US President Barack Obama is renewing efforts to scrap a host of oil and gas tax incentives, but this time the likely cost to the industry will be higher -- $36.5 billion over the next decade, up from the $31.5 billion projected by the White House last year. Oil industry leaders have accused the administration of sending out a mixed message -- hitting the petroleum sector on tax while at the same time seeking to encourage upstream spending by showing greater flexibility on drilling access (PIW Sep.21,p3). The 2011 US budget submitted by the White House last week proposes the long-term elimination of tax deductions -- originally intended to encourage domestic exploration and production -- for intangible drilling costs, geophysical costs and depleting wells. The budget also aims to remove tax exemptions for "passive loss" in the oil and gas sector -- effectively a tax break on higher risk exploration activity -- and repeal incentives for oil and gas manufacturing.
The resulting higher tax burden is expected to put the brakes on domestic oil and gas production and refining, but the budget must first get through Congress, where a number of Democrats and Republican lawmakers have expressed misgivings about the proposal. "American energy is already being displaced by cheaper foreign energy from Opec nations, Russia and Africa," argued Senator Mary Landrieu, a Democrat from Louisiana. "Raising the costs of domestically produced energy only accelerates our dependence on lower-cost foreign oil."
The White House argues that the tax incentives must be removed to help pay for new government spending and rein in the country's budget deficit. But oil industry leaders believe the tax plans will do no such thing. "The administration has again chosen to single out the American oil, gas and refining community for additional taxes under the guise of leveling the playing field with other corporations," National Petrochemical and Refiners Association President Charles Drevna said. "In fact, it accomplishes the opposite and puts our members at a precarious disadvantage [to] foreign fuel producers." The elimination of credits for intangible drilling costs is expected to affect almost every producer in the country. Independent producers could be worst affected by the increase in exploration costs caused by the removal of financial protections for passive loss, according to Independent Petroleum Association of America (IPAA) Vice President of Government Affairs Lee Fuller, while the elimination of tax deductions for manufacturing could have a big impact on the integrated majors.
While talking tough on tax, the Obama administration is starting to show a more conciliatory approach on upstream access. The president expressed support for expanding offshore drilling access in last month's annual State of the Union address to Congress, and the Department of the Interior recently said it plans to start reviewing six applications for seismic testing in the little-explored Atlantic portion of the US Outer Continental Shelf (PIW Aug.17,p4). The review will involve applications covering four planning areas, ranging from the waters off New England to the Straits of Florida. "There hasn't been seismic activity in the Atlantic for almost 30 years," IPAA Vice President for Federal Resources Dan Naatz said. "Since then seismic testing has really moved forward." He cautioned, however, that "these are all still tests -- until you actually put drill bits in the ocean floor, we won't know what's out there." Onshore, however, there's less good news, with the Interior Department indicating that leasing on federal lands will proceed more slowly in order to allow more thorough environmental reviews.
