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Producers Hear 'Rumblings' About Windfall Profits Tax

Major producer groups last Tuesday warned Washington policymakers that a windfall profits tax or other punitive taxes on producers would hurt the financial health of the industry, reduce domestic oil and natural gas production and result in significant job losses.

"We have heard rumblings that some in Congress may seek to add a windfall profits tax or other type of tax [on oil and gas producers] to fund renewable energy programs. The natural gas industry supports renewable energy -- we need wind, solar and other sources of alternative power. What we don't need, however, are bad public policies that negatively impact the people employed by our industry," said R. Skip Horvath, president of the Natural Gas Supply Association.

The economic stimulus bills (HR 1) that are pending in Congress call for up to $70 billion in tax cuts/incentives and direct investments to spur the production of renewable fuels, construct new transmission facilities and improve energy efficiency. Oil and gas producers are worried that lawmakers may raise their taxes or strip them of existing benefits to offset the cost of the renewable energy provisions.

Horvath's remarks followed the release of a report last Tuesday by CRA International, which was commissioned by the American Petroleum Institute (API) more than a year ago when the threat of a windfall profits tax was at its zenith. The study found that a windfall profits tax would likely cause a net loss of up to 490,000 U.S. jobs by 2030; reduce the U.S. gross domestic product by roughly 1%, or $240 billion, by 2030; and increase U.S. imports of crude oil by up to 18% over the next two decades and cut domestic oil production by 26% over the same time period.

"Last year the natural gas and oil industry -- the blue jobs of our economy -- employed directly and indirectly nearly six million people. We want to protect those people and their jobs. We hope Congress will listen," Horvath said.

In 2006 a Congressional Research Service report found that the windfall profits tax, which was last imposed in 1980, resulted in less domestic production and more imports. Production fell 3-6%.

President Obama supported the idea of a windfall profits tax during his run for the White House. But the tax had become a less attractive option for Obama late in the campaign in light of the steep drop in oil and natural gas prices. News that Obama had shelved the tax plan came in early December (see NGI, Dec. 8, 2008).

While producers appear to have dodged a bullet on the windfall profits tax for the time being, majors and independents still are concerned that Congress may revise or strip away existing tax benefits for oil and natural gas to offset revenue losses and narrow the budget deficit.

"There's a lot of ways to skin this cat," said Rayola Dougher, API senior economic adviser, in December. "There are all sorts of ways [other than the windfall profits tax] that they could go after" producers.

"Although [the API] study has specifically assessed the impact of a proposed windfall profits tax, similar forms of increased taxation or other policies that reduce incentives for new investment would be expected to have similar negative consequences," said W. David Montgomery, a vice president of CRA International.

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