Several updates were added to this story on Feb. 2.
Nick Snow
OGJ Washington Editor
WASHINGTON, DC, Feb. 1 -- The Obama administration proposed $36.5 billion of new oil and gas taxes as it released its proposed fiscal 2011 budget. The proposed levies—which it framed as removing tax preferences to help balance the federal budget and promote clean energy—were essentially the same as the ones it presented a year earlier.
“Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices,” the budget request said. The White House Office of Management and Budget estimated that the $36.5 billion of new taxes over 10 years would represent about 1% of total projected domestic oil and gas revenue, it added.
Between Jan. 1, 2011, when they would take effect, and the end of 2020, OMB estimated that repealing the percentage depletion allowance would raise $10 billion, doing away with expensing of intangible drilling costs would generate $7.8 billion, and increasing independent producers’ allowed geological and geophysical amortization would bring in $1.1 billion of new revenue.
The single biggest bite would be downstream, with the proposed repeal of the domestic manufacturing tax deduction for oil and gas companies. That would raise $17.3 billion over 10 years if enacted, OMB said. It also would make US refiners the only domestic business not covered by the manufacturing tax credit, which Congress enacted in response to foreign governments’ subsidies of industries in their countries.
Other proposed oil and tax incentive repeals in the latest proposed budget include the exception to passive lost limitations for working interests in producing properties, which OMB said would generate $180 million over 10 years, and the deduction for tertiary injectants, which it said would bring in $67 million.
The White House also proposed repealing the enhanced oil recovery credit and the credit for production from marginal oil and gas wells, but did not project additional revenues from these moves.
Quick responses
The proposals drew immediate fire from oil and gas groups. “With America still recovering from recession and 1 in 10 Americans out of work, now is not the time to impose new taxes on the nation’s oil and gas industry,” American Petroleum Institute Pres. Jack N. Gerard said. “New taxes would mean fewer American jobs and less revenue at a time when we desperately need both.”
“In repudiating the president’s attempt last year to impose prohibitive tax policies on those find and produce energy in America, Congress rightly recognized the important role that small, independent energy producers can play in fueling the short-term recovery and long-term revitalization of our struggling economy,” said Independent Petroleum Association of America Pres. Barry Russell.
“Unfortunately, in his search for ‘easy’ revenue, the president appears once again to be endorsing a series of tax change that will result in fewer American jobs, less government revenue, and a tightening of our already dangerous dependence on foreign, unstable energy,” Russell said.
National Petrochemical & Refiners Association Pres. Charles T. Drevna took particular issue with the administration’s proposal to eliminate the tax credits refiners receive under Section 199 of the 2004 American Jobs Creation Act.
“We are disappointed that the administration has again chosen to single out the American oil, gas, and refining community for additional taxes under the guise of leveling the playing field with other corporations,” Drevna said, adding, “In fact, it accomplishes the opposite and puts our members at a precarious disadvantage with foreign fuel producers.”
Russell said contrary to what the White House’s budget request implies, the US oil and gas industry pays more taxes and royalties than any other US business. “Very few industries have the potential to create as many high-wage jobs in our current economic climate as quickly and effectively as we do,” he said, adding, “While efforts to impede that work may produce short-sighted budget relief in the near term, they will result in far less revenue, investment, and activity in American resource development in the long term.”
‘Knockout blow’
“For our members—the small businessmen and women of our nation’s oil and gas industry—this is a knockout blow,” Somerlyn Cothran, executive director of the National Stripper Well Association in Tulsa, said on Feb. 2. “Implementation of this budget proposal would mean a significant loss of jobs and a dramatic loss of tax revenues for each of the 35 states where our members are productive, contributing businesses. Plus, the resulting decrease in oil production will serve only to make America even more dependent upon foreign oil.”
Cothran noted that while a marginal, or stripper, well produces 15 b/d or less of oil, US stripper wells collectively produce 20% of the country’s oil or 1.2 million b/d—as much as the US imports from Saudi Arabia.
“There is a shocking difference between the ‘big oil’ companies and the little guys, who are Rotary Club and PTA members in their respective hometowns,” Cothran emphasized. “There should absolutely be a structural and financial difference in relation to tax subsidies between the large-scale, international oil companies and small, independent operators. This is the only way to ensure the survival of our industry’s small businesses.”
Marc W. Smith, executive director of the Independent Petroleum Association of Mountain States in Denver, said on Feb. 2, “I understand the temptation to go after ‘Big Oil,’ but the truth is that these punitive tax and fee increases will be most harmful to small businesses struggling to survive our current economic crisis. This administration continues to assure us that they are not ‘anti oil and gas,’ and yet every week brings some counterproductive new policy to make developing American energy even more burdensome.”
Smith said the proposed tax hikes came in addition to proposed inspection fees, a nonproducing acreage fee, and a royalty rate increase in the US Department of the Interior’s fiscal 2011 budget request. “Every day, I hear concerns from our members about whether they will be able to continue developing energy in the West,” Smith said, adding, “I have to wonder if shutting down all energy production on public lands is the ultimate goal of this administration. They are forgetting that these are vital energy resources that belong to all Americans.”
Other terminations
The proposed budget also calls for termination of US Department of Energy oil and gas research and development programs, which the 2005 Energy Policy Act had authorized. OMB said in addition to promoting fossil fuels instead of clean energy, the R&D typically funds development of technologies that can be commercialized quickly, such as improved drill motors.
Eliminating the EPACT-mandated programs would reduce DOE fossil fuel outlays by $200 million over 10 years to $240 million, according to the proposed budget. In addition, said OMB, a recent Government Accountability Office report said DOE oil and gas programs are dwarfed by industry R&D ($20 billion for 1997-2006), and DOE has often conducted research in areas which already received private sector funding, especially for evolution advances and incremental improvements.
“The program is primarily operated by a private sector consortium; only 25% of the funding is spent through the National Energy Technology Laboratory,” it indicated.
The White House also proposed ending the ultradeepwater research program at DOE, which it said would save $50 million from fiscal 2010 funding levels, and unconventional fossil technology R&D, which it estimated would save $20 million. It also recommended canceling the planned expansion of the Strategic Petroleum Reserve, which it said would save $71 million, and ending DOE’s gas technology research support, which it said would save $18 million.
Responding to a reporter’s question at the US Department of the Interior’s budget briefing, Interior Sec. Ken Salazar noted that EPACT tax incentives he supported in 2005 as a US senator from Colorado have accomplished their purpose. “They were designed to provide incentives to explore the deepwater Gulf of Mexico. We know what’s out there now, and that the oil and gas industry is interested,” he said.
Salazar added that a proposal in the fiscal 2010 budget request to impose a severance tax on new gulf production is gone from the latest proposal. The money it would have raised has been made up elsewhere, he said.
Contact Nick Snow at [email protected].