[Senate Hearing 113-357]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-357
 
                FUELING AMERICA: ENABLING AND EMPOWERING 
            SMALL BUSINESSES TO UNLEASH DOMESTIC PRODUCTION 

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 21, 2014

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                    ONE HUNDRED THIRTEENTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                 JAMES E. RISCH, Idaho, Ranking Member
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           MARCO RUBIO, Florida
MARK L. PRYOR, Arkansas              RAND PAUL, Kentucky
BENJAMIN L. CARDIN, Maryland         TIM SCOTT, South Carolina
JEANNE SHAHEEN, New Hampshire        DEB FISCHER, Nebraska
KAY R. HAGAN, North Carolina         MICHAEL B. ENZI, Wyoming
HEIDI HEITKAMP, North Dakota         RON JOHNSON, Wisconsin
EDWARD J. MARKEY, Massachusetts
CORY A. BOOKER, New Jersey
                Jane Campbell, Democratic Staff Director
           Skiffington Holderness, Republican Staff Director



                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana.     1

                               Witnesses

Comstock, Stephen, Director of Tax and Accounting Policy, 
  American Petroleum Institute...................................    35
Jackson, Lee, Chairman and CEO, Jackson Offshore Operators, LLC..    41
Landry, Stephen J., Partner, National Tax Practice, Ernst and 
  Young, LLP.....................................................    47
Lazenby, Virginia, Managing Member and CEO, Bretagne, LLC........    53
LeBlanc, Joseph, Co-Founder and Senior Managing Director, 
  PerPetro Energy, LLC...........................................    60
Stewart, Jennifer, Vice President Tax, Southwestern Energy 
  Company, and Chair of the Tax Committee of the American 
  Exploration and Production Council.............................    66

          Alphabetical Listing and Appendix Material Submitted

Comstock, Stephen
    Testimony....................................................    35
    Prepared statement...........................................    38
Gamble, Deanna
    Report titled ``An Ethical Approach to Shale Resource 
      Development................................................    84
Jackson, Lee
    Testimony....................................................    41
    Prepared statement...........................................    43
Landrieu, Hon. Mary L.
    Opening statement............................................     1
    Report titled ``Eliminating Oil and Gas Company Tax Breaks: 
      Independent Producers Face a Funding Gap''.................     5
Landry, Stephen J.
    Testimony....................................................    47
    Prepared statement...........................................    49
Lazenby, Virginia
    Testimony....................................................    53
    Prepared statement...........................................    55
LeBlanc, Joseph
    Testimony....................................................    60
    Prepared statement...........................................    62
Rosen, Rebecca
    Letter dated December 11, 2013, to Senators Landrieu and 
      Risch......................................................   163
Stewart, Jennifer
    Testimony....................................................    66
    Prepared statement...........................................    68


                       FUELING AMERICA: ENABLING
                    AND EMPOWERING SMALL BUSINESSES
                     TO UNLEASH DOMESTIC PRODUCTION

                              ----------                              


                       TUESDAY, JANUARY 21, 2014

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                     Lafayette, LA.
    The Committee met, pursuant to notice, at 3:00 p.m., in the 
Picard Center--Rockhold Learning Center, University of 
Louisiana, Lafayette, LA, Hon. Mary L. Landrieu, Chair of the 
Committee, presiding.
    Present: Senator Landrieu.

 OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S. 
                     SENATOR FROM LOUISIANA

    Chair Landrieu. Good afternoon, everyone. I'd like to call 
this field hearing of the Small Business Committee of the 
United States Senate to order. Let me welcome all of you for 
this very important--and I think it's going to be very 
productive--discussion. I thank our witnesses for being 
available today.
    I want to begin by thanking the University of Louisiana at 
Lafayette and particularly the Picard Center for allowing us to 
host our field hearing here. It's the first time for me in this 
center. Of course, I've heard a great deal about it. I knew 
Cecil Picard personally, and I'm just so overwhelmed to be in 
his presence and the family and what they have meant to 
Louisiana, not in the field of energy but in education as one 
of our great leaders of early childhood education.
    So this center is just really a wonderful blessing to this 
university and to our state. I thank them for allowing us to 
hold our hearing.
    I also want to thank a few special guests from the 
university. Mark Zappi, the Dean of Engineering, is here. Randy 
McCollum, the Chair of the Chamber Energy Committee; Jerry Luke 
LeBlanc, former elected official; and Bruce Conque from the 
Lafayette Chamber are here. Thank you all for being here and 
others that have joined us.
    I want to begin by saying how pleased I am that we could 
have this hearing in Lafayette, Louisiana, today's hearing. 
It's timely and important on the subject of job creation, of 
independent energy gas producers, and their job creation 
prowess.
    It's only appropriate that we have this hearing in 
Lafayette. This region of Louisiana and the Gulf Coast is home 
to 1,300 companies operating in the oil and gas sector and host 
to the second largest oil and gas exposition in the nation, the 
Louisiana Gulf Coast Oil Exposition. I'd particularly like to 
thank, of course, Jason El Koubi of the Lafayette Chamber, who 
couldn't be with us today, and, of course, the president of the 
university, Dr. Savoie, and others that I had mentioned earlier 
today.
    In virtually every recent public poll that asked 
respondents to name the most important issues Congress is 
facing today, jobs, the economy, and expanding opportunities 
for the middle class come out as the number one issues. 
Partisan bickering is slowing things down, but the 
congressional dysfunction should not stand in the way of 
efforts to create the kinds of high-skilled, high-wage jobs 
that will move our economy forward and provide the high-paying 
jobs that the middle class needs and relies on and our country 
relies on for energy self-reliance.
    According to the Independent Petroleum Association of 
America, as oil and natural gas jobs continue to grow, incomes 
associated with this industry are also rising in contrast to 
the national average of stagnant wages of the past decade. 
According to a recent paper by the Economic Policy Institute, 
the vast majority of U.S. workers, including white collar and 
blue collar and those with or without a college degree, have 
endured a decade of wage stagnation. However, the average 
hourly pay for upstream oil and gas is about $34.50 an hour or 
nearly 50 percent higher than the national average.
    Here in Louisiana, the annual wage is about $57,000, but 
the average wage of direct jobs in the unconventional oil and 
gas industry is almost double that at $108,000. The facts are 
that jobs in this particular industry pay more than four times 
the minimum wage, which has been pegged at $7.25 for a couple 
of years now. Of course, it's being debated to increase, but 
has not yet.
    These jobs pay the kind of wages and salaries, in my view--
and I know it's shared by many here--that allow families to 
invest in homes, in their education, and in their futures. If 
Congress can take the steps to increase domestic energy 
production, we not only increase America's energy independence, 
but we also create the kinds of jobs that will grow the middle 
class and have a major impact on reducing income inequalify in 
our country, which is a goal I believe that we all share.
    The focus of today's field hearing is to examine the 
important role of independent oil and gas producers in 
supporting the small business supply chain and impacting our 
energy security and some of the challenges that these companies 
face in their ongoing operations. The facts won't surprise 
anyone in this room.
    But many of my colleagues on Capitol Hill would be 
surprised to learn that the companies that primarily power our 
domestic production are not the mammoth, international, 
integrated companies that we're all proud of and well aware of, 
but rather the 14,000 independent producers that, on average--
this is going to be shocking to some--employ 12 people full 
time and three part-time. In addition, this industry creates 
work and jobs for more than 46,000 small businesses that are 
along the production supply chain.
    According to testimony from the Independent Petroleum 
Association of America, independent producers develop 95 
percent of America's oil and gas wells, produce 54 percent of 
America's oil, and 85 percent of gas. Independent producers are 
exploration and production companies that participate in only 
upstream activities. This means they explore for and produce 
oil and gas, but they do not necessarily transport, refine, or 
market the product.
    They are an integral part, however, of this industry. 
According to the independent producers, the average independent 
producer has been in business for 26 years, and, as I said, 
employs only 12 full time employees and three part-time--quite 
a contrast, I believe, to the commonly held view.
    The small, tight-knit, and in many instances family owned 
or family like businesses have a mighty impact on America's 
energy economy across our country. Independent producers 
support over 4 million direct jobs and indirect jobs onshore 
and over 200,000 offshore, according to IHS Global Insight. 
These jobs drive over $100 billion in total payroll, 
contributing billions to local tax revenues and economic 
activity, which, in turn, supports an average of 5.2 jobs for 
everyone directly employed.
    Onshore independent producers contribute $579 billion to 
the U.S. economy and, offshore, $100 billion, again, according 
to the same study. In 2010, the most recent year for which data 
is available, independent producers drilled 37,175 wells. These 
wells represent the vast new reservoirs, if you will, or 
findings of gas and oil and have driven the expansion of shale 
gas production.
    Combined independent production also drives nearly $6 
billion of the $11 billion collected each year in rents, 
royalties, and bonuses by the federal government. I'd like to 
underscore that just once again. Combined independent 
production also drives nearly $6 billion of the $11 billion 
that goes to the federal treasury each year in rents and 
royalties and bonuses. Almost $6 billion of that comes off the 
shores of Louisiana and Texas in the Gulf.
    Although not all independent producers quality as small 
businesses, the ones that do impact our economy in a mighty 
way. One of our witnesses today representing a larger 
independent says in her testimony that her company contracts 
with over 3,500 small businesses from all over the country and 
paid a total of $2.7 billion to those businesses over a two-
year period.
    To give you some perspective of what this means, the entire 
budget of the Small Business Administration, which I authorize 
as the chair of the Small Business Committee, is, for the whole 
nation, $1 billion a year. So this one company, a large, 
independent oil and gas, contracts with over 3,500 small 
businesses. That's how long and powerful this small business 
supply chain is.
    Independent contractors drill the majority of wells 
associated with new production. As you will hear from the 
producers today, one of the most significant economic drivers 
supporting investment by the industry is access to cash flow. 
Cash flow from operations drives the next investment and helps 
mitigate some of the industry's real financial risks, 
especially in the exploration and production stage.
    One of the primary cash flow strategies independent 
producers employ is entering into partnerships with their major 
industry counterparts to finance exploration and offset risks 
with new ventures. For example, in practice, offshore 
operations often begin with small operators exploring new 
fields, which are then developed through partnerships with 
larger operators. Offshore independent producers are the 
largest shareholders in 66 percent of the 7,521 leases in the 
entire Gulf of Mexico and 81 percent of the producing leases. 
They are also partners to major companies on the remaining 
leases and provide necessary support for offshore development.
    In addition to partnering with well-funded investors, 
independent producers rely on longstanding provisions of the 
U.S. tax code to facilitate these important cash flow 
requirements. As every witness here today will tell you, the 
current tax code includes a number of provisions that 
independent producers count on to recover substantial 
investment costs quickly for tax purposes, amounts that are 
immediately reinvested into additional domestic production, 
which drives contracts with small business, drives our economy, 
and drives job creation.
    Not withstanding these obvious and proven benefits, some of 
these tax provisions have come under fire in recent years as 
being unnecessary or excessive industry subsidies. As part of 
this hearing, I would like to enter into the record a 2011 
Bloomberg government report entitled ``Eliminating Oil and Gas 
Company Tax Breaks: Independent Producers Face a Funding Gap'' 
that concluded that repeal of these tax provisions would reduce 
the drilling activity of independent producers.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Landrieu. If these beneficial tax provisions had not 
been included in the current code, independent producers would 
have spent $2.1 billion less to drill new wells. About 1,558 
fewer wells would have been drilled in the United States at a 
time when we're trying to increase domestic production for 
obvious reasons. Revenue loss and job loss would have resulted.
    So I would like this hearing to be an opportunity to set 
the record straight, to hear from independent producers here 
today how proposals to eliminate these longstanding provisions 
in the tax code would impact their operations and ability to 
fund new projects and the ability to expand their operations. 
We have an impressive list of panelists today. They each bring 
with them their own individual experiences.
    I'd like to first start with Stephen Comstock. I'm going to 
introduce all of them for a five-minute opening, and then we'll 
go to some questions to the panel.
    First, we have Stephen Comstock, who is the Director of Tax 
and Accounting for the API, formerly the Chair of the Energy 
and Environmental Tax Committee for the American Bar 
Association.
    Stephen, thank you for being here and for your testimony.
    Next we'll hear from Lee Jackson, who is a majority 
shareholder of Jackson Offshore and an offshore services 
operator with more than 20 years in the maritime industry. Mr. 
Jackson is a former river boat pilot, and has been appointed to 
the Louisiana River Pilot Oversight and Review Board.
    Thank you, Mr. Jackson, for your attendance.
    Joe LeBlanc is Co-Founder and Senior Managing Partner of 
PerPetro Energy, LLC, which is a privately held independent oil 
and gas company headquartered right here in Lafayette. Formed 
in 2011, it has a plan to maximize the value of Gulf Coast 
Basin legacy properties. Joe has more than 30 years of 
experience in the industry.
    Joe, thank you very much for being here.
    Jennifer Stewart is Vice President of Tax of Southwestern 
Energy. She is also here in her capacity as the Chair of the 
Tax Committee of the American Exploration and Production 
Council.
    And, finally, Stephen Landry, who is a Tax Partner with 
Ernst and Young. From 2007 to 2013, Steve served as VP of Tax 
for Marathon Oil.
    And, Gigi, I didn't want to pass you up.
    Gigi Lazenby is Managing Director and CEO of Bretagne, an 
independent oil and gas company with properties in the Big 
Sinking Field of Kentucky that she founded in 1988. She is 
formerly the Chair of the Independent Oil and Gas Producers. I 
had the pleasure of hosting Gigi in my home, I think, in 
Washington.
    So it's wonderful to see all of you here.
    Stephen, why don't we start with you. I think the staff has 
directed a five-minute introduction, and then we'll go into a 
series of questions.

