should become a major force in the production of energy for the United States over the next 20 years, and it seems reasonable to expect that much the same could apply to other parts of the world. However, it is important that safeguarding the environment should guide the DOE in terms of its incentive programmes for specific processes.

An Assessment of the Effects of the Windfall Profits Tax on Crude Oil Supply

Most economic assessments of the recently enacted crude oil "windfall profits tax" (P. L. 96-223) have concluded that the tax will reduce the economic incentive to produce crude oil and will therefore have a negative impact on U.S. oil production.' This article disagrees with that view. Instead we show that the tax offers incentives to producers on existing properties that exceed those offered by a free market. Furthermore, based on estimates of these incentives, we conclude that the tax will1. See, for instance, Mead (1979) Wall Street Journal (1980), and Friedman (1980). Support from grants to the program on business and government relations at the School of Organization and Management at Yale University is gratefully acknowledged. Extraordinary assistance from Edward Erickson and Linda Scotten in improving the exposition of this paper is also gratefully acknowledged. The author assumes full responsibility for any errors.