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Producers 'Still in Woods, but Not Swamp' on Proposed Tax Hike

An independent producer group last week was cautiously optimistic as the House and Senate budget panels moved their budget blueprints for fiscal year (FY) 2010, saying it appeared that Congress "was not going to rush to judgment" on President Obama's proposed $30 billion in tax hikes for oil and natural gas producers.

"There's not a sense that the Senate and the House are locking into what Obama has proposed" with respect to boosting producer taxes, said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America (IPAA), which represents independent producers. Neither the Senate nor the House budget committees included reconciliation instructions for the tax-writing committees to draft a broad tax title, and they made no specific assumptions or stipulations about where revenues should be raised to fund the president's energy priorities, he noted. Fuller sees both as encouraging signs.

If reconciliation instructions had been made, the tax-writing committees would have been required to produce tax legislation within a couple of months, and the debate on the measure would have been considerably restricted, he said. It's likely that the producer taxes still could be addressed in an energy bill, Fuller said, but under that scenario producers would have a "better chance to make our case" because the bill would be subject to full debate and lawmakers could offer amendments.

Despite the positive actions, he stressed that the prospect of a major tax increase for producers has not disappeared. "We're still in the woods, maybe not in the swamp."

The House Budget Committee last Wednesday voted out a $3.45 trillion budget resolution, shaving more than $100 billion from the president's proposed budget that was released in late February (see NGI, March 2). The Senate Budget Committee followed suit last Thursday, voting out a $3.53 trillion budget resolution to the Senate floor. Both the House and Senate are planning to vote on their budget resolutions this week before departing for a two-week recess.

The budget resolutions have what are called "deficit-neutral reserve funds" to fund Obama's major initiatives -- energy, health care, education and the environment. This means that Congress will have to come up with offsetting revenues from other sources to fund these initiatives, possibly from oil and gas producers.

"We have had to insist that things be paid for," said Senate Budget Chairman Sen. Kent Conrad (D-SD). The House and Senate budget resolutions are nonbinding, but they set the framework for tax and spending legislation later in the year, according to CQ Today.

Meanwhile, Fuller said IPAA officials and independent producers have been flooding Capitol Hill to "talk to anybody we can about what the consequences of these tax provisions in Obama's proposal would be for independent producers."

He noted that the producer group is "working closely" with Rep. Gene Green of Texas and other moderate Democrats who have signaled their opposition to the president's proposed $30 billion tax hike.

A coalition of 16 House Democrats led by Green last Tuesday expressed their objection in a letter to House Budget Chairman John M. Spratt Jr. (D-SC). This could potentially pose a problem for Obama's tax plan in the House.

"We support President Obama's goals to end our addiction to foreign oil, invest in clean, renewable energy and transition to a low-carbon economy while creating U.S. jobs," the Democrats said. But "we are also concerned with the impact [the] budget proposals may have on domestic energy production and job growth. Increasing the costs of producing energy would further strip essential capital from new domestic investments and reduce our energy supplies.

"Lower energy prices and the tight credit market have already shed thousands of energy industry jobs nationwide, which disproportionately impacts small, independent U.S. energy producers," said members of the coalition, which included drilling proponent Rep. Neil Abercrombie of Hawaii, Sen. Jim Costa of California and Rep. Charlie Melancon of Louisiana.

Independent producers develop 90% of domestic wells and produce 82% of U.S. natural gas and 68% of domestic oil, according to the lawmakers. And independents employ about 2 million people in the country, they said.

The House lawmakers further cited the importance of gas for global climate change, saying "if we make it more expensive or difficult to produce natural gas domestically, it will hinder our ability to meet our clean energy goals while also increasing natural gas prices for all Americans."

Sen. Mary Landrieu (D-LA), a centrist and friend of oil and gas producers, also has vowed to look out for independent producers. "Big Oil can fight its battles...But independent oil and gas producers which are the backbone of the domestic industry cannot bear the elimination of these tax credits," she told a reporter last Wednesday.

Even Interior Secretary Ken Salazar, who has taken several actions in recent months that were unfavorable to producers, signaled that the administration is willing to listen to small oil and gas producers. "If it is going to have a disproportionate impact on a mom-and-pop kind of operation, I do think that's something that should be taken into consideration," he said during an interview with Dow Jones Newswires.

The Obama budget for FY 2010, which was released in late February, proposes to repeal the expensing of drilling costs (costing producers $3.34 billion over 10 years); repeal percentage depletion for oil and gas ($8.25 billion); repeal the marginal well tax credit; repeal the enhanced oil recovery credit; increase geological and geophysical amortization costs for independent producers to seven years ($1.18 billion); levy an excise tax on Gulf of Mexico production ($5.28 billion); and repeal the manufacturing tax deduction ($13.29 billion).

Besides the Obama administration's proposed excise tax on Gulf of Mexico oil and gas production, which would take effect in 2011, it also wants to charge producers user fees for processing oil and gas drilling permits on federal lands and increase the return from oil and gas production on federal lands by "reforming" royalties and adjusting rates.

In addition, the administration in its budget for the Department of Energy seeks to repeal the ultra-deepwater oil and gas research and development program, which is projected to save the federal government $210-250 million over a 10-year period.

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