 STATEMENT OF STEPHEN COMSTOCK, DIRECTOR OF TAX AND ACCOUNTING 
              POLICY, AMERICAN PETROLEUM INSTITUTE

    Mr. Comstock. Thank you, Senator Landrieu, for the 
opportunity to testify today. I'm Stephen Comstock, Director of 
Tax and Accounting Policy at the American Petroleum Institute. 
API is the national trade association representing over 550 
member companies of every size and representing every segment 
of the U.S. oil and natural gas industry.
    America's oil and natural gas industry has been a bright 
spot in our economy, as you said, with benefits felt across the 
country. Innovation, many times spurred by small businesses and 
entrepreneurs, has helped generate a domestic energy revolution 
through the development of hydraulic fracturing and horizontal 
drilling techniques. This revolution, in turn, has sparked new 
life into domestic manufacturing, is supporting 2.1 million 
jobs, and has raised the average household's disposable income 
by $1,200 a year.
    Large and small companies work together to meet America's 
energy demand. According to the recent census data, there are 
over 46,000 small businesses supporting the production of oil 
and natural gas in the United States and directly employ over 
300,000 workers. Every day, they provide a vital aspect to the 
generation of America's energy.
    One area where this is clearly seen is something familiar, 
as you noted, offshore development. Due to the cost involved in 
offshore energy exploration production, larger companies are 
more likely to develop these areas. But to make those 
investments work, larger companies must rely upon a vast 
nationwide supply chain that includes and supports countless 
small businesses.
    As an example, opening up the Atlantic Outer Continental 
Shelf to oil and natural gas development could create 280,000 
new jobs along the East Coast and across the country and 
contribute up to $23.5 billion per year to the U.S. economy, 
according to a just-released study by Quest Offshore Resources. 
Many of those jobs would be directly in the oil and natural gas 
industry, but the impact would extend to a wide range of 
businesses in our robust supply chain to provide food, 
transportation, retail, healthcare, and other services to our 
employees and their families.
    Of course, small businesses are also involved in finding 
and producing oil and natural gas. This has always been and 
will continue to be a risky, time consuming, and expensive 
process. Industry operators must spend significant time and 
money before generating a return on their investments. 
Therefore, the ability to generate and preserve cash flow is 
vitally important to the industry.
    The current tax code allows exploration and production 
companies to recover costs quickly so that investment profile 
is maintained. Specifically, ordinary costs involved in 
drilling a well which have no salvage value, such as wages, 
fuel, and maintenance, can be deducted when incurred. The 
resulting improvement in cash flow means operators have more 
money to invest and can perform more exploration and drilling, 
produce more energy, and create more jobs. All of that helps 
grow our economy.
    Changes to cost recovery would force small producers to 
shut down older domestic oil and natural gas wells and cut back 
on drilling new ones. These economic changes would impact 
larger companies as well. Accordingly, the result would be 
reduced domestic oil and natural gas production and fewer U.S. 
jobs. The economic ripple would adversely impact the job growth 
and revenues of many small businesses in our domestic supply 
chain and those that depend on a secure energy supply.
    In short, changes to the tax code in cost recovery could 
unintentionally hit the brakes on America's energy and 
manufacturing renaissance and have a devastating effect on 
jobs, the economy, and revenue to the government. The domestic 
oil and natural gas industry, both large and small, supports 
9.8 million jobs in the United States. Manufacturing jobs are 
coming back to the U.S. in droves thanks to the abundance of 
affordable U.S. energy.
    Just by allowing our industry to do what we do best, the 
federal government collects revenues averaging $85 million a 
day in taxes, rents, royalties, and bonuses. In short, energy 
is working in America.
    Thank you, and I welcome your questions.
    [The prepared statement of Mr. Comstock follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Landrieu. Thank you very much.
    Mr. Jackson.

