After passage of the 1978 Natural Gas Policy Act, Bill Saxon, Robert A. Hefner 3d and J.D. Allen rode a geyser of gas, oil and money out of Oklahoma's Anadarko Basin, gambling and winning on wells running three or more miles deep into the ground.
The 1978 act removed federal price ceilings on gas from such deep wells and, backed by bankers and investors with an unquenchable thirst for a piece of the action, the three independent oilmen made fortunes both immense and fragile. Their money flowed into the Republican Party.
Saxon, according to Federal Election Commission reports, gave $87,000 from 1979 though 1982, including $30,000 to the Republican National Committee (RNC), $23,000 to the Republican Senate and House committees and $13,000 to committees backing President Reagan. Allen, former co-chairman of the Oklahoma Republican Party's finance committee, handed out $73,750 in a similar pattern. Hefner and his close relatives, once Democratic Party loyalists, gave $55,200 to Reagan and to Washington-based Republican committees.
Moving outside the political arena, Saxon stunned colleagues in the petroleum industry in October, 1981, with the announcement of his pledge to Oklahoma University of $30 million toward the construction of an energy research and training institute.
Saxon said at the time that he knew he "couldn't spend it all . . . I don't mean to sound braggadocious, but it does not strap me or hurt me to do it."
At that moment, Saxon and his colleagues in the independent oil and gas industry, were on a winning streak that seemed to have no end. Their growing wealth was accompanied by growing political influence as their contributions to the Republican Party escalated.
The end of that streak came suddenly with the collapse of oil and gas prices last year, with severe consequences for the industry and its alliance with the GOP.
The price of deep natural gas, the only kind that was fully decontrolled, began to dive late last year, in large part because of the recession. From a high of $9.77 a thousand cubic feet--the price equivalent of oil at $57 a barrel--the market price has now dropped to the $3 range, if there are any buyers at all, wreaking havoc in the Anadarko Basin.
Saxon's firm, the Saxon Oil Company in Dallas, has reported losses totaling $90.9 million for 1982, almost half of that, $41.1 million, in the fourth quarter. The firm is currently struggling to restructure $84 million in debts to InterFirst Bank of Dallas, and to win approval from a committee of drilling contractors, service companies and other suppliers for a special plan to pay off another $54 million in debts. Saxon, according to a company spokesman, is not responding to inquiries about the $30 million pledge to Oklahoma University.
J.D. Allen's company, Longhorn Oil and Gas, was one of the first to get caught in the undertow from the collapse of the Penn Square National Bank in Oklahoma in June, 1982. Last February, Allen petitioned the U.S. Bankruptcy Court for a Chapter 11 reorganization, declaring that he owes $9.88 million in loans and personal guarantees to his companies, including Texas Oilfield Supply and Longhorn Oil & Gas.
More than 100 bankruptcies have been filed by oil drillers and producers over the past 12 months. "Producers who were overextended now have to pay off loans at the bank," said Julian C. Martin, executive vice president of the Texas Independent Producers and Royalty Owners (TIPRO). "They were betting on the come and now they are caught in the squeeze."
Already battered by the drop in oil and gas prices, the independents were jolted politically by President Reagan's proposal Feb. 28 to remove price controls on gas. While some independents would benefit from decontrol, others, including those who specialized in deep gas, gas below 15,000 feet, would be hurt.
The result is a deep split in the industry. Hefner, whose Oklahoma City firm escaped the fates of Allen's and Saxon's companies, has become an aggressive critic of President Reagan's plan. Complaining that its main benefits will go to the major oil companies at the expense of most independents, he has formed the Independent Gas Producers Committee to defend the independent producers' interests.
A major element of the dispute is how deregulation will deal with the most important categories of natural gas. Gas discovered before 1977 is considered "old" gas under Section 104 of the 1978 natural gas legislation, while most gas discovered after that is termed "new" gas, under Section 102 of the act.
"The major oil companies are the ones that have most of the old gas and they are the ones that are going to get most of the benefit," said Lew Ward, an independent oilman from Oklahoma.
The Reagan decontrol plan is likely to provoke "a war between the 102 boys and the 104 boys," said Martin of TIPRO.
"For gas producers, proposed decontrol involves a redistribution of economic benefits on a grand scale," according to Deborah Warhoff, an industry analyst for Paine Webber Mitchell Hutchins Inc. The firm found the following:
If the price of oil is $30.30 a barrel in 1985, natural gas, a competing source of energy, could be expected to sell for an average wellhead price of $2.85 for each 1,000 cubic feet. Under existing regulation, old gas, which makes up 43 percent of the supply, would have to sell for $1.52, while new gas, which has a rapidly climbing ceiling price and makes up 57 percent of the supply, could rise to $3.84, to produce the $2.85 average.
With deregulation, however, old gas could rise immediately to the competitive price of $2.85 and new gas would be forced down to the same $2.85. The gain from deregulation to old gas producers for just one year would be $5.92 billion, while the loss to new gas producers would be $5.84 billion.
The change would impose a $2.78 billion loss in one year alone on the independent oilmen, who own an estimated 76 pecent of the new gas and only 28 percent of old gas. The majors, who have 24 percent of the new gas and 72 percent of the old, this would get a $2.86 billion bonus in one year.
In addition, those who would be hurt the most would be the deep well drillers of Oklahoma's Anadarko Basin, whose prices would fall the furthest.
The consequences for the Republican Party are likely to be significant.
"Somebody's got to be able to explain those things, and right now a lot of people are just now beginning to say 'What in the world is wrong?'" said Lew Ward, a Republican National Committeeman who donated $38,500 from 1979 through mid-1982 to Washington-based Republican committees.
"Right now we don't have the answers," he said.
