MEETING THE ENERGY NEEDS OF OUR COUNTRY A

MEETING THE ENERGY NEEDS OF OUR COUNTRY A VIEW FROM WASHINGTON, D. C. Petroleum Industry Appreciation Day August 28, 2002

NATIONAL ENERGY POLICY May, 2001

“To meet our energy challenge, we must put to good use the resources around us and the talents within us. ” -Vice President Dick Cheney “America must have an energy policy that plans for the future, but meets the needs of today. I believe we can develop our natural resources and protect our environment. ” May, 2001 -President George W. Bush

“We’re going to be out of crude oil about the year 2000 or shortly thereafter. What happens then? ” Ecologist/Zoologist Kenneth E. F. Watt 1970

The diagnosis of the U. S. energy crisis is quite simple: demand for energy is increasing, while supplies of oil and natural gas are diminishing. Unless the U. S. makes a timely adjustment before world oil becomes very scarce and expensive in the 1980 s, the nation’s economic security and the American way of life will be gravely endangered. 1970’s Carter Administration National Energy Plan

Access to the Resource. . .

Ninety-eight percent (98%) of transportation is fueled by oil. More than 55% of oil consumed in the United States is imported from other countries.

Oil imports have risen from a low of 32% (1982) to over 56% currently. Source: Independent Petroleum Association of America - US Petroleum Statistics 2000

NATIONAL ENERGY LEGISLATION AND INDEPENDENT PRODUCERS’ ISSUES

ACCESS ISSUES An assessment of impediments to onshore leasing (House) Funding for the timely processing of leases, permits and inspections (Senate) A requirement to eliminate unwarranted denials and stays of federal leases (House) Exemption of held by production acreage from lease acreage caps (Senate)

ACCESS ISSUES A credit against royalties for preparing environmental analysis (House) A coalbed methane study (Senate) Limitation of cost recovery of onshore activities by government (House) Authority to open limited areas of the Arctic National Wildlife Refuge to oil and natural gas exploration and development (House)

INCENTIVES A study of the impact of other incentives for the offshore (House) A study on the impact of financial incentives on offshore/onshore production (Senate) Limited royalty incentives for water depths 400 meters and deeper (House) Offshore subsalt lease suspensions (House and Senate)

ROYALTY ISSUES Requirement to reduce royalties when prices are low for onshore and offshore marginal oil and natural gas wells (House) A permanent royalty-in-kind program (House)

ENVIRONMENTAL ISSUES A requirement for the EPA to assess the environmental risk of hydraulic fracturing and make a regulatory determination regarding whether federal regulation is necessary (Senate) A requirement for greenhouse gas emissions reporting (Senate)

TAX REFORMS Permits delay rental costs to be expensed (House) — $1, 294 million over 10 years Amortization of delay rental payments over 24 months beginning with the month expenses incurred (Senate) — $ 672 million Allows the expensing of geological and geophysical expenditures (House) — $2, 083 million Amortization of G&G costs over 24 months beginning with the month expenses incurred (Senate) — $675 million

TAX REFORMS Natural gas gathering lines treated as 7 -year property for both regular and minimum tax purposes (including depreciation methods (House) — $87 million Same, but AMT depreciation methods still applicable (Senate) — $87 million

TAX REFORMS Provides a marginal oil and gas well production credit equal to $3/bbl of oil and $. 50/mcf of natural gas. The credit would begin to phase in at $18/bbl of oil and $2. 00/mcf of gas. The production credit would be applicable against minimum tax and could be carried back 10 years (House) — No Revenue Effect

TAX REFORMS Same, except that no 10 -year carryback for unused credits. General oneyear carryback would apply, except no carryback permitted to a taxable year ending on or before date of enactment. Also, no language permitting application of credit against minimum tax (Senate) — No Revenue Effect

TAX REFORMS Temporarily suspends 65 percent taxable income limitation on percentage depletion for marginal production through 12/31/06 (House) — $ 862 million Extension of suspension of 100 percent net income limitation (from the property) for marginal production through 12/31/06 (House) — $123 million Provides five-year NOL carryback for losses attributable to operating mineral interests of independent oil and gas producers (House) — $1, 071 million

TAX REFORMS Extends and expands Section 29 production tax credit (House) — $ 2, 661 million Provides a $3. 00 per barrel non-inflation adjusted credit for the production of qualified nonconventional source fuels from new wells drilled or placed in service prior to January 1, 2002 (Senate) — $ 1, 875 million

TAX REFORMS Temporarily repeals the AMT preference item for IDCs through 12/31/04 for independent producers (House) — $ 24 million Temporarily allows for EOR tax credit against AMT through 12/31/04 (House) — $ 241 million Countercyclical tax credit for Alaska natural gas with a recapture when the price exceeds 150 percent of the trigger price 3 years after the credit was triggered. The trigger price is $3. 25/mcf on 1/01/10 at the AECOC Hub in Alberta, Canada (Senate) — No Revenue Effect

TIMELINE OF ACTION Sept. 3 Sept. 16 Congress Yom Reconvenes Kippur Sept. 7 Rosh Hashanah Sept. 11 Special Session in NY Sept. 23 Target for Member Agreements on Oil and Gas Issues Sept. 16 Target for Staff Agreements on Oil and Gas Issues Oct. 4 Target Adjournment Date Sept. 30 Target for Agreement on Bill Nov. 5 Election Day Lame Duck Session?

Status Conference issues are intertwined politically. Momentum is toward passage of a bill. Time is short with many hard decisions to be made quickly.

PLEASE CONTACT YOUR SENATORS AND REPRESENTATIVES

A Changing Paradigm…

Informing the Electorate • In 1980, 60% watched the evening news on the major networks. In 1996 only 25% still did. • In 1976, 67% of Americans regularly read daily newspapers. Only 30% of those under 30 do today. • In 1997, only 14% of Americans went online. In November 2000, nearly 50% were online.

Closest Margins in Recent History • Control of House decided by 5, 959 votes • Senate control decided by 0. 09% of votes in Washington • Presidency decided by 0. 01% of votes in Florida • Less than 10, 000 votes total made the difference in control of government.

Traditional political tools no longer work.

The Electorate

‘Have you heard from your employer or labor? ’

Who Is Most Credible? October 2000 Nat'l Political Party 27% April 2002 Labor Unions 16% Nat'l Political Party 29% Don't Know/ Refused 4% Don't Know/ Refused 11% Employer 23% None Of These 23% Labor Unions 22% Employer 28% None Of These 17% "Which organization do you feel can provide the most credible political information on issues and elections affecting your job, company and industry? "

‘Do you want to hear from your employer? ’ April 2002 October 2000 Wants More Information Doesn't Trust Employer 6% 27% 22%* Wants More Information Doesn't Trust Employer 11% 15% 59%* 26% 31% 16% 29% 17% 51% Strongly want more info Strongly doesn't trust employer 14% Somewhat want more info Not Sure/Refused 12% Somewhat doesn't trust employer * Due to Rounding "Employee A says he wishes his employer would let him know about how government issues impacts his job, his company and industry, while Employee B says he doesn't trust his employer to give him straightforward information on government and politics. "

The Prosperity Project Four steps to success… • Identify issues that matter to your business – Tell your employees how the issues affect them – Inform your employees where incumbents and candidates stand on these issues – Help your employees register and get them to the polls

EMPLOYERS MUST FOLLOW THROUGH WITH. . . Voter Registration Drives Absentee Ballot Acquisition “Get Out the Vote” Drives

QUESTIONS… COMMENTS?