 STATEMENT OF LEE JACKSON, CHAIRMAN AND CEO, JACKSON OFFSHORE 
                         OPERATORS, LLC

    Mr. Jackson. Thank you, Senator Landrieu. And one 
clarification: I'm still a very active and proud river boat 
pilot.
    Thank you for this opportunity today to discuss how we can 
work together to improve the commercial environment for small 
businesses and entrepreneurs in Louisiana through the growth of 
domestic energy production. Obviously, I'm no expert when it 
comes to tax law, but, surely, I can testify to the trickle 
down effect of such incentives and the effect on companies such 
as mine.
    Jackson Offshore Operators supplies fast crew supply boats 
and platform supply vessels to the offshore oil and gas 
industry in the Gulf of Mexico. We currently have two 175-foot 
fast crew supply vessels in operation under long-term contracts 
with super majors. In addition, we have two 210-foot fast 
supply crew boats under construction at a shipyard in Harvey, 
Louisiana, and four 252-foot platform supply vessels under 
construction at a shipyard in Florida.
    The fast crew supply vessels are utilized to carry 
industrial workers and general oil field cargoes between shore 
based locations and the drilling rigs and production 
installations offshore. The four platform supply vessels are 
much larger vessels that are specifically built to support deep 
water drilling, development, and production. These four vessels 
are also on long-term contracts with super majors as well.
    Jackson Offshore Operators was formed in 2011 when I 
purchased two fast crew boats which had previously been built 
in Louisiana two years earlier. By this time next year, Jackson 
Offshore's employment will grow to approximately 136 personnel 
once our expanding effort reaches its peak, and that represents 
eight ships in operation with an annual payroll and benefit 
costs of about $30 million.
    While Jackson Offshore Operators is a young company, we 
have been blessed to have loyal support from our customers, the 
domestic and international oil and gas companies. Without these 
large companies being active in Louisiana and the Gulf of 
Mexico, my company and its growth would simply not be possible.
    Jackson Offshore is involved a capital-intensive industry. 
We have to build state-of-the-art vessels to support deep water 
drilling, and these ships are very costly. Currently, the six 
ships under construction will cost in excess of $180 million. 
Without the long-term contracts issued to Jackson Offshore by 
the majors, I would not be able to secure the equity capital 
which is over $35 million and obtain the necessary debt 
financing to build these ships contracted by the offshore oil 
and gas companies.
    The major oil and gas companies find investments in the 
United States to be attractive for several reasons. The U.S. is 
a stable country. It is a country with fair and well-
established laws and tax regulations that make drilling, 
development, and production for oil and gas in the U.S. 
economically attractive.
    In addition, the U.S. has been blessed that oil and gas has 
been found here in abundance. However, there are many other 
countries around the world where oil and gas has been found and 
that also offer attractive alternatives for the investments of 
capital dollars to the oil and gas industry. As a result, it is 
of critical importance that the environmental laws and the tax 
regime in the U.S. remain competitive with those found in other 
countries around the globe.
    I'm not suggesting that we should reduce our commitment to 
having high environmental protection for our country, but that 
the environmental laws and the regulations sometimes represent 
a less transparent and a less fair and balanced way. Using 
environmental laws and regulations and with new and more 
punitive interpretations to punish the oil and gas companies 
will unnecessarily raise the cost of safe and clean drilling, 
and development and production of oil and gas will certainly 
result in the capital of these companies moving to other 
countries.
    While our tax laws are and have been used to incentivize 
and direct investments of capital throughout the history of our 
country, I would argue that they are not giveaways. And 
changing existing tax laws and regulations for the oil and gas 
industry at this time would have a very detrimental effect on 
the future growth of Jackson Offshore and the oil and gas 
industry in general.
    The administration proclaims it wants an all-of-the-above 
approach to energy policy in the U.S., and it has taken many 
actions to encourage production of renewable energy. I believe 
that the focus on renewable energy is good for our country. But 
an all-of-the-above approach to energy policy in the U.S. 
should not include any changes in the current tax laws and 
regulations that discourage oil and gas exploration, 
development, and production.
    Changing the existing tax laws and regulations to increase 
taxes and fees and create high costs to the detriment of the 
oil and gas industry in the U.S. will only cause the oil and 
gas companies to move their future capital spending to other 
countries that provide a better economic return to the 
investors. We should all remember that investment capital 
always flows to the venue where it is best treated.
    Raising the cost of drilling, developing, and producing oil 
and gas in the U.S. will only result in reduced capital dollars 
being invested here at home. Without the commitments from the 
oil and gas companies to the deep water of the U.S., Jackson 
Offshore would not exist today. Without those continued 
investments by the oil and gas industry in the U.S., our future 
growth will be ended.
    We must all realize that the U.S. is in a competition with 
other countries for investment dollars. We need to encourage 
and not discourage additional investments in the U.S. by both 
domestic and international oil and gas companies.
    Thank you for this opportunity to provide you with my views 
on this topic that is critical to my company, Louisiana, and, 
frankly, the U.S.
    [The prepared statement of Mr. Jackson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Landrieu. Thank you, Mr. Jackson.
    Mr. Landry.

STATEMENT OF STEPHEN J. LANDRY, PARTNER, NATIONAL TAX PRACTICE, 
                      ERNST AND YOUNG, LLP

    Mr. Landry. Senator Landrieu, thank you for inviting me to 
testify in today's hearing. My name is Stephen Landry. I am a 
partner in the National Tax Practice at EY. I serve in the oil 
and gas industry group, and the opinions I express are my own 
and not those of the firm.
    Growth in domestic production of oil and gas in the last 
five years has been well documented. The production growth is a 
direct result of increased capital spending. A recent American 
Petroleum Institute publication indicates that capital spending 
for U.S. projects in 2013 was approximately $350 billion.
    This capital spending was by businesses of all sizes. And 
according to the Independent Petroleum Association of America, 
the overwhelming majority of wells drilled in the U.S. were 
drilled by independent producers, most of which qualify as 
small businesses.
    Current law allows a deduction for independent producers of 
100 percent of intangible drilling costs. These costs, though 
labeled with the term, intangible, are clearly not. These costs 
are for wages, fuel, repairs, hauling, supplies, and similar 
expenses without salvage value that are incident to and 
necessary for the drilling of oil and gas wells.
    Having these deductions allows for rates of return that 
have created the capital spending we discussed. Changes on 
these rates of return for oil and gas wells will be directly 
influenced by changes in the tax law. It has been estimated 
that a change to amortization of IDCs over five years could 
change the rate of return by as much as 8 percent for 
independent oil and gas producers and their wells.
    This reduction in the cost recovery value of IDCs, using 
conservative discount rates, will raise the cost of capital for 
investments in oil and gas. A change in the expected return of 
this magnitude is significant enough to change investment 
decisions and could make investments in some oil and gas wells 
uneconomical.
    Large integrated producers that are choosing among 
alternative investments might simply allocate their capital to 
other projects and jurisdictions that offer better rates of 
return. Small companies, for whom cost of capital is a larger 
barrier to entry, might not enter at all or be forced to grow 
at a slower rate.
    Because more than 60 percent of IDCs are wages, such a 
reduction in the rate of return on investments in oil and gas 
wells could have an immediate impact on workers in oil 
producing states. IDCs relate to jobs because the ability to 
deduct these expenses in the year in which they occur provides 
the capital used by independent producers to drill the next 
well. The negative economic impact of their repeal could be 
substantial. States may see a decline in the creation of new 
jobs and could experience a lower wage base for existing jobs.
    Over the next 10 years, the industry could also experience 
significant job loss relative to what would occur under present 
law. The effect will be felt eventually by the entire economy, 
given the importance of low cost energy throughout the country, 
especially at this point in the country's economic recovery.
    There are other provisions in the tax code that also affect 
the cost of developing oil and gas. The industry already has a 
reduced percentage in the deduction for domestic manufacturing 
activity costs. Depletion and amortization of geological and 
geophysical costs, like IDCs, are also capital cost recovery 
allowances. Depletion is simply a form of depreciation for oil 
and gas and mineral resources that allows for a deduction from 
taxable income to reflect the declining production of reserves 
over time.
    Tax policy reforms that increase the cost of capital for 
America's oil and gas could have several negative effects for 
the overall economy. Fewer wells drilled and decreased energy 
investment will cause domestic oil and gas production, one of 
the bright spots in our economy over the last several years, to 
fall significantly below current projections, making the goal 
of attaining U.S. energy independence over the next decade much 
more difficult to reach.
    Taxes paid by the industry to the federal government could 
fall significantly. In addition, the effects would include 
lower earnings and fewer jobs for America's small businesses 
and oil field laborers.
    [The prepared statement of Mr. Landry follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Landrieu. Thank you. Very well said, Mr. Landry.
    Ms. Lazenby.

