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Obama Wants to Wipe Out $26B in Producer Tax Credits

Domestic oil and natural gas producers last Thursday took a major hit in the program details of President Obama's $3.4 trillion budget for fiscal year (FY) 2010, although it was less severe than what was originally proposed earlier this year.

The president proposes to strip away more than $26 billion in tax credits and incentives from producers between 2010-2019. The administration called these "unjustified tax loopholes that benefit oil and gas corporations. Ending these subsidies would raise...$26 billion over the next 10 years." The latest proposal fills out the details of the budget outline that Obama released in February (see NGI, March 2). In the budget outline, the president proposed producer tax cuts of $32.6 billion over 10 years.

Under the category of "mandatory terminations and reductions," the Obama administration seeks to eliminate the preferential time period treatment for geological and geophysical amortization for independent producers (estimated to cost producers $1.19 billion over 10 years); repeal the deduction for tertiary injectants ($62 million); repeal expensing of intangible drilling costs ($3.35 billion); repeal the Section 29 manufacturing credit for oil and gas companies ($13.29 billion); repeal the passive loss exemption for working interests in oil and gas ($49 million); repeal percentage depletion for oil and gas ($8.25 billion); and cut funding for the oil and gas research and development (R&D) program at the Department of Energy ($250 million). It also proposes to terminate the oil R&D program at DOE, saving $5 million in FY 2010.

The FY 2010 budget further would increase permitting fees and repeal royalty incentives, as well as impose new inspection fees, a fee on nonproducing leases and an excise tax on offshore production.

"The proposal would give oil and gas companies the same tax treatment as other corporations engaging in similar activities and would take effect beginning Jan. 1, 2011," the Obama White House said.

"The oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices," according to the budget proposal. The proposed $26 billion in savings "represents only a tiny percentage of annual domestic oil and gas revenues -- about 1% over the coming decade...Any claim that this proposal would have a significant impact on oil and gas production is unfounded."

The Independent Petroleum Association (IPAA), which represents independent producers that would be most affected by Obama's actions, decried the administration's plans to roll back tax credits. IPAA President Barry Russell projected that up to 20% of the country's oil and 13% of gas production could be wiped out if the president's proposal is enacted (see related story).

"This budget does not recognize that in order to decrease our reliance on foreign oil, we need to increase our own American supplies of natural gas and oil. It also punishes American natural gas production which could play a lead role in climate change discussions," he said.

"From repealing existing tax provisions that encourage American production to new excise taxes on offshore production to new user fees that will go to pay for an already complex and costly permit process, this budget takes our national resources and puts them further out of reach."

R. Skip Horvath, president of the Natural Gas Supply Association, echoed the sentiment. "This budget is bad news for American consumers and worse news for American jobs...[It] is the wrong prescription if you want to see more clean natural gas produced and grow the number of people working during these rough economic times," he said.

"Tax policies directly impact the decisions that are made regarding drilling, especially for smaller companies. More importantly, over 80% of the natural gas in the U.S. is actually produced in this country. We are troubled that the administration has such a basic misunderstanding of how domestic natural gas markets will be impacted."

While oil and gas interests were in the budget doghouse, the FY 2010 budget would allocate $12 billion -- up from $11.3 billion this year -- to the Department of Interior to play a central role in Obama's energy priorities -- renewable fuel projects and carbon reduction. It earmarked $50.1 million for Interior agencies to promote the development of renewable fuels, and a significant increase in funds to assess carbon impacts on federal lands and potential carbon capture (sequestration) methods.

The DOE would see an increase of $406 million for FY 2010 to spur production of renewable fuels and the development of a smart electric transmission grid. The department's budget for FY 2010 would total $26.4 billion.

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