Dividends and An $18 Billion loophole enriches oil companies

Governments have the ability to direct investments and when the economy is slowing down, they often want to provide incentives to assist companies to revive the economy. The problem from a taxpayers point of view it takes a number of years to see if the incentives work and they should be taken off the books or sunset laws do not exist.

In an article by Hiroko Tabuchi of the New York Times, the Government Accountability Office, a nonpartisan agency that works for Congress, reported the government has “lost” billions of dollars to oil and gas companies because of a loophole in a decades-old law.

The loophole dates from 1995 in an effort to encourage offshore drilling in the Gulf of Mexico companies were offered a temporary break from paying royalties produced. The problem is for some wells the royalties were made permanent.

The National Oceans Industries Associations which represents the oil companies says there is no mistake, if the law did not exist, the oil companies would not have drilled to the extent they have drilled.

The politicians who wrote the bill including former Democrat senator from Louisiana Bennett Johnston says that was not our intent. He said there should have been a threshold that the law did not apply when prices went over a certain price level.

Royalties from offshore oil and gas bring in $90 billion from 2006 to 2018, but they could have brought in $18 billion more.

The companies which hold the leases, royalty free are Chevron, Anadarko, Equinor, Shell, ExxonMobil, BP and CNOCC.

It is noted in 2006, the government tried to impose the royalties, however an oil producer sued and won the case. The oil and gas wells are royalty free until they are closed.

Linking to dividend paying stocks, while most people believe that incentives are a good idea when the economy is slowing or in a downturn, what happens when the economy improves. In the case of the oil and gas leases, it was only the majors or dividend producing companies which could take advantage of the incentive. Laws are made and companies allocate resources to react to the law, who can blame them for taking advantage when the economy changes so that no incentives are needed?

There are more questions than answers, till the next time – to raising questions.

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