Obama's proposed budget would repeal several oil and gas tax breaks

The Obama administration proposed eliminating what it termed "oil and gas company preferences" as it released its proposed fiscal 2010 federal budget on Feb. 26. The move would raise nearly $31.48 billion of revenue by fiscal 2019, it said.

In the budget's mandatory and receipts proposal table, it called for the repeal of the manufacturing tax deduction for oil and gas companies, which it said would raise an estimated $13.29 billion over 10 years, and the percentage depletion allowance, which it said would raise some $8.25 billion during that period.

It also recommended repealing the enhanced oil recovery credit, the marginal well tax credit, expensing of intangible drilling costs, the deduction for tertiary injectants, and the passive loss exception for working interests in oil and gas properties.

The proposals also included placing an excise tax on Gulf of Mexico production and reducing royalty relief, which the proposed budget said would raise $5.28 billion, beginning in 2011 "after the economy has had time to recover." It also would increase the geological and geophysical amortization period for independent producers from five to seven years to raise nearly $1.19 billion, essentially reversing a provision in the 2005 Energy Policy Act.

The proposed budget also envisioned charging producers user fees for processing permits to drill on federal lands, and reforming royalties and adjusting rates to increase revenue.

'A devastating blow'

One major oil and gas group's president responded immediately. Barry Russell of the Independent Petroleum Association of America called it "a devastating blow to the American oil and natural gas industry." He noted that independent producers drill 90% of the oil and gas wells in the United States, which means tax increases hurt these companies the most.

"Hurting American oil and natural gas production runs counter to the Obama administration's interests. America's clean-burning, abundant natural gas will be essential to any clean energy agenda for the administration, and America's natural gas and oil are critical to decrease our reliance on foreign oil," Russell said.

Royalties collected from the US oil and gas industry already account for the federal treasury's second-largest income stream, he noted. Less domestic oil and gas production would also immediately reduce federal and state governments' income, he said.

"These proposals make no sense during this economy when increased, American energy could result in new jobs and more tax and royalty revenues. Coupled with his administration's delay in implementing the new five-year plan for offshore exploration, this is not welcome news to the majority of Americans who favor increased American oil and gas production, especially from the offshore," Russell maintained.

National Petrochemical and Refiners Association President Charles T. Drevna also criticized elements of the Obama administration's proposed budget, including its repeal of the manufacturing tax deduction for oil and gas companies. "[This] would only weaken, not strengthen, our nation's energy security by stifling both the well and ability to increase domestic oil and gas production," he said.

'Significantly strained'

The deduction also encourages refinery capacity expansions, he added. "With demand for gasoline continuing to grow each year, US refining capacity is already significantly strained despite multi-billion dollar re-investments 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," Drevna noted.

Because US refiners compete in a global marketplace, the manufacturing tax credit helps them compete with foreign petroleum processors and bolster national energy security by reducing the need for oil product imports, he said.

Congressional energy leaders' responses to the proposed 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'

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 continued.

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." She said that she looked forward to reviewing the plan in greater detail but expressed particular concern about changes it would make in the oil and gas tax regime.

"It was only eight months ago that oil reached $150/bbl because our domestic supply was too tight. Due to the economic crisis, the price of oil is temporarily low. 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 that 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.

Impacts on marginal wells

"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.

Non-industry groups also responded to the proposals. Thomas J. Pyle, president of the Institute for Energy Research, said that they were not economic development but "a surefire way to send America's businesses either to bankruptcy or overseas. 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 continued.

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. 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," Wilderness Society President Bill Meadows 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," said Erich Pica, domestic programs director for Friends of the Earth.

Contact Nick Snow at [email protected]