Crude Oil Pricing Regulation - Considerations For The Evaluation Of U.S. Petroleum Company Acquisition Candidates
Authors: Crouse Philip C. , Neely Michael L. 
Published: December 2007

Introduction

The Federal energy regulations pertaining to the first sale of domestic crude oil have significant impact in determining the proper monetary value to assign a U.S. petroleum company acquisition candidate. Domestic crude oil pricing regulations originated from the economic programs implementing the Economic Stabilization Act of 1970 and have remained throughout the last nine years as complex, costly and burdensome regulations. Because of the current structure of crude oil regulations, an acquisition task force must spend a significant amount of time and effort in determining the proper regulatory classifications of crude oil along with pricing projections to incorporate in the evaluation of an acquisition candidate's crude oil producing properties.

This paper summarizes current pricing mechanisms, a suggested internal crude oil regulatory group interface with an acquisition task force, and provides illustrations of forecasting pricing conditions ranging from a status quo continuation of the crude oil regulations to full price decontrol for crude oil. A theoretical crude oil property is used to demonstrate a workable, time-reducing technique of regulatory group evaluation for an acquisition task force. Case economics are also shown depicting purchase price and present worth impacts of different resolutions of a forecast of prices, with sensitivities of potential regulatory impacts being prices, with sensitivities of potential regulatory impacts being recommended for presentation to management.

Advent and History

Domestic crude oil pricing regulations originated from the Economic Stabilization Act of 1970. This Act was administered in four phases with its statutory authority set to expire on April 30, 1974. During Phase IV implementation, the 1973 Arab Oil Embargo occurred. Rapidly escalating foreign crude prices and the passage of the Emergency Petroleum Allocation Act (EPAA) of 1973 helped to promote further regulations on crude oil.

On June 27, 1974, the Federal Energy Administration (FEA) was formed; and at this time, it was becoming evident that Federal price controls were not temporary constraints. Two further bills price controls were not temporary constraints. Two further bills affecting and amending the EPAA were passed and signed into law. These bills further complicated crude oil pricing. On March 1, 1977, the FEA was reorganized and incorporated into the Department of Energy (DOE), a 10 billion dollar-plus agency designed to address and solve the energy problems in the United States.

Current Pricing Developments

All authority to control the price of domestically-produced crude oil expires on September 30, 1981 under the Energy Policy and Conservation Act (EPCA) of 1975, which amended EPAA. Effective June 1, 1979, the pricing of domestic crude oil became discretionary with the President. On April 5, 1979, as part of a major energy address to the nation, the President announced that he had adopted the policy of phased decontrol with a proposed windfall profits tax, which must be passed by Congress before becoming law. profits tax, which must be passed by Congress before becoming law. If the windfall profits tax is adopted by Congress as the President has recommended, full decontrol at the wellhead would President has recommended, full decontrol at the wellhead would occur on October 1, 1981. The upper tier tax would phase out on January 1, 1991; but the market incentive tax would be permanent.

The President's Phased Decontrol ScheduleAs of June 1, 1979, newly discovered oil is permitted to receive free market price. Regulations were promulgated by the Economic Regulatory Administration (ERA) of the Department of Energy on May 2, 1979 (44 FR25829).Effective June 1, 1979, the Department of Energy also promulgated a rule under which certain production from marginal properties may be sold at an upper tier price (April 22, 1979, 44 FR25160).