Oil, gas targeted for more taxes

There are "ample signs" that the US states and federal government will take a bigger tax bite from upstream and downstream oil and gas operations to cover pending financial shortfalls in 2009.

Jan 26th, 2009

Sam Fletcher
Senior Writer

There are "ample signs" that the US states and federal government will take a bigger tax bite from both upstream and downstream oil and gas operations to cover pending financial shortfalls in 2009, warned analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va.

"All over the world, cash-strapped governments looking for ways to shore up shortfalls look to petroleum industry cash flows as a potential source of operating funds. Generally speaking, resource-exporting countries (or US states) consider 'windfall' taxation of the upstream (because that's where the money is), while net importers of crude and petroleum products look at the downstream," FBR analysts said.

There's talk California Gov. Arnold Schwarzenegger (R) may consider a severance (extraction) tax and a gasoline tax to help cover his state's "grievous" budget deficit and "precipitously declining" stabilization fund. FBR analysts said, "Our industry sources are skeptical that the governor might cut off the head and feet of the Golden State's golden goose (California is home to 4 of the nation's 10 most-productive oil fields), but our California sources see growing support for tax hikes somewhere in the value chain."

On Feb. 2 when President Barack Obama delivers his first budget request to Congress, "he will set in motion a two-stage process for modifying mandatory federal spending: a budget 'resolution' or outline, followed by 'reconciliation' of federal laws with these spending targets," the analysts said. "Because this process requires only 51 votes (budget bills cannot be filibustered), it presents House and Senate tax-writing committees with a powerful mechanism for stripping oil industry tax benefits."

Likely changes, they said, include:

-- Shifting inventory accounting from "last in, first out" to "first in, first out."

-- Rescinding Section 199 deductions under the 2004 Jobs bill (an effective 2% tax hike).

-- Assessing a new 13% surcharge on Gulf of Mexico deepwater production and deducting existing royalties—"a 0.5% hike for leases with royalty relief phase outs, but a 13% haircut for producers with 'flawed' leases sold in 1998 and 1999," said FBR analysts.

-- Treating as US corporations those companies that "inverted" their domicile prior to March 2003, "the current safe harbor date."

-- Potentially revisiting tax treatment of intangible drilling costs and geological and geophysical expensing for at least some companies.

FBR analysts predict, "Any new tax changes could [further reduce] gasoline demand given the fragility of the US consumer."

Moreover, Diana DeGette (D-Colo.), vice-chairman of the Energy and Commerce committee, "shares Chairman Henry Waxman's (D-Calif.) distaste for hydraulic fracturing, raising odds that 2009 will kick off what we estimate to be a 2-year countdown to higher extraction costs," said FBR analysts. But although fraccing "is in the cross hairs," they said, "the time frame for actual change in standards governing effluent could be more than 2 years away (6 to 12 months to pass a new law and 12 to 18 months to write a new regulation)."

Economy over environment
Strengthening the nation's economy and improving the job market are the top two priorities among US adults while environmental concerns have fallen steeply, according to an annual January poll by the independent Pew Research Center for People and the Press in Washington, DC.

"The share of Americans saying that strengthening the nation's economy should be a top priority has risen from 68% 2 years ago to 75% last January to 85% today. Concern about jobs has risen even more sharply. The 82% who rate improving the job situation as a top priority represents a 21-point jump from 61% a year ago," said researchers.

Energy is in sixth place—below terrorism, social security, and education—as a top priority among 60% of those polled, up from 40% in 2003. Protecting the environment fell "the most precipitously" to 41% this year, down from 56% in January 2008, said Pew Research officials. The decline in environment concerns crossed partisan and demographic lines primarily because of growing public concern about the economy, they said. More respondents were concerned with reducing the national deficit (53%) and tax cuts (43%) than with the environment.

The center said a partisan gap emerged this year over reducing middle-class taxes. "At the start of 2008, roughly half of both Democrats (50%) and Republicans (46%) rated this as a top priority. Today, just 31% of Republicans say middle class tax cuts are a top priority, compared with 48% of Democrats," they said.

Priorities on crime, illegal immigration, and health care also declined. Global warming (30%) was at the bottom of the 20-issue list, below lobbyists (36%) and trade policy (31%).

(Online Jan. 26, 2009; author's e-mail: samf@ogjonline.com)

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