Sharp divisions have formed over the Obama administration’s budgetary proposals to eliminate “oil and gas company preferences” worth an estimated $31.48 billion over 10 years and raise other taxes on the industry.
A budget that would eliminate tax mechanisms crucial to capital formation for drilling, such as expensing of intangible drilling costs (IDC), drew immediate criticism as “a devastating blow to the American oil and gas industry” from Independent Petroleum Association of America Pres. and Chief Executive Officer Barry Russell (OGJ Online, Feb. 26, 2009).
President Barack Obama on Feb. 26 unveiled the $3.6 trillion budget for the fiscal year beginning Oct. 1.
In addition to eliminating IDC expensing, the budget would repeal the manufacturers’ tax deduction for oil and gas companies and the percentage depletion allowance, which is important to small independent producers.
The budget also would repeal the enhanced oil recovery credit, the marginal well tax credit, the deduction for tertiary injectants, and the passive loss exception for working interests in oil and gas properties.
It also would impose an excise tax on Gulf of Mexico production and would reduce royalty relief beginning in 2011. It also would increase the geological and geophysical amortization period for independent producers from 5 to 7 years.
Separately from the section on tax “preferences,” the budget would charge producers user fees for processing permits to drill on federal lands and reform royalties and adjust rates to increase revenue.
And it would reinstate the Superfund tax on refiners and petrochemical manufacturers, envisioning receipts beginning at $1.2 billion in 2011 and phasing up to $2.3 billion in 2019, totaling $17.2 billion in 2011-19.
Congress created the Superfund tax with the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) to fund cleanup of abandoned hazardous waste sites.
Superfund taxation authority expired in 1995. Since expiration in 2003 of a trust fund established by CERCLA and expanded by the Superfund Amendments and Reauthorization Act of 1986, Superfund activities have been funded by congressional appropriations from general revenues.
New responses
National Petrochemical and Refiners Association Pres. Charles T. Drevna criticized elements of budget including repeal of the manufacturers’ tax deduction for oil and gas companies.
Congress created the deduction for all US manufacturers when it passed the American Jobs Creation Act of 2004. Drevna said denying its use to refiners “would only weaken, not strengthen, our nation’s energy security by stifling both the well and ability to increase domestic oil and gas production.”
The manufacturers’ deduction encourages refinery capacity expansions, he said. “With demand for gasoline continuing to grow each year, US refining capacity is already significantly strained despite multibillion-dollar reinvestments by the industry to expand it. Under normal economic circumstances, most refineries operate at more than 90% capacity throughout the year (except during maintenance season), which is significantly higher than the normal industrial average of about 75-80% of capacity.”
Because US refiners compete in a global market, the manufacturing tax deduction helps them compete internationally and bolsters national energy security by reducing the need for oil product imports, he said.
Congressional energy leaders’ responses to the budget’s oil and gas tax provisions generally followed party lines.
US House Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.) essentially welcomed them. “The president’s proposal places a major emphasis on ensuring that taxpayers receive a fair return for the extraction of oil and gas resources on public lands and presses wealthy oil companies to diligently develop the leases they already possess on the Outer Continental Shelf,” he said.
“Last Congress, I introduced legislation to reform the royalty collection program, encourage the diligent development of federal oil and gas leases, and require energy companies to pay their fair share for the use of public resources. I am heartened that the president’s budget includes all of these initiatives and also correctly identifies our public lands as an immense potential resource for the development and deployment of domestic alternative energy,” Rahall said.
‘Punitive provisions’
But US Sen. Lisa Murkowski (R-Alas.), the Energy and Commerce Committee’s ranking minority member, expressed concern not only about the billions of dollars of additional taxes, fees, and other expenses for oil and gas producers but also about so-called “Use it or lose it” requirements for federal lessees. “These punitive provisions will raise revenue for the federal government, but they won’t increase the energy security of the United States,” she said.
“This represents an attempt to drive the oil industry overseas through a combination of breaching past agreements the government has made with oil and gas producers and making future production more difficult and expensive. Instead of declaring war on the domestic production of conventional energy, as I believe the president’s budget does, we need to focus on how we can use our abundant domestic resources of oil, natural gas, and coal in the cleanest, most environmentally friendly way possible for the sake of our nation’s economy, our nation’s security, and the world’s environment,” Murkowski said.
Sen. Mary L. Landrieu (D-La.), who is on the Energy and Natural Resources Committee, called the budget proposal “an honest and balanced blueprint for America’s future” that “emphasizes high-return investments and makes significant strides in restoring fiscal responsibility and deficit reduction.”
But she expressed concern about changes it would make in the oil and gas tax regime. “In these tough times, we must make sure that we do not disadvantage our domestic energy industry, which is critical to the nation’s security, against foreign competitors. This industry provides good-paying jobs and plays a critical role in helping us reduce our dependence on foreign oil,” Landrieu said.
After expressing his concerns about carbon cap-and-trade provisions of the president’s proposed budget, Sen. James N. Inhofe (R-Okla.), the Environment and Public Works Committee’s ranking minority member, said the budget’s proposed oil and gas tax increases would potentially eliminate tens of thousands of domestic jobs in the industry, increase fuel costs for consumers, and make the nation even more dependent on foreign oil.
“In the United States, there are nearly 6 million Americans directly and indirectly employed as a result of the oil and gas industry. Tax increases of this magnitude will significantly curtail the operating budgets of all exploration and production companies, big and small. Every marginal well operator in the country should be gravely concerned that these proposals will force the premature plugging of low-production marginal wells. And, despite the rhetoric, America’s oil companies are already paying taxes at the highest rates,” he said.
Nonindustry responses
Nonindustry groups also responded to the proposals.
Thomas J. Pyle, president of the Institute for Energy Research, said they were not economic development but “a sure-fire way to send America’s businesses either to bankruptcy or overseas.”
He said, “It’s alarming enough that the administration’s plan to balance its books relies on funds it hopes to receive from a policy it hopes to someday enact. But what’s truly appalling is that it’s attempting to sneak this huge stealth tax into the budget at a time when so many Americans are facing unprecedented economic constraints.”
David Holt, president of the Houston-based Consumers Energy Alliance, said that while Obama’s proposed budget takes unprecedented steps to develop new alternative energy sources, it also takes unprecedented steps to make producing affordable energy from traditional sources more difficult and expensive. “The realization of an alternative energy future will not be achieved by making a reliable energy present impossible. My fear is that a number of the provisions in this budget would do precisely that at precisely the wrong time for struggling consumers and a flagging economy,” he said.
Environmental organizations expressed the opposite view. “Today’s budget announcement makes clear that the oil and gas industry will not continue to enjoy a taxpayer-funded feast at the expense of America’s public lands and waters,” Wilderness Society Pres. Bill Meadows said. “Following his strong statement on climate when he addressed Congress on Tuesday night, the president today offered further confirmation that it’s not business-as-usual in Washington when it comes to fighting global warming pollution.”
Erich Pica, domestic programs director for Friends of the Earth, said, “The days of Big Oil earning record profits while feeding at the taxpayer trough are coming to an end. President Obama’s decision to put an end to these giveaways is a huge victory for taxpayers and the planet.”