    STATEMENT OF VIRGINIA LAZENBY, MANAGING MEMBER AND CEO, 
                         BRETAGNE, LLC

    Ms. Lazenby. Chairman Landrieu, thank you so much for 
inviting me to testify and to participate in this very 
important hearing on independent producers and oil and natural 
gas provisions. My name is Gigi Lazenby. I am the Managing 
Member and Chief Executive Officer and 100 percent shareholder 
of Bretagne, LLC, an oil and gas production company that I 
founded in 1988.
    Bretagne's properties are in the Big Sinking Field of 
Kentucky which produced over 100 million barrels since it was 
found in about 1917. Unfortunately, I didn't produce all those 
barrels, but there are still a lot left. My company's 
operations include primary and enhanced recovery operations as 
well as development and field extension drilling.
    I am also the immediate past chair of the Independent 
Petroleum Association of America. IPAA represents, as you 
quoted earlier, thousands of independent oil and natural gas 
explorers and producers as well as the service and supply 
industries that support their efforts. These would be 
significantly affected by changes to the tax code.
    Independent producers develop 95 percent of American oil 
and natural gas wells, produce 54 percent of American oil, and 
produce 85 percent of American natural gas. The average 
independent has been in business for 26 years and employs 12 
full time employees and three part-time employees. 
Additionally, IPAA is the primary national trade association 
representing smaller independent natural gas and oil producers, 
many of which are marginal operators, like myself.
    Since independent producers' revenues are derived from the 
selling of produced natural gas and oil, federal government 
actions that reduce this revenue thereby reduce the investment 
capital independents can make in production activities which 
would result in significant reduction in American energy 
production and the economic machine it fuels. Tax reform 
proposals being contemplated in Congress pose serious risks to 
independent producers' ability to develop oil and natural gas 
in Louisiana and across the United States.
    Much of the discussion surrounding tax reform in Congress 
has involved eliminating business deductions in order to lower 
marginal rates. While there has been talk of comprehensive tax 
reform, reforming both the individual and corporate sections of 
the tax code, nearly all of the congressional focus has been on 
corporate taxation and the need to lower corporate marginal 
rates. Tax reform along these lines poses big risks for 
independent producers.
    First, independent oil and natural gas producers are not 
tax rate driven. Instead, independent producers are concerned 
with the need to generate capital and recover costs to reinvest 
in American operations.
    Second, a substantial majority of IPAA's producer members 
are not organized as C-Corporations. As such, these businesses 
would see no benefit to only lowering corporate tax rates.
    Three key issues that affect independent producers are the 
expensing of intangible drilling costs, IDCs; the percentage 
depletion deduction; and the passive loss exception for working 
interests in oil and gas operations. IDCs generally include any 
costs incurred that have no salvage value and are necessary for 
the drilling of wells or the preparation of wells for the 
production of natural gas or oil.
    Information provided to IPAA by its members indicates that 
drilling budgets would be cut by 25 percent to 40 percent if 
the ability to expense IDCs was eliminated by Congress. This 
could result in nearly one-quarter fewer wells being drilled 
per year.
    The percentage depletion deduction is truly a small 
producer issue. While percentage depletion is available to all 
extractive industries--that's all mining, coal, gravel, gold 
mining--it is highly limited for oil and natural gas and is 
only available to independent producers and only on the first 
1,000 barrels per day of production. Percentage depletion is 
critical for smaller independent producers' ability to maintain 
existing production and to finance drilling operations from 
cash flow.
    Finally, the passive loss exception for working interests 
in oil and gas properties is also an important smaller 
independent producer issue. The Tax Reform Act of 1986 provided 
an exception for working interests in natural gas and oil from 
being part of the passive income basket, and if a loss resulted 
from expenditures for drilling wells, it was deemed to be an 
active loss that could be used to offset active income as long 
as the investor's liabilities were not limited. That's an 
important point--not limited.
    Most American wells today are drilled by small and 
independent companies, many of which depend on individual 
investors. So far, only the administration has formally 
proposed eliminating all oil and natural gas provisions for all 
producers.
    Recently, Senate Finance Committee chairman, Max Baucus 
from Montana, released a discussion draft regarding cost 
recovery provisions in the tax code. The Baucus draft proposes 
substantial changes to IDC and percentage depletion to the 
detriment of American oil and natural gas production.
    Further, the Baucus draft only proposes changing cost 
recovery tax provisions. There is no discussion of rate 
reduction or impacts to individual filers. To date, there has 
not been a proposed tax reform formulation that would not 
result in a tax increase for independent producers.
    In summary, independent producers invest their American 
cash flow back into new American production projects. 
Reinvestment is essential to maintain and grow U.S. production. 
Without it, U.S. production would decline rapidly because wells 
deplete as they are produced.
    If the United States wants to continue to increase national 
energy security and further the economy, more drilling will be 
required, not less. I would urge Congress to support those 
actions that enhance the future and reject the ill advised 
calls for adverse restrictions to capital.
    I look forward to further questions.
    [The prepared statement of Ms. Lazenby follows:]

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    Chair Landrieu. Thank you very much.
    Mr. LeBlanc.

  STATEMENT OF JOSEPH LEBLANC, CO-FOUNDER AND SENIOR MANAGING 
                 DIRECTOR, PERPETRO ENERGY, LLC

    Mr. LeBlanc. Thank you, Senator Landrieu, for allowing me 
the opportunity to speak to you today. I know that I had some 
prepared notes, but what I've heard is a great dissertation by 
all the previous members on the tax law, and I'm not going to 
talk about it.
    But I do feel that when they mentioned the concept of an 
independent producer in Louisiana, they're talking about me. My 
name is Joe LeBlanc. I am the Co-Founder and actually the CFO 
of PerPetro Energy, which is a startup independent oil and gas 
company headquartered in Lafayette, Louisiana.
    We started the company in 2011 as a company that was 
focused on going back out into the Gulf of Mexico. It should be 
no surprise that most of the companies that are currently 
operating in the Gulf Coast, shallow Gulf of Mexico, in this 
region are seeking an exit. They're seeking an exit because 
there are better rates of return and regulatory environments in 
other areas of the U.S. and around the world.
    One of the things that you should know is I've been in the 
independent Louisiana-based world for most of my career. I was 
recently the Associate Director of the Tulane Energy Institute 
and Clinical Professor at the A.B. Freeman School of Business 
at Tulane University.
    Prior to joining Tulane, I served as the Principal 
Financial Officer, Treasurer, Planning and Marketing Director 
of EPL. I was the Manager of Finance and Business Development 
at McMoRan, Exploration Company, a derivatives trader of Shell 
Oil products.
    And I've worked for, I feel like, most of my career now at 
the Louisiana Land and Exploration Company as their Planning 
Coordinator, Derivatives Trader, Audit Coordinator, et cetera. 
So I'm very familiar with what it's like to be an independent 
producer. I am also a CPA, but I'm not going to talk too much 
about taxes.
    But where we are right now is we have been working 
extensively on a number of transactions. We're negotiating to 
actually acquire the properties of people who are exiting. We 
have spent a tremendous amount of time trying to find the 
contrarian capital that was interested in investing when 
everyone else was leaving.
    So where we are right now is we've arranged a $500 million 
commitment to come back into the Gulf of Mexico. And you 
wouldn't believe that the comments and the questions that I'm 
getting as we're finalizing all these negotiations to buy these 
properties are: I think I may need to raise your cost of 
capital because there's talk in Washington about changing the 
rules.
    What you're effectively talking about is changing the law 
so that I need to start capitalizing my payroll. That's not 
creating jobs. That's actually impacting us.
    When we went around the Gulf Coast, looking at arranging a 
new model, a new way of going back into the Gulf of Mexico, we 
went around to the different service companies, the companies 
you're talking about up and down the corridor here in Louisiana 
that would be our service providers. What we found was that 
these companies were sitting on about 40 percent to 70 percent 
of their fleets here in the Gulf Coast idle.
    These are large independent service companies that have 
grown up in this area. They love their people. They love their 
business. They want to stay, and they're looking for creative 
ways to stay. We've created partnerships with them to put those 
people and that equipment to work in this region, and they're 
willing to put their capital at risk. If we start changing the 
tax laws, will it affect all of those decisions?
    So as we're going into this venture, the next consideration 
is that in order to go back into this region you need to be 
able to post collateral with the BOEM and all the other players 
to be able to handle the abandonment liability. Of a typical 
transaction, it's probably 80 percent of the capital that's 
required. So we need to post capital that says we have the 
capacity to handle the abandonment.
    The interesting component about it is that it's probably 
one of the few, if only, places that all the capital is 
required to be placed up front with no tax basis. I will have 
no basis for that liability that I'm having to fund in advance. 
It is causing this region to be completely noncompetitive with 
the rest, and that's really one of the other reasons people are 
exiting.
    So as we talk about these issues, they're affecting us. 
We're trying to bring capital back in. Right now, we have it to 
where we'll be creating and/or retaining jobs right here in 
this area of 100 people within probably the next 30 to 60 days, 
plus all the other transactions that we have. The changes that 
we're talking about, the ones that are proposed, would 
dramatically affect us.
    [The prepared statement of Mr. LeBlanc follows:]

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    Chair Landrieu. Thank you, Mr. LeBlanc. I'm trying to help 
you, too. So thank you very much.
    Ms. Stewart.

