Statement of John J. Nalbone, Jr., President,
Universal Resources Holdings, Inc., Dunkirk, New York

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

Field Hearing on Energy and Prices, Mayville, New York

March 5, 2001

Congressman Houghton, ladies and gentlemen thank you for inviting me to testify at this hearing today.

I. Brief History of Universal Resources Holdings, Inc.

Formed in the mid seventies, our firm has operated in Western Pennsylvania and Western and Central New York and has drilled over 600 gas wells and about 60 oil wells, most of which were drilled for organized limited partnerships.

Our peak operational year was 1981 when we drilled 141 wells.

Prior to the tax reform act of 1986, and the oil price crash of 1986, we had drilled over 620 of these wells in our first 10 years of operation, and less than 40 wells in the 15 years since 1986. We have drilled no wells after 1992 when the last of the local area tight gas sand drilling incentives for production tax credits expired.

Since 1986 the national oil and gas industry has been devastated with most of the experienced skilled tradesmen leaving for other industries, due to massive layoffs and inactivity.

II. Government Impact on Drilling/Production Since the 1986 Tax Reforms

During this time our national oil production has declined from about 9MM B/D to less than 6MM B/D. In 1981 the industry had over 4100 rigs running but today about 1100.

The effect of the tax rate reduction from the top 70% bracket to the current 39% bracket (which will probably be reduced to around 33%) coupled with the elimination of several types of tax credits - plus the change in the passive loss rules requiring passive losses to be offset only by passive income, and the implementation of the alternative income tax devastated the usual capitol source for most of the small independent producers who combined had accounted for over 50% of the national natural gas production in the early to mid eighties.

During this period supplies were made plentiful, the consumer prices were reasonable and the perception of a "Gas Bubble" left little incentive for the lawmakers at that time to develop a long range tax policy that would ensure the continuation of ample supply.

III. How Independent Producers Sell Gas Now

Since 1986 and with gas deregulation we've seen the coming of a much more complex and volatile pricing market with the presence of numerous large Gas Marketing firms dominating the market as middlemen and futures market speculators causing wild price swings on the Spot Market.

To counteract the loss of profit caused by deregulation, the local area distribution companies have successfully prevailed upon their Public Service Commissions to allow the charging of what are excessive tariffs to transport gas across their wholly depreciated pipeline distribution systems.

Thus the consumer bears the brunt in the end in having to pay higher prices for excessive middlemen and gas transportation markup and the supply shortages.

IV. Suggestions On Improving Supply & Lowering Prices.

The industry needs better tax incentives to fund the risk of substantially more drilling today.

These necessary incentives should be significantly much easier for the lawmakers to justify than the billions of dollars of subsidies given to the farm industry.

The recommendations which I believe would turn the supply problems around and result in lower consumer prices are:

1. Restoration of several of the key tax provisions that stimulated the drilling "boom" of the early eighties that were taken away from the industry with the tax reform act of 1986 as follows:

A. Return the 10% investment tax credit on recoverable tangible equipment.

B. Return to the passive loss rules that existed prior to 1986 so that our traditional investors would have the incentives to return to us within the Limited Partnership formats that existed in the past.

2. Extension for at least 10 years of the Section 29 Non-conventional fuel tax credit program for tight gas sands production which is set to expire at the end of 2002 for existing wells that were properly registered with FERC when drilled and allow the extension of these fields for new offset wells under this program. A great part of the remaining National undeveloped reserves are in tight gas sands reservoirs. This would have great benefit for the character of the traditional drilling play that has been ongoing in Western New York for the past 100 years and stimulate a lot of new activity.

3.Elimination of the alternative minimum tax for new oil and gas drilling investments as the implementation of this tax over the past 15 years was as much a determent to investor incentive to participation in drilling ventures as was the changing of the passive loss rules.

Thank you for allowing me to make this address.