Statement of S. Michael Cantrell, President/Owner, Oklahoma Basic Economy Corporation

Testimony Before the Subcommittee on Oversight,
of the House Committee on Ways and Means

Hearing on the Incentives for Domestic Oil and Gas Production and Status of the Industry

February 25, 1999

Thank you for the opportunity to share with this committee just one man's view of the devastation that is taking place in the domestic independent oil industry and the ramifications to our nation of this oil price crisis.

I am a native Oklahoman and third-generation "oilie." I am a small independent oil producer from Ada, Oklahoma. I employ 10 people. We operate 85 oil wells, all of them located within 30 miles of my home.

The Oil Crisis is Real

The business environment for my company is the worst it's been since the Great Depression. Without boring the committee with a series of statistics, please allow me to provide the following back-drop for my testimony:

* Oklahoma's oilfields are among the most mature in the world. Oklahoma has about 85,000 producing oil wells, which pump a total of about 200,000 barrels a day. That means the average well in our state produces about 2 1/2 barrels of oil a day.

* Average costs to produce an Oklahoma barrel of oil is about $13. In other words, at the prices paid for Oklahoma oil since November, Oklahoma producers, like me, have been losing an average of $4/barrel or close to a million dollars a day. No business -- no industry -- can survive for long in that sort of cash-flow crunch.

* At the beginning of last year, there were 45,000 Oklahomans directly employed in the oil and natural gas industry. There were probably twice that many employed indirectly because of oil and gas exploration and production. Our state oil and gas organization, the Oklahoma Independent Petroleum Association, estimates about 6,000 of those Oklahoma jobs are already gone ... and the rate of layoffs in the Oklahoma oilpatch is escalating at a rate of about 1,500 per month. That means 50 bread-winners a day are being forced to find new work, be re-educated or re-trained or relocate. Just in Oklahoma.

* Oklahoma's preeminent geologist, Dr. Charles Mankin, estimates there are still 18 billion barrels of oil under the ground in Oklahoma. We just celebrated the centennial of our industry in Oklahoma. In 100 years, we've produced 17 billion barrels. But the remaining one-half of the energy resource -- the wealth, the tax base, etc. -- may not be produced if the access to the oil reservoir, the wellbores, are plugged and abandoned prematurely because these marginal wells are too costly to continue to operate at a loss over the near-term.

The Oil Crisis has a Face

Oklahomans are a proud people. Many of us stayed through the horrible oil crash of the mid '80s. This crisis is deeper and has gone on longer than the "bust" of '86. Pumpers, welders, roughnecks, oilfield supply houses, pipe yards, secretaries, accountants, landmen, and company owners. Nobody in the oil industry is spared. But the Oil Crisis doesn't just impact one segment, albeit a major segment, of the Oklahoma economy. It impacts all of us. Hundreds of small "oil towns" across Oklahoma are facing an economic double-whammy as the two staples of our rural culture and economy -- oil and agriculture -- struggle to survive.

The decline in the value of oil just in the past two years, is the equivalent to the loss of a billion-dollar-a-year industry in Oklahoma. It effects the grocer, the pharmacist, the convenience store owner, teachers and other government service providers. The decline in oil-related tax collections is estimated at $10 million a month to the state treasury, perhaps as much as four percent of the overall state budget. This means less money for schools, roads, services

The Oil Crisis "Winners"

There are identifiable winners in this oil crisis. No, I won't start by talking about American consumers, because -- even though all of us benefit in the short run from lower prices for energy products -- these savings won't last.

The winners are the foreign countries, and their oil company partners, who are systematically decimating the U.S. oil producing sector. Every time a U.S. oil well is plugged prematurely, the Oil Barons of the New Millennium, come one step closer to complete control of one of the staples of our existence and one of the foundation pins of our nation's freedom.

The former head of the Venezuelan oil regime announced 15 months ago: " Lower prices will result in some marginal production being shut in and force some high-cost producers, particularly in the U.S., out of business." In the winter of '97, with my oil selling for $18/barrel, that comment flew right past me. Today, it slaps me in the face.

I believe it is Venezuela's goal to displace 1-2 million barrels of U.S. production over the next 3-5 years. I believe they are joined in this global struggle for market share by Iraq, Iran, Canada, Mexico, Saudi Arabia, Norway and other countries. I believe their plan is working. I know some of my friends, neighbors and former colleagues in the oil business are already victims. I understand my company could be a fatality in the not-to-distant future.

What I don't understand is why the U.S. Government is compelled to aid and abet this foreign seizure of control of the global energy marketplace. Some will say it is not prudent for Congress or the Administration to interject itself into the "free market." Frankly, I have come to scoff even at the term.

When U.S. taxpayers subsidize the world's largest oil companies because our government allows these major companies to call the royalties they pay to foreign governments taxes ... which allows these companies to avoid paying taxes to our government. When U.S. oil producers pay upwards of $4/barrel in environmental/regulatory costs that producers in other parts of the world don't face. When U.S. taxpayers provide "free-of-charge" protection, via the U.S. Armed Forces, to tankers in shipping lanes around the globe. There is no free market for oil. There is no level-playing field for U.S. oilfield workers.

What can Congress do to address the Oil Crisis?

I would offer the following:

* The appropriate Congressional committees and/or federal agencies should begin immediately an investigation to identify the true cost of imported oil.

-- Differences in tax treatment of foreign oil production
-- Differences in regulatory/environmental requirements for foreign oil production
-- Factoring in military costs.

* The appropriate Congressional committees and/or federal agencies should begin immediately an investigation into the substantial harm caused to U.S. oilfield workers by the overt and systematic taking of oil markets by foreign-controlled interests.

* Congress or the Administration should impose a graduated tariff (tied to world oil prices) on imported oil and petroleum products.

* Congress should enact major tax changes specifically aimed at preserving marginal oil wells, including the redefinition for tax credit purposes of enhanced recovery to include both new and existing hydro-injection projects.

* Congress should provide small independent oil and natural gas producers an exemption from anti-trust statutes for the purpose of forming cooperatives to aggregate production and improve the prospects for these small market players a more reasonable opportunity to compete against the conglomerates being formed by mergers of the majors and many larger independent producers.