STATEMENT OF JENNIFER STEWART, VICE PRESIDENT TAX, SOUTHWESTERN 
ENERGY COMPANY, AND CHAIR OF THE TAX COMMITTEE OF THE AMERICAN 
               EXPLORATION AND PRODUCTION COUNCIL

    Ms. Stewart. Thank you. Senator Landrieu, thank you very 
much for the opportunity to testify today. I'm Jennifer 
Stewart. I'm the Vice President Tax of Southwestern Energy, an 
independent energy company primarily engaged in the exploration 
of natural gas and crude oil. I'm also here in my capacity as 
the Chair of the Tax Committee of the American Exploration and 
Production Council, which represents 32 of the nation's leading 
independent natural gas and oil exploration companies.
    I trust you'll agree with me that the domestic oil and 
natural gas industry has been one of the few business sectors 
instrumental in providing new jobs and spurring growth in all 
sectors of our economy. The contributions of the industry 
during the recent recession demonstrate that current tax policy 
has proven ties to developing a stronger economy.
    But how does that work? One of the most significant 
economic drivers supporting investment in our industry is 
access to cash. Cash flow from operations drives the next 
investment and helps mitigate some of our industry's real risks 
in the exploration and production stage where upfront 
investment is extremely large. The key component in this cash 
flow model is the ability to recover these large investment 
costs quickly for tax purposes, and the tax code has a number 
of provisions currently reflecting this policy.
    For example, as many of my colleagues have attested to, 
independent energy companies are currently permitted to deduct 
their business expenses as they are incurred. These expenses 
are primarily wages, fuel, transportation, repairs, and other 
costs necessary to construct a well pad, drill a well, and 
complete a well.
    To limit the ability of these companies to deduct these 
expenses as they are incurred is to limit cash flow from 
operations, which limits capital investment, which we have all 
spoken to this afternoon, and to limit or even eliminate jobs.
    Southwestern Energy is actively exploring now in northern 
Louisiana, and we have a very large position in our sister 
state to the north, Arkansas. So I want to share with you some 
data from a 2012 study conducted by the University of Arkansas. 
It concluded that for every direct job created by the oil and 
natural gas industry, an additional two jobs are created in the 
energy services sector and in the industries that support them.
    I can illustrate this further using 2012 data of my own 
company, Southwestern Energy. Based on the university's study, 
every well we drill creates about 20 direct and indirect jobs. 
If current expensing of our ordinary and necessary business 
expenses was no longer permitted, we estimated that 243 wells 
would have been eliminated from our drilling program in 2012.
    This would have translated into 4,900 jobs lost in 
Arkansas, 1,700 direct jobs and 3,200 indirect jobs. The 
negative impact on any local economy, not just the Arkansas 
economy, of 5,000 jobs cannot be overstated.
    But what are these jobs? As you mentioned in your opening 
remarks, they are high paying. Based on a University of 
Arkansas study, the average annual pay in Arkansas in the oil 
and gas industry is $75,000, twice the average salary in that 
state.
    Then there are the indirect jobs that follow the supply 
chain, of which most are generated by small business. Think of 
the contractor that hauls gravel to the well pad construction 
site. Someone has to sell him--and then I added, or her--
diesel, sell him or her tires, repair his trucks, provide his 
insurance, clean his office, and prepare and sell him food when 
he stops for lunch.
    But why am I testifying today? Southwestern Energy and most 
of the AXPC membership are not small businesses. To answer 
that, permit me to provide one last statistic. In the years 
2012 and through this year to date, my company contracted with 
3,532 small businesses from all over the United States and paid 
a total of $2.7 billion to these small businesses over this 
brief time. And we are just one energy company out of the 
thousands across the United States.
    I would like to share with you a remarkable conversation 
that I learned of recently as I was preparing my testimony. 
This represents the perspective of one small business owner in 
the energy sector that, in my view, in very few words, speaks 
volumes.
    The small business owner started his business in 1985 with 
one bulldozer. In 2005, he approached Southwestern Energy to do 
well pad construction work for us. We granted him a contract to 
do so, and in that same year, he went from 10 employees to 100 
employees.
    Before his work with the oil and gas industry, he was 
digging ponds for farmers and, in his words, struggled to make 
ends meet. And, in his words, and I quote, ``My company has 
grown. We have a stop light, a Sonic, and a Subway, and these 
wouldn't be here if it wasn't for the gas companies.''
    In closing, our nation needs a strong domestic energy 
policy, and I am confident that a change in tax policy would 
only weaken the industry at a time when we can ill afford it. 
The American energy renaissance was created as a result of 
development of our domestic resources. Anti-growth tax policies 
will only weaken our domestic energy industry and inflict harm 
on small business by limiting economic growth and the 
advantages that come with ample supplies of secure domestic 
energy.
    Thank you very much.
    [The prepared statement of Ms. Stewart follows:]

