Obama keeps new oil and gas taxes in his final 2010 federal budget

US President Barack H. Obama released his final fiscal 2010 federal budget on May 7. It included $31.5 billion of new oil and gas taxes over nine years which were part of the original request he submitted to Congress in February.

Collections would begin in fiscal 2011. The White House projects that through 2019, revenue would total $13.3 billion from denying oil and gas companies the tax deduction available to other US manufacturers, $8.3 billion from repealing the percentage depletion allowance, and $5.3 billion from placing an excise tax on new Gulf of Mexico production.

Another $3.3 billion would come from repealing expensing of intangible drilling costs, $1.2 billion from increasing independent producers' geophysical and geological amortization period to seven from five years, $62 million from repealing the tertiary injectants deduction, and $49 million from repealing the passive loss exception for interests in oil and gas properties.

It also repeals the enhanced oil recovery credit and marginal oil and gas well tax credit. OMB did not list revenues from either of these actions, probably because of price thresholds.

The budget also reinstates superfund taxes, which the White House Office of Management and Budget projects would raise $6.7 billion from 2011 through 2019. It establishes fees on non-producing federal leases (the so-called "use it or lose it" concept) and reinstates permit fees which the 2005 Energy Policy Act prohibited at the US Department of the Interior. OMB projects $574 million of revenue in the 2011-19 period from the first action and $171 million from the second.

A lobbyist said that only the tax on new Gulf of Mexico production remains in play. "Everything else looks final," he told OGJ Washington Pulse.

'Punishes gas production'

The new taxes and other provisions in the budget will make it more difficult to develop domestic energy, Independent Petroleum Association of America President Barry Russell said. "This budget does not recognize that in order to decrease our reliance on foreign oil, we need to increase our own American supplies of natural gas and oil. It also punishes American gas production, which could play a lead role in climate change discussions as our abundant, affordable clean-burning energy source," he maintained.

"From repealing existing tax provisions that encourage American production to new excise taxes on offshore production to new user fees that will go to pay for an already complex and costly permit process, this budget takes our natural resources and puts them further out of reach," Russell said.

Natural Gas Supply Association President R. Skip Horvath said that Obama's budget was bad news for American consumers and worse news for American jobs. "People don't appreciate how big the gas industry is in this country. Four million Americans depend on domestic gas for their livelihoods, both those who work directly in the industry as well as those in second jobs, such as steel and concrete, and retailing," he said.

He said that it was too soon to say definitively how many jobs would be lost, "but just a 10% decrease in direct natural gas jobs could wipe out the beneficial effects of a doubling of wind and solar jobs.

'Basic misunderstanding'

"Tax policies directly impact the decisions that are made regarding drilling, especially for smaller companies. More importantly, over 80% of the gas in the US is actually produced in this country. We are troubled that this administration has such a basic misunderstanding of how domestic gas markets will be impacted," said Horvath.

Marc Smith, executive director of the Independent Petroleum Association of Mountain States in Denver, found the White House's assertion in its budget that the oil and gas industry has tax loopholes absurd.

"The president's budget repeals the expensing of intangible drilling costs (IDCs), which are costs similar to those that all other manufacturing and production industries can expense. Without IDCs, the domestic gas industry would further contract and capital which otherwise would be reinvested in American energy would be reduced by 30-50%," he said on May 7.

"These tax increases will render many natural gas projects in the Rocky Mountain region uneconomic at today's prices, and will have the perverse effect of destroying thousands of green jobs that already exist in the natural gas industry," Smith warned.

Contact Nick Snow at nicks@pennwell.com

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