Natural Gas Tax Breaks to Disappear?

By BEN GEMAN, Greenwire
Published: February 26, 2009
New York Times
President Obama's budget proposal would repeal several oil industry tax incentives while imposing new taxes on Gulf of Mexico producers to close "loopholes" that have allowed companies to avoid royalty payments.The overall budget eliminates $31.5 billion in "oil and gas company preferences" over a decade, according to a slender summary released by the White House this morning.

Many provisions are certain to prompt resistance from the oil industry and from Republican and Democratic lawmakers from oil-producing states. The plan drew a swift rebuke today from the oil industry's most powerful trade group, which called the measures a bad idea, especially during a recession.

"New taxes could mean fewer American jobs and less revenue at a time when we desperately need both," American Petroleum Institute President Jack Gerard said in a statement. "More taxes also could reduce our nation's energy security by discouraging new investment in domestic oil and natural gas production and refining capacity and pushing those investments -- and American jobs -- abroad."

But critics of petroleum tax and royalty policies say the industry has received too much support, even during periods of record-breaking profits, and that repealing tax breaks can help fund alternative energy programs.

The plan includes a "new excise tax on offshore oil and gas production in the Gulf of Mexico to close loopholes that have given oil companies excessive royalty relief." The new tax would begin in 2011, which the document says is "after the economy has had time to recover," and the budget assumes it would bring in nearly $5.3 billion over a decade.

The excise tax plan is an effort to ensure payment from deepwater leases issued in the late 1990s that allow royalty waivers -- also called "royalty relief" -- even when oil prices are high. The leases were drafted without the clauses that end the incentive when oil and gas prices exceed certain limits.

Senate Energy and Natural Resources Chairman Jeff Bingaman (D-N.M.) floated a new gulf excise tax as part of a major 2007 energy bill, but it was not ultimately included in the final bill (E&ENews PM, June 19, 2007.).

That 2007 plan would have allowed a credit against the tax for royalties paid, and the new proposal is modeled on that earlier effort, an Interior Department spokesman said today. "Producers that pay royalties would receive a credit, so this provision only impacts current royalty-free production," said spokesman Frank Quimby.

Elsewhere, the budget would repeal oil and gas companies' ability to claim a deduction on domestic manufacturing income, which would do away with an incentive that last year's Wall Street bailout bill had already frozen. Ending the incentive would bring in more than $13 billion in federal revenues over a decade, according to the document.

Other tax provisions include the repeal of expensing of intangible drilling costs and of the percentage depletion for oil and natural gas, among other measures, the document states.

'Use it or lose it'

In addition to the tax provisions, the budget proposal says Interior will ensure companies are "diligently" developing their existing leases or risk losing them, a concept that Democrats call "use it or lose it."

The plan says one step would be charging new fees on nonproducing Gulf of Mexico leases, which the outline claims would provide an incentive for companies to start producing from these leases or relinquish them.

The new fee on nonproducing leases would raise an estimated $1.2 billion total during the 2010-19 period, the document states.

The Obama administration is also proposing new user fees on oil companies for processing federal lands drilling permits and "increasing the return from oil and gas production on federal lands through administrative actions, such as reforming royalties and adjusting rates."

The budget also calls for ending federal funding for an ultra-deepwater oil and gas research and development program.

Copyright 2009 E&E Publishing. All Rights Reserved.

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