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    Chair Landrieu. Excellent. Thank you all for that excellent 
testimony. And, as you know, this is the Small Business 
Committee, but the intersection of tax policy, business, and 
energy is clear. I've had the pleasure to serve not on the 
Finance Committee, but on the Energy Committee for many years 
now and, hopefully, in the next few weeks, will actually assume 
the chairmanship of that committee. So I'm excited about that.
    I am very pleased to be holding what probably will be--I 
didn't realize this when we scheduled it--but the last field 
hearing that I'm going to conduct as the chair of the Small 
Business Committee on this subject. That's how important it is, 
I think, not only to our region, but to the nation. I think 
your testimony that will be submitted and filed in the 
congressional record will be extremely helpful in this debate 
that will occur in the Finance Committee and then in Congress.
    Ms. Stewart, I was really struck by the tremendous impact 
that just your one company has had--business with 3,500 small 
businesses. And I know that you work with or are knowledgeable 
of other companies similarly situated as yours.
    Could you give one or two other examples of other companies 
that you know? Do they do the same kind of work with small 
business, or do you think you are in a unique situation? Or do 
you think the kind of work that you do is done by other 
companies of similar size, whether in this region or somewhere 
else in the country?
    Ms. Stewart. I think for any domestic producer--and not 
necessarily for domestic independent producers, but your majors 
as well that have large plays in the United States--the 
trickle-down effect is the same. So, you know, I can't speak 
for any other producer, but to me, when I think about our guys 
that are working on the rig, working 12-hour, seven-week 
shifts, you know, they have to eat lunch.
    So someone in the local community has to prepare the food 
and sell them the food. And someone sells to the person who is 
preparing the food the ingredients to cook the food. And then 
someone else sells them their napkins, and someone else sells 
them cleaning supplies. That's all local business.
    So I think what I was trying to impress with my testimony 
is, as you mentioned, the supply chain implications. It's not 
just the direct jobs. You know, my statistic of, basically, 
three jobs for--or 20 jobs for every well--that's just within 
the energy sector. That's not including all the periphery that 
goes into supporting the energy sector.
    Chair Landrieu. I think the reason that that's important--
and I'd like some of you to comment if you want to on that 
particular question--is that I think in Washington, you always 
hear the phrase, big oil, big businesses. I think people get a 
little disconnected in their thinking about what is actually 
happening on the ground in places like Lafayette, the Gulf 
Coast, Arkansas, North Dakota, Pennsylvania, Texas.
    With the opening up of so many basins in the energy 
renaissance that we're--you know, there's something big about 
it, all right. It's moving this economy in a big way. But there 
are very small parts that make up that big punch, and I think 
that's what we're trying to communicate. At least, that's what 
I'm going to try to do, to use this field hearing to 
communicate to my colleagues and to inform this debate as it 
moves forward to push back against this idea that these tax 
breaks are special interest. They really are broadly used and 
strongly used to create the kinds of jobs that I think we want 
in our economy.
    Stephen, did you want to add anything to that?
    Mr. Comstock. Yes. There was a report that API did in 2011 
looking at the economic impacts associated with offshore 
development. As part of that, we did an informal survey of the 
members and people who gave information to that study and found 
that there were 2,500 contractors that were associated with 
just--like I said, an informal analysis of people who help 
support the operations offshore.
    Chair Landrieu. Does anybody else want to comment on that 
question to Ms. Stewart? I have a few others.
    [No verbal response.]
    Ms. Lazenby, your testimony states that independent 
producers are not tax rate driven. Instead, independent 
producers are concerned with the need to generate capital, 
recover costs, reinvest in their operations. Independent 
producers historically have reinvested as much as 150 percent 
of the American cash flow back into projects right here in 
America.
    Supporters of proposals to eliminate the current oil and 
gas tax provisions claim that any tax increase from the 
elimination of these provisions will ultimately be offset by 
lower tax rates. You hit that in your testimony, but can you 
underscore or explain why lowering tax rates, once again for 
the record, does not necessarily help the kind of reinvestment 
and capital reinvestment that is so important and critical to 
the expansion of this industry and to the creation of jobs?
    Ms. Lazenby. Well, I think--and you all can help me on 
this. But I think the proposals are to try to get the tax rate 
down to approximately 25 percent, something like that. For the 
oil and gas industry, you start with a tax rate of 39 percent 
or something, and you deduct your intangible drilling costs, 
your percentage depletion. You come down with an effective tax 
rate lower than 25 percent--10, 15. You pay that tax, and you 
take the additional cash flow between the 35 percent tax rate 
and the 10 percent or 15 percent tax rate that you have, and 
you reinvest it in drilling.
    If you were not able to take those deductions and got a 25 
percent tax rate, flat, you would be paying more tax and 
wouldn't have the cash flow to invest back in the oil and gas. 
So it's not a benefit. There is no proposal that proposes to 
reduce the tax rate lower than about 25 percent.
    And when you have tax policies that were put in place for 
the express purpose of encouraging capital formation to develop 
industrial products and industries in this country--and that's 
why those deductions were allowed, to reduce the rate so that 
you could put your money in. But if there are no deductions 
allowed and they reduce it down to 25 percent, then there's no 
encouragement to form capital. You've lost that 10 to 15 
percent of additional rate that you would have available to 
invest.
    Chair Landrieu. Does anybody else--Mr. Landry?
    Mr. Landry. Congress has recognized several times over the 
last 10 years the importance of economic stimulus of 
accelerated cost recovery. The 2012--I think it was called the 
American Taxpayer Relief Act, which was the last big tax act in 
the summer of 2012. It included an extension of bonus 
depreciation of 50 percent for all asset acquisitions in 2013. 
That's been extended several times. We've had the GO zone 
credits as part of the help for Katrina back--it's in several 
relief areas.
    If you liken that policy which says if we take capital cost 
recovery maybe quicker, that's an economic stimulus--50 percent 
bonus depreciation with a seven-year MACRS in the first year 
results in about a 64 percent write-off. The integrated oil 
companies right now get 70 percent for IDC and some might get 
100. So what we're talking about here is to simply finance a 
reduction in rate by increasing recovery and allowances can 
have an adverse impact on the economy.
    One of the things that several studies have mentioned is if 
we look to some of the major jurisdictions in the world that 
have lowered their tax rate, much like we're talking to, like 
the U.K. and Canada, those tax rates don't have to be lowered 
in one fell swoop. The tax rates can come down over a period of 
three to five years, which is what Canada and the U.K. have 
successfully done in the last decade. If we do that, then you 
don't have to hit capital cost recovery allowances so quickly 
to get there and do the type of damage we've talked about and 
Ms. Lazenby talked about.
    Mr. LeBlanc. Could I add a comment to it?
    Chair Landrieu. Yes.
    Mr. LeBlanc. There's a precedent in a large number of the 
other countries that are trying to attract capital, which has 
been going on for about the last 15 or 20 years. An oil company 
looks and says, ``I've got a certain amount of money. I've got 
all of these particular options around the globe. Where would I 
like to invest?''
    When you look around the globe, you've got to be able to 
say, ``Well, in this country I might be faced with 1,000 
percent inflation. I might need to look at all of the different 
particular items.''
    But there's a structure that people are using called a 
production sharing contract. And, basically, other countries 
are saying, ``Come in and invest, and before we impose a tax 
structure on you, we'll allow you to get all your money back 
and a rate of return before we come in with a tax structure.''
    Here's what occurs: The actual decision making that occurs 
at the E&P level is we would rather continue to reinvest than 
get exposed to the tax implications of taking the money out. So 
while you're there, you are generating a very large economic 
engine for those countries by doing that.
    Chair Landrieu. So they lure you in.
    [Laughter.]
    Mr. LeBlanc. They lure you in. But what I'm saying is----
    Chair Landrieu. And then they make you so happy you don't 
want to leave.
    Mr. LeBlanc. Well, that's right. But what we're talking 
about here is if you contrast that to ours--they don't ask for 
any royalties, nothing, until you get your money back.
    But what the U.S. does is on day one, you get a royalty 
check. I haven't collected all my money back yet. And then as I 
go to reinvest, now you're telling me that I don't get a 
deduction for it. So you're actually making it currently very 
noncompetitive with other basins.
    If we want to attract the capital here, that's a model 
that's out there. It's not a new model. It's very creative, and 
it's what we're looking at. If you've got access to 
international investments, those are very attractive.
    Chair Landrieu. And let me ask you this, Mr. LeBlanc. Is 
there anything that you've testified today that has a bearing 
on either pre-Macondo or post-Macondo? What you referred to as 
having to put up 100 percent of your liability--was that always 
the case, or is that just post-Macondo?
    Mr. LeBlanc. It's a new factor, basically because--what the 
government requires is that you either put up money directly 
with them, or you post capital to a surety company, and then 
they issue a bond. Because of the people that are exiting, the 
sureties are asking for--what used to be 20 percent to 30 
percent capital to be able to post this bond is now 70 percent 
to 100 percent. I've even heard some companies faced with 125.
    There are current discussions right now where most 
independents were exempt from supplemental bonding, that 
there's talk in the industry right now by the BOEM that they're 
looking at changing the rules so that 85 percent of the current 
independents will lose their exempt status and would have to 
start posting bonds. That means that a lot of the companies 
we're talking about have $2 million, $3 million, $5 million, 
$100 million of abandonment liability--that that would be 
capital coming out of the engine and sitting in a trust 
somewhere for the benefit of the government without any tax 
breaks on it at all.
    Chair Landrieu. It doesn't sound like a good idea to me.
    Mr. LeBlanc. It's not. So I'm just sharing those different 
models.
