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This study was prepared by Robert Lucke of the Tax Analysis Division of the Congressional Budget Office, under the supervision of James M. Verdier. Questions regarding the analysis may be addressed to them.
 
 

A broad spectrum of firms are engaged in petroleum exploration and production in the United States. The companies range in size from Exxon ($62.9 billion in assets) to Patton Oil ($6.2 million in assets) to the lone stripper operator in Oklahoma. From the standpoint of the actors in the petroleum business, there are two types of firms in the industry--the large integrated producers (the majors) and the independents (all the rest). Whereas the integrated companies are involved in exploration, production, refining, and marketing, the independent firm frequently restricts its operations to the exploration and production phases of the business. In general, the independents are active in onshore areas and leave the high-cost offshore fields to the majors.

Two definitions of "independent" are used in this paper. One is that used by the petroleum industry, which considers all but the the very largest oil and gas corporations--about 25 firms--to be independent producers. Another definition is that of the tax code, which usually defines an independent as a producer with no significant retail or refining operations, thus excluding refiners, gas distribution companies, service station operators, and fuel oil (residential) distributors. For statistical reasons, the standard industry definition will be used in Part I, which provides an overview of independent operators. In Part II (tax provisions), the tax code definition will be used.

The oil and gas industry includes a wide variety of actors--from large multinational corporations to passive investors. A number of parties usually have an economic interest in any given oil property. Partnerships and joint ventures are common, used both to raise capital and to share risks among producers. Although there may be a number of separate economic interests in a given property, there is usually only one firm that does the actual work. This partner or operator is the actor responsible for actually conducting the exploration, production, and distribution operations (though it may also contract with other firms to perform these activities). The distinction between gross and economic (net) interests is important for both statistical and tax reasons. In general, production statistics on a "gross" basis reflect the activities of a firm or subset of firms regardless of ownership interest (that is, gross production is the amount that a company actually produces). On a gross operator basis, a firm will report data for all properties operated, regardless of ownership; this includes working interests, royalty interests, and production payments to the owners. Statistics derived on a "net" basis reflect: the economic interests of a firm or firms. Thus, net company statistics reflect the net ownership of a firm's interests in oil and gas leases. For example, a firm may produce 100 barrels--its gross production--and have an economic (net) interest of only 70 barrels. In addition, firms are generally taxed only on their economic or net interests and not on their gross production.

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