White House retains oil tax increases in proposed 2013 budget

US oil and gas producers’ federal taxes would climb by nearly $27 billion over 10 years under the Obama administration’s budget proposal that was released on Feb. 13.

The proposed fiscal 2013 budget called for repeals of intangible drilling cost expensing, percentage depletion for oil and gas wells, the tertiary injectant deduction, and the exception to passive loss limitations for working interests on oil and gas properties.

The administration also proposed increasing the geological and geophysical amortization period for independent producers to seven years.

US-based multinational oil companies would be affected by a proposal to raise $10.72 billion over 10 years by modifying rules for dual capacity taxpayers, while domestic producers’ expenses on federal acreage would rise with proposed onshore drilling permit processing fees, offshore inspection fees, and fees for not meeting lease development deadlines.

Oil and gas industry leaders immediately criticized the proposals. “The president’s 2013 budget plan returns to the well of bad ideas and backtracks on his state of the union commitment,” American Petroleum Institute President Jack N. Gerard said. “Instead of advancing constructive pro-development policies, his budget plan calls for increased taxes on America’s oil and gas industry.”

“The Obama administration’s proposed budget piles additional roadblocks to US oil and gas development in the form of hiked royalty payments and increased user fees for producers operating on federal lands,” observed Virginia B. Lazenby, chairman of the Independent Petroleum Association of America and chief executive of Bretagne LLC in Nashville, Tenn.

Hardly ‘all of above’

“This attempt to restrict federal land access flies in the face of President Obama’s promise for an ‘all-of-the-above’ energy strategy,” she maintained. “After all, federal lands have seen the fewest number of onshore leases since 1984.”

American Fuel & Petrochemical Manufacturers Pres. Charles T. Drevna said, “It’s disappointing that President Obama is once again proposing to bar companies that produce oil and gas, and that manufacture fuels and petrochemicals from taking the same business tax deductions as other industries.”

The nation would benefit if the administration opened more areas to oil and gas production, reduced harmful overregulation that is raising fuel costs, and approved the Keystone XL pipeline, Drevna said.

Brian M. Johnson, a senior tax advisor at API, confirmed that modification for dual capacity taxpayers was the single biggest issue for US-based oil and gas multinationals in the White House’s fiscal 2013 budget request.

“It essentially would result in double taxation of US-based businesses by denying us full use of the foreign tax credit,” he told OGJ. “In a company like Qatar, where the generally applicable domestic rate is 10%, US companies would not be able to claim the entire 35% rate they pay.”

DOI agencies

The proposals also included $368 million in funding for the US Bureau of Ocean Energy Management and Bureau of Offshore Safety & Environmental Enforcement, the two US Department of the Interior agencies formed in the restructuring of the US Minerals Management Service after the 2010 Macondo deepwater well incident and crude oil spill.

BSEE would receive $222.2 million offset by $125.9 million in collected inspection fees, rental receipts, and cost recovery fees. BOEM would receive $164.1 million to implement the 2012-17 US Outer Continental Shelf program and hold the program’s first offshore oil and gas lease sale during fiscal 2013’s first quarter.

“Results matter, and sustained investments in these agencies are paying off,” US Interior Secretary Ken Salazar said during a teleconference with reporters. “Onshore, the amount of natural gas produced from federal lands was the second-highest since 1994, and oil production was the highest since 1997. Offshore, US crude oil production reached its highest production level since 2005. Gas production also has increased, and US oil imports continued to fall.”

The budget request also proposed $45 million for the US Department of Energy, US Environmental Protection Agency, and US Geologic Survey to jointly examine potential health, safety, and environmental risks from hydraulic fracturing. “I think the best thing we can do is to stand up the natural gas industry, as the president has proposed, and support it by making sure that fracing doesn’t create environmental or water quality problems,” Salazar said. “Natural gas is a very important part of the nation’s energy portfolio. The science we’ll get from USGS will make sure the gas we recover by fracing is produced safely.”

The US Bureau of Land Management would impose inspection fees on oil and gas producers to raise $48 million in collections, offsetting a $38 million reduction in appropriations for a net $10 million increase. BLM said that the increase was aimed at correction deficiencies which the Government Accountability Office identified in a February 2011 report which designated management of federal oil and gas resources, including production and revenue collections, as high risk.

Other BLM plans

BLM also is requesting $15 million to implement sage grouse conservation and restoration measures to help prevent the bird’s future listing as an endangered species, and proposes continuing to charge fees for processing onshore drilling permits to raise $32.5 million.

The Office of Natural Resources Revenue, which was formed after Salazar ordered revenue and royalty collection spun off from the old MMS, would get $119.6 million, $191,000 above the enacted fiscal 2012 level.

At the US Department of Transportation, the US Pipeline and Hazardous Materials Safety Administration’s budget would climb to $248 million in fiscal 2013 from $160 million in 2011, partially offset by pipeline fees which would rise to $167 million from $90 million. PHMSA would use the money to more than double the number of pipeline inspectors over 3 years, modernize pipeline data collection and analysis, and expand public education and outreach, the White House said.

“We have closed a record number of enforcement orders for the past three years, but we have more work to do to,” PHMSA Administrator Cynthia Quarterman said. “The 2013 budget request will help build upon these efforts to protect communities and increase oversight over the commercial transportation of hazardous materials by air, rail, vessel, highway, and pipeline.”

Contact Nick Snow at nicks@pennwell.com

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