    Chair Landrieu. Mr. Jackson, do you have anything to add, 
or Mr. Landry?
    Mr. Jackson. Well, one of the things that we were talking 
about is the large super majors. Another part of that trickle-
down effect is that these larger companies--they divest these 
assets. And when they divest these assets, they're not 
economically feasible anymore for these large organizations. 
Then you see those properties tend to venture off into places 
like your small independents.
    So it's always--it's an engine that keeps on going. So I 
think, you know, those tax breaks are all--they just don't 
represent those big companies. I think they're incentives for 
the smaller ones as well, when those divestments happen, when 
these things occur, when these larger companies are no longer 
seeing the economic model making sense anymore in these 
particular properties.
    Chair Landrieu. Let me ask this. I think you all have hit 
this, generally. But if you could be a little bit more 
specific--and maybe some of the CPAs could--when I hear in 
Washington--now, I do not agree with this, but I hear, again, 
this is just special interest for the industry, et cetera, et 
cetera.
    How do some of these intangible drilling costs or tax 
treatments correspond to similar industries that are either 
extractive in nature or important in terms of building jobs, et 
cetera, so that we can do a better job of advocating for why 
these provisions--they've been longstanding, they've been 
helpful, they should not be changed. I don't know who wants to 
take that question.
    Gigi.
    Ms. Lazenby. I'll start. We just made some comments to 
Senator Baucus as they requested that we do. This was basically 
about percentage depletion. That's one example. Here are the 
people that signed on for us: American Institute of Iron and 
Steel, Building Stone Institute, Indiana Limestone, IPAA, Iron 
Ore Association, Lime, National Stone, Portland Cement, 
Fertilizer.
    So, basically, what's happening is that the cost recovery--
this is percentage depletion, which I'd like to say a little 
bit about in a minute. But, basically, the provisions that 
they're talking about changing are really anti-manufacturing. 
It's not just oil and gas.
    We have formed associations and gotten together with a lot 
of manufacturing companies. And they're taking away deductions 
for actual expenditures, which those companies are all using to 
create jobs, and you're not able to have the cost recovery, all 
for reducing the rate on maybe some finance companies or 
something. And it doesn't make sense because they aren't 
creating jobs. They're not adding payroll, et cetera.
    Chair Landrieu. It just doesn't make sense.
    Ms. Lazenby. In terms of percentage depletion, which all of 
these companies, extractive industries that I talked about--
they all get percentage depletion. It was put in the code 
because it was recognized that depletion--the limitations on 
cost depletion led to the early closure of these resources and 
they needed to be protected.
    In terms of oil and gas, it's really become a small 
producer issue, a marginal well producer issue, of which I am a 
good example. But the significance--it's not just me as a 
producer. Marginal production reflects 20 percent of all the 
oil and gas produced in this country, and it is a lot of little 
biddy wells.
    Now, that is a massive base of the oil and gas production 
in this country, and it is blessed with a low decline rate. If 
you take away the ability of the marginal producer to create 
cash flow to keep drilling the marginal wells and keep the 
wells producing or reworking them, you're going to have a 
larger decline rate in that base. There's already a big decline 
rate in the newer big wells being built.
    So I'm not just one marginal producer. We're 20 percent of 
the base, and it's very important. We don't have access to 
capital like the larger companies do. No community bank is 
going to loan a marginal small producer money anymore on a 
bunch of little biddy strip oil reserves. We have to rely 
mostly on our own internal cash flow and some outside 
investors, and that's why that is so imperatively important.
    Chair Landrieu. That was beautifully said. I'm going to get 
Mr. Landry and then Mr. LeBlanc.
    Mr. Landry. Senator, you asked for some of the other 
provisions related to other industries. First of all, let's 
talk about Section 199, which is a manufacturing deduction that 
Ms. Lazenby referred to a little bit.
    Right now, the manufacturing deduction for the oil and gas 
industry is one-third less than it is for other manufacturers. 
That's one-third less--some companies creating big jobs like 
movie producers and newspaper publishers are still getting a 9 
percent number and it's 6 percent for the oil and gas industry. 
So the oil and gas industry already has a reduced, vis-a-vis, 
other industries that are providing jobs in manufacturing. It's 
Section 199.
    For intangible drilling costs, which is probably the single 
biggest indication, the closest analogy that I've heard is that 
new drug companies under Section 174 write off the cost of 
discovering a new drug. Again, this is something that's wages, 
science, and something without salvage value if that drug ends 
up not being permitted. Well, that's much the same as drilling 
an oil and gas well. If you get a dry hole, there's nothing 
there. As a matter of fact, there's cost. There's a negative 
impact to that, to remove the cost of that dry hole.
    So there are other industries and there are things 
analogous. And as I mentioned earlier, bonus depreciation is 
capital cost recovery. That, again, is very much----
    Chair Landrieu. I think people would be surprised in our 
state to understand that in the current tax code drug companies 
get 100 percent write-off for their costs. And if they produce 
a drug that has absolutely no value or effect, they just move 
on, because they've written it off, to try something new.
    But the same benefit does not hold for the oil and gas 
industry that, obviously, has a huge impact on the small 
business supply chain, which is a very important principle of 
our economy--small business and entrepreneurship--and has such 
a dynamic impact on energy security, and then manufacturing 
renaissance. I mean, those are three really powerful reasons.
    You could probably think of others, but, immediately to 
mind, the positive impact on small business and 
entrepreneurship, the independence of energy, self-reliance of 
the U.S. or at least North America, and then the manufacturing 
renaissance. You would think that this would be more easily 
understood in Washington.
    Joe, let me get to you.
    Mr. LeBlanc. I just wanted to add a little color to what 
they're talking about here. If you just think about a company, 
and it has a certain amount of production, which is important 
to all of us to--when you hear about the availability of 
production, it helps stabilize prices and everything else 
associated with that.
    The contrast--just a point about the decline. In this 
region here, in the Gulf Coast, we're talking about 40 to 70 
percent decline. So if I bring on a new well, a new strong gas 
well, I'm anticipating a 70 percent decline rate. That means 
that in order for me to stabilize production for my company and 
continue just staying flat, if I don't reinvest those dollars 
(and we saw that post-Macondo), most oil companies started to 
have a really hard time because they weren't able to reinvest 
at the rate that they needed to because there was a pause in 
permitting.
    That cost companies--and in some ways, if you drop very low 
or drop very quickly, you may never get back up to the level 
that you had. It's going to create risk with your credit 
facilities and et cetera, and you may lose your access to 
capital. So what you're talking about is taking money out of 
that reinvestment engine needed to be able to continue to keep 
production flat.
    And just as another note, those other countries that we're 
talking about allow you to recoup even your dry hole cost 
against that mix. So it's actually a big ring fence around the 
entire investment window.
    Chair Landrieu. Stephen?
    Mr. Comstock. I really don't have anything to add. We've 
done a lot of research into the intangible drilling cost 
discussion----
    Chair Landrieu. Can you speak up a little bit?
    Mr. Comstock. I'm sorry. We've done a lot of work in the 
intangible drilling cost deduction, the history of it, where it 
came from, just to make sure that we provide education to the 
policy makers as to why it's there. Back in 1954, when it was 
put into the code, it was originally put in as an R&D 
deduction. It was part of the R&D. Then through the committee 
action, it was taken out and given its own section.
    So in many respects, the policy makers, when they codified 
it, actually were thinking of it as an R&D deduction, that we 
need to do this, that this represents a huge capital investment 
that's at risk that needs to continue on a current basis in 
order to continue to produce either a drug or a new technology 
or whatever, but, in this case, energy. So the analogy that 
Steve drew was actually pretty apt. It was, in fact, what 
happened back in 1954.
    Chair Landrieu. Ms. Stewart.
    Ms. Stewart. Senator, I'd like to add--I'll play devil's 
advocate to Stephen. In my role with AXPC and on behalf of my 
own company, I've made some Capitol Hill visits, and I've heard 
from some contrarians that say, ``Well, really, you're saying 
this is equivalent to a research and development expense, but 
you guys--this isn't experimental. This is a manufacturing 
operation. There's no risk anymore. You go, you stamp a hole in 
the ground, the hydrocarbons come out. Where's your risk? So 
why should we incent you for this risk? So put that argument 
aside. It's not valid. This is not a risky exploration.''
    My counter to that would be, well, let's not call it 
intangible drilling cost anymore. Let's call it--how about 
wages. Are wages deductible? Is interest--are rents deductible? 
Is transportation of crushed concrete deductible for everyone 
else? Well, yes, it is. So why shouldn't it be for us or for 
the industry?
    I think part of the problem is this misnomer with 
intangible drilling cost, that it's some secret special thing 
that no one understands when it's just the cost to do business.
    Chair Landrieu. Which every other business gets to do.
    Ms. Stewart. Right. So going to your point, if you're 
saying we're not at risk anymore, then how are we different 
than any other company doing business in the United States.
    Chair Landrieu. And for states like Louisiana and Texas, 
where a great percentage of our economy is based on energy and 
energy related, this is a huge issue for us to make Congress 
understand. That's part of why this hearing--this isn't the 
only hearing that's occurred, but it's the most recent. It's 
very, very important to get this testimony to Washington.
    Gigi.
    Ms. Lazenby. The other argument you hear sometimes, 
especially from the renewable fuel people is, first of all, 
they call it subsidies. But the point is that they say, 
``You've had these deductions for years, and, therefore, it's 
our turn to have them. You don't need them anymore, because 
it's a fully developed--you know, you've developed your 
thing.'' It's like you created a medicine, and you've gotten 
deductions for it.
    Well, we create a medicine every day--a new well, at risk, 
every time we drill a new well. And we produce in this country 
out of fossil fuels about 70 to 77 percent of our energy needs. 
For the foreseeable future, we're going to still be relying on 
