It has become a rite of Washington's spring. As the snow and ice begin to melt (with the piles particularly high this year following two major snowstorms within a week in mid-February), independent producers descend on the nation's capital to explain why administration tax proposals would be so devastating.
What the White House Office of Management and Budget considers outdated federal tax loopholes needing to be closed are lifelines that independents say are needed to continue operating. The Independent Petroleum Association of America and several regional groups are coordinating these "member call-ups" to discuss other issues as well. But OMB's punitive tax proposals lead the list of grievances.
Trade associations effectively explain contributions a healthy independent oil and gas community makes to national, regional, and local economies. They draw attention to the domestic production that would be lost if, for example, operators of wells producing less than 15 b/d lost their federal tax exemption.
The numbers add up. They also might obscure the fact that many who would be hurt are small businesses.
Readers speak out
Fortunately, OGJ readers aren't bashful. When several sent e-mails after the White House released its proposed fiscal 2011 federal budget, I asked two of them how the oil tax proposals might affect them.
E.P. Reddy, who has operated Reddy Oil & Gas Co. in Tulsa since 1987, was concise. He said his company has five employees and is a secondary producer that would not remain profitable if Congress approves the proposed oil tax changes.
Terry Sternbridge, who founded SW Operating Inc. in Kilgore, Tex., in 1983, was more specific. "Not to be able to have intangible drilling expensed in the current year would make it virtually impossible to amass capital to drill risk-laden wells, which are the lifeblood of small exploration companies like mine," he said.
A heavy load
The percentage depletion allowance "at least offers some relief" to already heavy oil and gas taxes, Sternbridge said. These include state and local severance and ad valorem taxes, federal and some state income taxes, fees for permits, and taxes on well equipment.
He said SW Operating directly employs four other people, but creates jobs for others "every time I drill or participate in a well." He said, "I probably have interests in 50 or more wells, most small to moderate producers, some that would not be economical with more taxes and regulations."
He wondered how he would stay in business as he examined the changes OMB proposed. "To have someone in the administration who knows absolutely nothing about oil and gas demonize energy companies and insist on all but confiscating the fruits of labor and hard-earned capital is simply unjust and not very smart. The president needs to encourage us," he maintained.
And that's why independents, once again, are on their way to Washington.