American Oil and Gas Reporter - May 2015 - 142

all at once, with the overproduction situation doing little to arrest the subsequent
free fall in oil prices from more than
$100 a barrel to less than $50 in the last
six months of 2014.
While most small operators downsized
their drilling plans as oil prices fell in an
effort preserve cash flow, McCallie said
many of the larger oil companies hedged
a good portion of this year's production,
which kept their bits turning. Short oil
futures and swap positions by large pro-

ducers against 2015 production worked
as a hedge against the price decline, essentially locking in better profits and
higher sales closer to $100 a barrel, he
said. However, he also indicated that
many of those contracts were rolling off,
with little or no hedging taking place for
2016 or 2017 production.
Tightening storage capacity at Cushing,
Ok., and total U.S. oil stockpiles-19 percent above 2014 levels-will continue to
keep pressure on oil prices throughout

the year, McCallie said. The United States
continues to set modern-day production
records above 9.0 million barrels a day,
nearly 11 percent above 2014's thenhigh output level. He added that while
oil prices averaged $90 a barrel before
the downturn, market prices swung from
$75 a barrel to $125 over the past several
years, as volatility continued to be the
new normal in oil transactions.
"This is not your father's oil market,"
he posed.
Ì

DOGGR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FROM PAGE 137

wants. People in that unaccountable position can get punitive. CARB creates
taxes and regulations that are punitive
and the board has free reign. That is not
how to run a democracy."
The proposal to cut petroleum consumption in half is vague and provides
no specifics on the means to that end, he
insists. "It empowers unelected bureaucrats
to do what they want, including punitive
actions toward domestic production,"
Zierman describes. "That does not decrease
demand, but it will decrease supply."
One type of bill that has not been introduced in the 2015 California General
Assembly is a severance tax on production.
A small tax funds DOGGR, he observes,
and localities collect ad valorem taxes,
he says.
"We don't have a statewide severance
tax," Zierman says. "Instead, we tax oil

and gas through ad valorem property
taxes and higher corporate and income
taxes. Every year, there has been a proposal for a broader severance tax and
every year it has been rejected. It also
has been on the statewide ballot, including
in 2006, but the voters rejected it. There
is always talk about it, but it never has
gotten any transaction."

Watching Washington
While state issues dominate CIPA's
time, the group says it also is monitoring
developments in Washington, which include calls for a federal tax overhaul. Although the Obama administration has
sought since its first budget proposal to
eliminate oil and gas production provisions
from the federal tax code, the Capitol
Hill dynamic that has stymied those
efforts may be shifting, notes CIPA Chair-

man Ken Hunter.
Hunter, who is CEO of Vaquero Energy in Bakersfield, Ca., notes that some
Republicans in Congress have signaled
an openness to repealing the deduction
for percentage depletion. "It could put
some companies out of business," he assesses. "That is one of the challenges at
the federal level that is on our radar
screen."
Losing percentage depletion poses a
disproportionately large threat to the economics of California's oil and gas operations, he warns. "A majority of our state's
wells are stripper wells," Hunter observes.
"Losing percentage depletion will further
challenge our economics. In many cases,
it will make wells uneconomic because
they produce only half a barrel a day.
Operators with those types of wells would
see a huge impact."
Ì

EPA's NSPS Facing Legal Challenges

WASHINGTON-Five oil and gas
groups have begun legal actions against
the U.S. Environmental Protection
Agency's new source performance standards.
Issued in December, EPA's Oil and
Natural Gas Sector: Reconsideration of
Additional Provisions of New Source
Performance Standards; Final Rule provides clarifications and updated regulations
that cover well completions, storage tanks
and natural gas processing plants. The
agency says they include the first federal
emissions standards for gas wells that
are hydraulically fractured, and also define
low-pressure wells and explain requirements for handling gas and liquids during
completion operations.
Filing petitions against the NSPS final
rule are:
* Independent Petroleum Association
of America;
* American Petroleum Institute;

* Western Energy Alliance;
* Texas Oil & Gas Association; and
* Gas Processors Association.
API says its petition asks EPA to
make several technical adjustments to
the rule to make it more feasible to implement, while IPAA reports its comments
cover low-pressure wells and storage
tanks.
EPA Changes
The Texas Oil & Gas Association
says its petition requests that the agency
delay selected provisions of the rule
during reconsideration and pending judicial
review. TxOGA's petition says in particular it wants the agency to remove provisions regarding storage vessels installed
and connected in parallel.
According to TxOGA's petition, among
the December revisions were changes
applicable to storage vessels that were
not proposed initially. The association

142 THE AMERICAN OIL & GAS REPORTER

says the revised definition for an affected
storage vessel was changed unilaterally
from "a single storage vessel" in the oil
and natural gas production, processing
or transmission and storage segments to
storage vessels "installed in parallel with
any storage vessel affected facility."
The changes have at least two impacts,
TxOGA asserts. Storage vessels previously
below the applicability threshold "installed
in parallel" (an undefined term in the
regulations) with other vessels that exceed
the threshold (and thus are subject to the
rule) now also must comply with the
regulations. Also, storage vessels previously not subject to the regulations because
they were below the thresholds now must
consider the emissions of all other "parallel" vessels (also undefined) such that
collectively they may be subject to the
rules.
"This is a change from the rule prior
to Dec. 31, 2014, and from the proposed

American Oil and Gas Reporter - May 2015

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