fossil fuels for those energy needs. Renewables and wind and 
air and solar--that's fine, and they need to grow also. But to 
say, ``You've already done yours and you don't need deductions 
anymore''--we need those deductions in order to keep doing what 
we're doing so we can grow at the rate we need to grow to 
provide energy for this country. So that's chimerical argument 
as far as I'm concerned.
    Chair Landrieu. Excellent. Anyone else? Let me check with 
the staff. I think we've gotten all the questions on the 
record.
    To get a little bit more on the record, if each of you 
could just take a minute--in your experience--and some of you 
said this in your opening statement--how would these proposals 
affect not only our ability in this region, but in America--
what impact would it have if these proposals went into effect, 
which I'm going to fight and others will as well--some of the 
things that have been suggested by the administration and 
members of Congress.
    But if they did go into effect, what impact would it have 
on small business in terms of the wages that are paid? I'd like 
for you all to underscore a little bit about the industry and 
the kinds of wages that are paid.
    I think, Jennifer, you talked about that.
    Ms. Stewart. Yes.
    Chair Landrieu. You know, these are just not any jobs. 
These are not minimum wage jobs. They're not low paying jobs. 
This is about entrepreneurship, business ownership, and wages 
that are--how much above the average? Could you all put a 
little bit more of that on the record?
    Ms. Stewart. Yes. I mentioned that briefly, that the 
average oil and gas wage in Arkansas is $75,000. And, actually, 
we were having this discussion at lunch today. A young man--and 
I will say man because it's 99.9 percent men who work in the 
field--without even a high school diploma, as long as he can 
pass a drug test, can go right now in my company and be a 
roughneck or a roustabout on a rig and easily make over 
$100,000.
    It's hard work. He would earn every dime that he gets. But 
these are the jobs that would be lost. So, yes, we employ 
physicists with Ph.D.s and geologists and reservoir engineers, 
people with very advanced degrees from the top technical 
schools in the country. But we also employ those with just a 
high-school education, and even less, that are making wages, 
like I said, close to and even over $100,000.
    You can't replace that anywhere. I've been to Capitol Hill, 
and they've told me, ``Well, if you look at the efficient 
allocation of capital within the United States, if we change 
the tax law with respect to the oil and gas industry, and your 
capital dries up, that capital will be efficiently allocated 
over here.'' And my argument is, ``Really? What's that guy in 
Conway, Arkansas, who is now making $100,000 a year''----
    Chair Landrieu. Where is he going to go to work?
    Ms. Stewart. With a high school education, where is he 
going to go? And then I get angry and we stop talking.
    [Laughter.]
    Chair Landrieu. Don't stop talking, Jennifer. You're doing 
very, very well. You've got to keep going.
    Joe, do you want to add anything to that?
    Mr. LeBlanc. Well, I think what you're talking about is 
these changes would raise the cost of capital and reduce the 
availability of capital available for companies to invest. It 
will lower the value of the properties that are out there to 
companies that are holding them which might end up in tripping 
some financial covenants and put those companies and jobs at 
risk.
    It will have the same impact when you start to pull capital 
out. Let's talk about what we felt during the moratorium, when 
everyone started talking about, ``My jobs are leaving the 
country. My equipment is leaving the country.'' That's going to 
be the impact. So what that will do is destroy companies and 
jobs.
    Chair Landrieu. So if we keep the capital flowing, the jobs 
will be flowing, and they'll be jobs that are $50,000, $60,000, 
$75,000, $100,000, $150,000 a year jobs.
    Mr. LeBlanc. Yes. I would agree with what she's saying, 
that the guys out in the field have an opportunity to make 
quite a bit of money, in the six figure range.
    Chair Landrieu. Gigi.
    Ms. Lazenby. I'm probably the third largest employer in the 
county--Lee County, Appalachian, a very rural Appalachian area. 
And if you took away my ability to have percentage depletion 
and intangible drilling costs and the deductions for capital--
because I have my own drilling rigs and drill my own wells, 
shallow wells--I would have maybe a 25 or 30 percent reduction 
in my drilling program.
    The guys that work for me--I have 40 employees. I have my 
own rigs. We do everything ourselves, except for fracking. We 
don't do that. But, basically--and logging. But we do it all 
ourselves. We've trained these people. A lot of the people, 
just like you said, can't read and write. But they know how to 
use an iPad now. We're up to snuff on high technology, and even 
these guys are learning how to do these things.
    They have healthcare, premium healthcare. One of the 
policies I've put in place over the years--I've probably paid 
almost 100 percent of their healthcare insurance. I know larger 
companies can't do that, but that's the way my small company 
went on. I just decided that it was more important, really, for 
them to have a higher raise. I provide healthcare, dental care, 
eyeglasses care, whatever.
    And because we've been able to drill these wells and have 
had success, and they've worked very hard, we have a bonus 
program. We have a nice 401(k) for these guys, and they're all 
into their 401(k). We have cash bonuses for them.
    And just to top it off, this Christmas, I must have gotten 
15 personal Christmas cards back from these guys and their 
wives, and they said, ``We can't tell you how important it is 
that you have this company and that we can work for you.'' I 
mean, it made me cry. It did, you know, for them to write that 
and say, ``We really appreciate your company and what you're 
doing.''
    Chair Landrieu. Because it's not just a minimum wage. It's 
a living wage, a saving wage, and something they can build a 
future on.
    Ms. Lazenby. Right. And, you know, you have a company 
picnic and all the kids come, and you look at it and say, 
``Look, this industry created this.'' And I'm going to go down 
fighting before I let somebody take away the ability for an 
industry such as ours to create jobs so much across the board 
for good, good workers.
    Chair Landrieu. Thank you.
    Mr. Landry.
    Mr. Landry. To expand a little bit on the wage impact, not 
only are these good paying jobs, as has been testified, but 
what we're looking at is an increase in the number of jobs in 
the industry and a trajectory that's going forward. Many of 
these jobs are math, science, and engineering. Petroleum 
engineers in this country when they walk out of school have 
high demand.
    And the communities that--if you look at the Eagle Ford 
area in Texas, the Bakken area in North Dakota, and you look at 
those communities, not only are all the people that have been 
there employed, but into those areas you're bringing a lot of 
highly educated people to help develop those reservoirs. That 
also has resulted in new roads, new schools, and those 
schools--some of them may have been in impoverished areas. 
They're building new schools with highly educated people and 
their children in those schools and raising the school 
districts in those areas.
    So not only do we take the impact of a local wage and bring 
it up, we bring in new people that help grow the community in 
the right way. And not only is the production in wages, but 
it's the ability to grow those wages and to maybe give some 
hope to communities beyond.
    Chair Landrieu. My friends, Heidi Heitkamp and Senator 
Hoeven, Senator Heitkamp, would be happy to hear that 
testimony. I'll be talking with them shortly.
    Mr. Jackson.
    Mr. Jackson. Basically, what everyone said--it's no 
different in the vessel business. It's all centered around 
supply and demand. I think mariners today do very well. For 
example, a captain on one of my vessels probably makes about 
$200,000 a year. Now, contrast that to a not so busy industry. 
That same guy was probably making about $90,000 a year. So it's 
incumbent that we stress that when oil and gas does well, 
everyone does well.
    We've seen where mariners--they're doing things they 
haven't been able to do in many, many years, and they have a 
comfort level. They're buying homes, and as she spoke to--
bonuses. We're getting to a point now it's becoming a very 
competitive marketplace to attract employees, but that's a good 
thing. That's a good, healthy thing, and we're doing incentive 
programs like bonuses and things like that, tangible things 
that families can grab ahold of and say, ``This industry is 
where I really want to be.''
    For so many years, the oil and gas industry as a whole has 
had its peaks and its valleys for many, many years. Some 
mariners, particularly, have been burned. And, unfortunately, 
when the business isn't well, the first thing--you have to go 
where your biggest cost is, and, for me, it's my salaries. It's 
an unfortunate thing that happens, but those mariners, once 
they're burned they go to other industries, they're not coming 
back.
    So we've got to continue to focus on that to allow them to 
see that this is a very stable place to work. And the thing 
that makes that happen is very simple. We've got to create an 
environment where my clients, the oil and gas companies, are 
willing to reinvest those dollars, as was spoken of here, and 
to continue that process. So that, in turn, enables us to 
continue to pay a great wage.
    Chair Landrieu. Mr. Comstock, last word. You had the first 
word, so we'll give you the last word.
    Mr. Comstock. I'll be very quick.
    I was going to say was that the oil industry is in a period 
of changeover. A number of the people who are operating in some 
of these high-paying jobs are going to be facing retirement 
soon. So there's going to be a lot of opportunity for the young 
to come in and participate in the oil and gas industry and 
partake of these wages, and not only for just sort of the 
traditional.
    But, also, we've done some reports with respect to 
minorities and the potential for jobs there in that community 
and to have these high-paying, good, stable work environments 
as well and take advantage of that. So I think that across the 
board--as you sort of alluded to, the high wages, the school 
benefits, the potential for new jobs coming forward--there's a 
lot there to really sort of take in and to realize that it's 
not just the large businesses.
    It's really the small businesses as well. It's felt all the 
way down the supply chain. And the jobs are there, and they'll 
be there as long as we have good policies to support it.
    Chair Landrieu. I couldn't think of a better way to 
conclude. So this meeting will adjourn. The record is going to 
stay open for two weeks. Anyone can submit testimony for this 
hearing.
    I thank you again for your really very well prepared 
statements and also for your very off-the-cuff and sincere 
comments about the industry that you all have helped to build. 
And you've got my commitment. Whatever committee I land on or 
am running will have my strong support in the future, because 
it's important to this state, but it's very, very important to 
our country.
    Thank you all. The meeting is adjourned.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]



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