Just three years ago, Ward said, there were probably 140 contributors who gave at least $10,000 annually to the Republican National Committee--the "Eagles," as the GOP terms them. "I'd say the number has declined to probably 50. They are still supportive, but they are kind of sitting back and just kind of wondering a little bit, wondering if they members of the administration are ever going to listen," he said.
At the same time, a number of Republican fund raisers said privately that while they expect continued support from the oil industry, they no longer see it as a growing base of support. Instead, they said, increased GOP attention is expected to focus on high-technology industries.
If a significant segment of the independent oil industry has a large stake in regulation, the same is true in spades in the tax arena. The independent oil industry has repeatedly fought for, and often won, amendments to tax legislation which give the industry an advantage over major oil companies, in contrast to the independents' customary appeals for deregulation and free market policies.
When the cost of these tax breaks is calculated from the time of enactment, the lost Treasury revenues are about three quarters the size of the federal government's $8.2 billion contribution to the Aid to Families with Dependent Children, a basic welfare program:
* In 1975, Congress repealed the special minerals depletion allowance for major companies, but retained it, at declining levels, for independent oil companies. The value of this tax break is estimated at $1.7 billion in 1985, rising to $2.2 billion in 1988.
* Most independents are allowed to "expense" or write off in one year 100 percent of such "intangible" drilling costs as labor, hauling, ground clearing and site preparation, rather than having to spread the deductions over a number of years, as is required for most capital investment. (The majors are limited to 85 percent, according to the 1982 tax bill.) The revenue loss from expensing of intangible drilling costs is $4.2 billion.
* During the 1980 battle over the windfall profits tax, independent oilmen won a series of special tax rates that signficiantly shifted the burden of the tax. As initially reported by the House, the measure would have required independents to pay $57 billion over 11 years. After an intense lobbying effort of the House-Senate Conference Committee, however, liability falling on the independents was reduced to $22.5 billion out of a total of $227.3 billion, a $34.5 billion reduction.
* In the 1981 tax bill, the independents won further relief from the burden of the Windfall Profits Tax. The tax rate on newly discovered oil, which is much more important to the independents than the rate on old oil, was phased down from 30 to 15 percent at a cost to the federal Treasury of $113 million in 1982, rising to $1.8 billion in 1986. In addition, "stripper" wells (less than 10 barrels a day) owned by independent oilmen were exempted from the tax altogether, at a cost to the Treasury rising to $797 million by 1986.
Some Democrats, angered by the Republican bias of oil money, are looking carefully at these tax breaks as a way to both raise money and to penalize opposition. Rep. Daniel Rostenkowski (D-Ill.), chairman of the Ways and Means Committee, has asked the panel's oversight subcommittee to begin an inquiry into all the special tax breaks received by independent oil.
Another faction of Democrats, however, is struggling to bring oil back into the Democratic fold, at least partially. Two Texas Democrats, Reps. Charles Wilson and Kent Hance, have been seeking out oilmen, trying to persuade them to give either directly to Democratic candidates, or to the Democratic Congressional Campaign Committee (DCCC).
In a January 6, 1983, letter to "about 75 independents that I consider to be above average in political judgement," Wilson wrote: "It is perceived by the House leadership, as well as the vast majority of Democrats, that the oil and gas industry only supported Republicans in the last election, with the exception of a few oil-state Democrats.
"This comes at a bad time--not only because the House will be much more liberal this session, but also because we are threatened with all manner of violence concerning gas pricing, as well as our customary defense of depletion, intangibles and our concessions under the Windfall Profits Tax."
In a direct meeting, Wilson said "I've told them, you've got to stop trying to change the world or you are going to get hurt." Rep. Tony Coelho (D-Calif.), chairman of the DCCC, who represents oil interests in his district, has joined in this drive to pick up Democratic oil support, which has produced an estimated $250,000, a tiny sum in comparison to the amount of oil money flowing into GOP coffers.
There is now a reaction among some prominent oil producers against the sharp swing by the industry toward the Republican side in 1980 and 1982. L. Frank Pitts, one of the most influential oilmen in Texas, former president of TIPRO and now its chairman of the board, earlier this year withdrew from the board of the Dallas Energy Political Action Committee, one of the most aggressive oil PACs channeling toward the defeat of vulnerable liberal Democrats.
In the 1982 elections, DALLENPAC and many of its supporters went beyond funneling money against marginal, anti-oil Democrats and helped finance the the campaigns of Republican challengers to some firmly pro-oil incumbent Democrats, including Rep. Glenn English (D-Okla.), who had wrung a written promise from President Reagan to veto any legislation placing a windfall profits tax on natural gas.
"Some of the PACs, including DALLENPAC, may have gone overboard in the percentage of contributions to Republicans," Pitts said. "The industry is perceived as having tilted toward the Republicans. That's not good in the first place. Not just perceived, but rightly perceived."
It has been a long fall for the independents since 1980, when their political power was at a peak and their economic prospects looked limitless. There are signs now, however, that the fall may have reached bottom.
The decline of the industry over the past two years has also made it a less attractive target for tax increases.
"The guys who want to go after oil couldn't have picked a worse time," a congressional aide close to the prospective tax battle noted.
In addition, there is a strong possiblity that the final outcome of the deregulation debate will be a continuation of controls on old gas, as Congressional Republicans from Kansas, Missouri and Illinois--where utility rates have risen sharply--have become increasingly worried about the impact of full decontrol on utility costs.
Under this scenario, which is subscribed to in many quarters, independent oil will emerge out of the first session of the 98th Congress largely untouched by Democratic retribution, and prepared, once the market revives, to resume its role as an elite participant in the congressional bargaining process and in the financing of American party politics.