Obama keeps pledge to end oil tax incentives in 2012 budget request

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Feb. 14 -- The White House followed through on US President Barack Obama’s promise to eliminate oil and gas incentives and preferences with a fiscal 2012 federal budget request that would increase direct taxes on the industry by an estimate $3.472 billion next year and $43.612 billion over 10 years. US producers and refiners operating internationally also would pay an additional $532 million in fiscal 2012 and $10.758 billion during 2012-21 under modified rules for dual-capacity taxpayers under the foreign tax credit.

“As the bipartisan fiscal commission concluded, the only way to truly tackle our deficit is to cut excessive spending wherever we find it—in domestic spending, defense spending, and spending through tax breaks and loopholes,” Obama said as the White House Office of Management Budget released the proposed budget on Feb. 14. “We’ve begun to do some of this with $78 billion in cuts in the [US Department of Defense’s] budget plan, by ending tax breaks for oil and gas companies, and through billions of dollars in savings from wasteful health spending.”

Oil and gas industry association leaders immediately condemned the proposed changes. “It’s no surprise the administration is proposing yet again to raise taxes on the US oil and gas industry. But it’s still a bad idea and comes at one of the worst times in our economic history,” American Petroleum Institute Pres. Jack N. Gerard said. “The administration continues to ignore the fact this industry is among the nation’s largest job creators and delivers enormous revenues to government at all levels. The industry pays income taxes, royalties and other fees totaling nearly $100 million every day and pays income tax at an effective rate far higher than most other industries.”

The White House’s latest federal budget request differs from its predecessors’ proposals in one respect: It does not contain provisions that would repeal the enhanced oil recovery credit or the credit for oil and gas produced from marginal wells. But it contains other proposals to increase tax revenue from the oil and gas industry which have become fixtures the past few years, including:

• Repeal of expensing for intangible drilling costs, which the White House OMB estimated would raise $1.875 billion in fiscal 2012 and $12.447 billion over 10 years.

• Repeal of the deduction for tertiary injectants, which OMB says would raise $6 million in 2012 and $92 million over 10 years.

• Repeal of the exception to passive lose limitations for working interests in oil and gas properties, which OMB says would raise $23 million in 2012 and $203 million over 10 years.

• Repeal of percentage depletion for oil and gas wells, which OMB says would raise $607 million in 2012 and $11.202 billion over 10 years.

• An increase of geological and geophysical amortization for independent producers to 7 years from 5, which OMB said would raise $59 million in 2012 and $1.408 billion over 10 years.

• Repeal of the Internal Revenue Code Section 199 domestic manufacturing deduction for oil and gas companies, which OMB said would raise $902 million in 2012 and $18.26 billion over 10 years. The deduction, which Congress approved in 2004 as part of the American Jobs Creation Act to help offset foreign government subsidies of competing firms, would continue to apply to other US businesses.

Oil and gas producers would face additional expenses from production on federal lands in the Obama administration’s proposed fiscal 2012 budget for the US Department of the Interior, which would impose user fees for drilling permit process and inspections on federal lands and in federal waters, establish fees for new nonproducing offshore and onshore oil and gas leases to encourage more timely production, and adjust royalty rates and terminate the royalty-in-kind program as part of a broader set of changes in the federal royalty system.

Onshore oil and gas royalties would increase by $349.8 million to an estimated $2.98 billion in fiscal 2012 from an estimated $2.63 billion in 2011, while rents and bonuses would fall by $2.3 million during the same period. OMB projected offshore mineral revenue increases of nearly $1.22 billion in rents and bonuses, $875.6 million in royalties, and nearly $24.6 million in fees from nonproducing leases in DOI’s proposed budget.

The budget request also proposes more than $500 million to restructure the US Bureau of Offshore Energy Management, Regulation, and Enforcement, the successor agency to the US Minerals Management Service; to hire new oil and gas inspectors, engineers, scientists and other key employees to oversee offshore operations in federal waters; to establish real-time monitoring of key drilling activities; to conduct detailed engineering reviews of offshore drilling and production safety systems; and to implement more aggressive reviews of companies’ spill response plans. “These reforms also will facilitate the timely reviews of oil and gas permits,” OMB said.

