Friday, August 14, 2009

No vacation in oil tax battle

Lobbyists have told me that the August congressional recess can be one of the most crucial periods in making important points to legislative staff members. There are so many issues affecting oil and gas in 2009 that it’s hard to pick one on which to focus, unless you’re an independent producer. Then it’s relatively easy: the Obama administration’s proposals to repeal what it considers tax breaks for the oil and gas industry, and what the industry considers vital incentives.

There are signs of slow, but steady, progress. On Aug. 3, the Independent Petroleum Association of Mountain States reported that Colorado’s two US senators, Michael F. Bennet and Mark Udall (both of whom are Democrats), wrote Finance Committee Chairman Max Baucus (D-Mont.) that they oppose the White House’s tax proposals, which include repealing expensing of intangible drilling costs.

IDCs are similar to costs which other manufacturing and production industries can expense under federal law, according to IPAMS President Marc W. Smith. “Without the IDC deduction, the domestic natural gas industry would further contract, and capitol which otherwise would be reinvested in American energy will be reduced by 30% to 50%. These tax increases will render many natural gas projects in the Rocky Mountain region uneconomic at today’s prices, and will have the perverse effect of destroying thousands of green jobs that already exist in the natural gas industry,” he explained.

A new report from Energy Policy Research Foundation Inc. (EPRINC) looks not only at the proposed production tax changes, but also on the greenhouse gas emission reduction plan using a carbon cap-and-trade program which the House approved earlier this summer and the administration’s proposal to deny refiners a manufacturing cost exemption available to other industries. (The report can be found online at

EPRINC’s conclusions? “Using existing US government evaluations of the financial cost of imported oil, increased tax revenues forecasted from the removal of upstream production incentives will be offset through lost domestic production as a result of lower investment in domestic exploration and development. Much of the production loss occurs from the accelerated closure of marginal wells, which are particularly reliant on free cash flow to sustain operations, as a result of the repeal of percentage depletion.

“The tax proposals will also lead to greater emissions of GHGs as domestic natural gas production is curtailed in favor of greater coal use in the generation of electricity, at least in the very near term.

“Finally, recent reforms in corporate tax treatment to place US manufacturers on a level playing field with foreign manufacturers would be repealed for the petroleum sector only. These new taxes would assist foreign refiners in gaining greater market share of the domestic market. The share of the US gasoline market now claimed by foreign refiners has doubled over the last nine years and likely will continue to grow as refiners face higher costs from the loss of the manufacturers’ tax credit.”

The National Stripper Well Association said on Aug. 12 that the US Energy Information Administration, the federal government’s independent energy analysis and forecasting service, predicted that the Obama administration’s tax changes, if enacted, will likely reduce future oil output by 1.32 million bbl a day (15.4%) and natural gas by 8.9% annually by the end of 2012.

“By 2019, EIA predicts that restrictions and new taxes will have reduced the federal tax take from oil and gas production by more than $118 billion, or about four times the expected yield of the new taxes,” NSWA continued. “By 2030, EIA predicts these proposed policies will have the effect of lowering oil production in the United States by just over 3 million b/d (approximately 28%) and natural gas by 30%. Also, by 2030 EIA forecasts the cumulative reduction in federal tax take from the oil and natural gas industry will be more than $780 billion, under current administration policies.”

One NSWA member, Arlene P. Snyder of Parish Oil Production Inc. in Newton, Ill., put the situation in stark terms: “If I had lost the oil depletion allowance during last fiscal year ending April 30, 2009, my company’s federal taxes would have increased by 170%, wiping out most year’s profit needed to reinvest in stimulating oil production on existing wells, retooling oilfield/fleet equipment and plans to drill for new oil reserves. Losing the depletion allowance would be a devastating blow to all stripper oil well operators, the ‘Mom and Pop’ small businesses of the oil and natural gas industry.”


Anonymous betty said...

Great site!!! Check it out-Google CEO Schmidt says punching down into the earth to capture natural and clean geothermal energy could help move the United States away from it's dependence on petroleum-Dec.16,2008-Betty

September 16, 2009 at 12:08 PM  

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