that current exploration/development drilling will have to be significantly increased. Chart 3 projects the production which must be found and developed if we are to contain import dependence at the current level of about 30 percent of domestic demand. This projection assumes an increase in demand of only two percent in the period 1985-94, which is below the growth we are experiencing currently.

As can be seen, domestic production will have to be increased by 11.4 million barrels daily by 1994. Because of the natural production decline from existing wells, this means 13 million barrels of new daily production will be required in this period.

Now, let us look at the drilling requirements to achieve this essential growth. Chart 4 illustrates that to meet 70% of domestic demand for petroleum liquids from domestic resources in the coming decade, the industry will be required to spend $620 billion and drill a total of 1,000,000 new wells. Maintaining relative energy security, in other words, will require a commitment of unprecedented capital resources to drill unprecedented numbers of wells. How does the activity level of the industry stack up against these requirements?

Just since mid-December 1984, the number of rotary rigs at work has dropped by 848 units or 30.4 percent. As of today, 58 percent of the industry's operable rotary rig fleet is idle. These facts clearly illustrate that while the economy as a whole is in its third year of recovery, the petroleum exploration/producing industry remains in a downcycle that shows no signs of abating. Recent experiences of the domestic industry have been marked by numerous sales, mergers and bankruptcies, continued difficulties in a number of oil country banks and extreme financial difficulties among a multiplicity of

Million

B/D

10

CHART 3

PRODUCTION NEEDED TO MAINTAIN IMPORTS
AT 30% LEVEL WITH A 2% INCREASE IN DEMAND

1984

1985

1986

1987

1988

1990

1994

IPAA CHART
MARCH 1985

long-established organizations providing equipment, supplies and services to

the industry.

The preceding facts, I believe, demonstrate clearly that (1) if we are to avoid growing energy vulnerability, our present level of drilling activity must be approximately doubled, (2) the domestic petroleum industry virtually is an economic "basket case" with its exploration/development programs in a state of collapse and (3) the public and the national interests will be ill-served unless we can reverse current trends and restore exploration/drilling/ development activity to adequate levels.

Against this brief "state of the industry" background, I now turn to the question of the impact of the energy provisions of the Treasury Department's "modified flat tax" proposal.

A number of fallacious assumptions have characterized much of the discussion about oil and gas tax treatment.

One such erroneous assumption is that percentage depletion permits recovery of funds in excess of invested capital. Chart 5 compares expenditures by

independent producers with their gross revenues from wellhead sales of both ofl 75-82

and natural gas. In the 10 years 1969-78, independents as a group made expenditures equal to 108% of total wellhead revenues. It clearly is not possible that a 15% depletion rate, adjusted by three specific offsetting limitations, could over time exceed expenditures by the industry as a whole.

Another common fallacy is that oil and gas producers receive undue benefits because of oil and gas tax provisions. However, the profits of oil and gas producers reflect no inordinate benefits. Chart 6 compares the rate of return on investment of domestic oil companies with the average rate of all manufacturing companies. Over the past 20 years, the rate for oil companies