The US Department of Energy would receive $29.55 billion, 12% more than the $26.94 billion enacted for fiscal 2010 and continued in 2011, under the administration’s proposed budget. DOE would receive $5.4 billion for its science office, including $2 billion for basic research to discover new ways to produce, store, and use energy; but essentially eliminate its fossil fuel office, where approximately $4 billion/year of what OMB considers tax subsidies for oil, gas, and other fossil fuel producers would be repealed. White House federal budget requests since the beginning of George W. Bush’s second term have called for the elimination of federal oil and gas research and development support, which has produced horizontal drilling, 3D seismic mapping, and other technologies in wide use now by producers.

Potential lost revenue
In his statement responding to the Obama administration’s latest proposed federal budget, API’s Gerard said the tax increases, besides eliminating thousands of potential new jobs, would actually lower revenue to the government by many billions of dollars because the tax hikes would prevent many projects from going forward.

“The irony is that the administration wants to increase taxes on the US oil and gas industry so the government can create green jobs, but the industry is already doing that more efficiently and with less burden on American taxpayers through its own green investments,” he said, adding, “It invested more than $58 billion from 2000 to 2008 on low- and no-carbon energy technologies, more either than the government or the rest of the private sector combined.”

Other oil and gas industry association leaders condemned the White House’s proposed federal oil and gas tax changes. “These provisions, if enacted, would have a chilling impact on the jobs our industry creates and on our nation's energy independence,” observed American Exploration & Production Council Pres. V. Bruce Thompson.

“Our member companies are responsible for a significant portion of the exploration for natural gas and oil in the United States. Raising taxes on these and other similar companies will not create jobs, nor will it increase the supply of clean, domestic and affordable energy,” he said. “While we recognize the need to deal with our nation's ongoing budget challenges, tax increases on an industry that is creating jobs is not the way to reduce budget deficits.”

Independents targeted
“Contrary to the president’s belief, his budget proposal does not target so-called ‘Big Oil,’ but instead goes after the thousands of small businesses, America’s independent oil and gas producers, who on average employ only 11 workers,” said Independent Petroleum Association of America Pres. Barry Russell. US production activities are dominated by independent producers who drill 90% of the total wells, and produce 72% of the nation’s gas and 44% of its oil, he noted.

“Virtually no industry in the United States pays more in taxes, royalties, and revenues than America’s oil and gas producers,” Russell stated, adding, “The industry pays federal taxes at a rate of 48%, as well as substantial state and local taxes to drive local communities. For example, the Louisiana Department of Education reported that some school districts located near the Haynesville shale now have the highest paid teachers. According to the department, the increase in salaries is a direct result of the share of increased sales and property taxes received by the school districts from the Haynesville shale production activity. Simply put, lost capital investment due to increased taxes will reduce these tax payments over time, not increase them.”

National Petrochemical & Refiners Association Pres. Charles T. Drevna, whose members would be most directly affected by the administration’s proposal to not have the Section 199 tax exemption apply to US oil and gas companies, said that it would effectively hurt consumers by driving up the cost of petroleum products and petrochemicals produced in this country.

“This proposal is a sweetheart deal for the state-owned oil companies in Russia, Iran, China, and other competitor nations, and for the Chinese who produce almost all the rare earth minerals needed to make batteries for electric vehicles,” he said. “It would weaken America’s oil production, refining, and petrochemical industries; would increase our reliance on foreign nations; would send more American jobs and more American dollars to our competitors abroad; and would increase unemployment here at home.

“Oil companies do not get subsidies. Like other American businesses, [they] get tax deductions for the products they produce and the jobs they create,” Drevna stated, adding, “President Obama’s proposal would cut those deductions for oil companies to force up their taxes. It is not in our national interest to destroy good American jobs today in hopes of creating so-called green jobs that may never materialize tomorrow.”

Contact Nick Snow at nicks@pennwell.com.

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