Citing restrictions on the oil and natural gas industry and potential for even higher energy prices, senior Bush administration advisors will recommend that the president veto the energy policy reform legislation and tax package that the House was to take up over the weekend, the Office of Management and Budget (OMB) said in a statement of administration policy issued Friday.

Because the $16 billion tax package (HR 2776) and energy policy legislation (HR 3221) "fail to deliver American consumers or businesses more energy security, but rather would lead to less domestic oil and gas production, higher energy costs and higher taxes, the president's senior advisors would recommend that he veto these bills," the OMB said in a two-page statement.

"The stated goal of energy reform by the new majority in the House of Representatives was 'to achieve energy independence, strengthen national security, grow our economy and create jobs, lower energy prices and begin to address global warming.' The administration is disappointed that the House has produced no such legislation," the agency noted.

"In fact, the combination of these two bills will result in less domestic oil and gas production, higher taxes to disadvantage a single targeted industry, and duplicative energy efficiency and R&D [research and development] efforts that are largely under way already," the OMB said.

"Repealing the manufacturing deduction for only the oil and gas industry is a targeted tax increase that puts U.S. industries at a disadvantage to their foreign competitors. Changes to the foreign tax credit rules related to foreign oil and gas extraction income and foreign oil-related income will also disadvantage U.S.-based companies by reducing their ability to compete for investments in foreign energy-related projects," the agency noted.

The House tax package "also includes $8 billion in expensive and highly inefficient tax credit bonds for renewable energy production and conservation efforts. Current law already provides sufficient federal assistance to encourage these efforts. The administration has concerns with the structure and overall cost of some of the production and investment tax credit incentives in HR 2776 as well."

In addition, the OMB said the Bush administration "strongly opposes" language that would force holders of certain deepwater oil and natural gas leases issued in 1998 and 1999 by the Clinton administration to either renegotiate the terms of the leases, pay an "excessive fee," or face being barred from future leasing in the Gulf of Mexico. "This provision is likely to result in significant delays in lease sales in the event that the provision is litigated," the agency said.

Because of chaos that erupted in the House between Republicans and Democrats late Thursday, action on the energy policy bill and tax package was deferred Friday. This was further complicated by electronic snafus on the House floor later in the day. Speaker Nancy Pelosi (D-CA) indicated that the House was to take up energy on Saturday "if all goes as planned."

The dispute in the House last Thursday began when Republicans sought to prevent welfare funding for illegal aliens as part of an agriculture spending bill. The Republicans claimed they won the vote by 215-213, while Democrats said the vote was deadlocked at 214-214. About 100 Republicans walked off the House floor in protest, and the acrimony spilled over to Friday and affected debate on scheduled energy legislation.

"I've never seen...what took place last night. It was a low moment for the House," said Rep. John Mica (R-FL).

House Democrats expressed confidence last week that they had enough votes to pass the energy legislation and tax package. But with "emotions running so high" at the close of the week, some saw the outcome as less certain. It was not believed that Republicans had enough votes to block the energy policy bill. A vote on the tax package, however, would be "pretty close," an energy legislative source predicted. The Senate passed comprehensive energy legislation in June, minus a $32 billion tax package (see NGI, June 25).

The House leadership made some changes to the contentious policy measure to win over Democrats from producing states, but producers, pipelines and large industrial customers said the revisions had not changed their minds one iota -- they still opposed it. Some said the changes had made a bad bill even worse.

"We [oppose] both bills because they undermine the production of oil and natural gas," said Jeff Eshelman, a spokesman for the Independent Petroleum Association of America (IPAA), which represents independent producers. "There is strong opposition even with the changes that have been made."

He noted that independent producers were not alone. They were joined by the National Association of Manufacturers, the Chamber of Commerce, the Industrial Energy Consumers of America, the Interstate Natural Gas Association of America (INGAA), the Natural Gas Supply Association (NGSA), the American Chemistry Council (ACC) and others.

"We believe, as do a number of others in the natural gas industry, that the legislation would reduce natural gas supply availability at the same time Congress is considering climate change legislation that will increase natural gas supply demand. The legislation is setting the country up for an energy train wreck," said Martin Edwards, vice president of legislative affairs for INGAA, which represents interstate gas pipelines.

In a joint letter last Wednesday, the heads of IPAA, INGAA and NGSA called on Pelosi to "reconsider the elements of this legislation" that would thwart the production of natural gas and development of delivery infrastructure. "Despite the efforts of a number of Democratic members to limit the harmful effects that this legislation will have on American natural gas production, the bills...remain an enormous step backwards in terms of energy independence," they said.

New anti-supply language in Title VII of the revised energy policy bill "is far worse than the already deeply flawed language that passed out of committee" in June, said ACC President Jack Gerard, who represents gas-intensive chemical companies. "House leadership took with the right hand what they tried to give with the left -- and the result is that it's worse than where it started," he noted.

In response to pressure from Democrats from producing states, Pelosi and Rep. Nick Rahall (D-WV), chairman of the House Natural Resources Committee, softened or dropped several provisions from the energy reform bill that came out of Rahall's committee in mid-June (HR 2337), which was widely opposed by the energy industry, CQ Today reported.

The revised energy policy bill is the product of a nearly a dozen of House committees. It was to be joined by a $16 billion tax package. The estimated tax hit on domestic oil and gas producers and refiners from Section 301 of the tax bill is expected to be $11.4 billion over 10 years, according to the Joint Committee on Taxation. Section 301 would deny deductions for income attributable to domestic production of oil, natural gas or primary products..

Pelosi had agreed to a separate vote on the tax provisions. This would allow opponents of the tax package to vote against it while supporting the energy policy legislation, CQ Today reported.

In a concession to some Democrats, the House leadership agreed to maintain the royalty-in-kind (RIK) program as is, giving producers the option to pay their royalty bills with product (oil and gas), rather than in cash. The bill voted out by Rahall's committee in June would have severely restricted the RIK program -- allowing the federal government to buy oil from producers only to fill the Strategic Petroleum Reserve (see NGI, June 18).

The revised measure also would cut the Bureau of Land Management's (BLM) time to process drilling permits to 45 days from the previously proposed 90 days. But even with this change, the IPAA's Eshelman noted that permit processing would take 15 days more than under the current law, which requires permits to be processed in 30 days.

To producers' dismay, the House energy bill would cut funding for some federal offices, the BLM in particular, that oversee permitting, according to Eshelman. New language also would increase some of the royalties for deep gas production in the shallow waters of the Gulf of Mexico.

In addition, the measure calls for the recovery of billions of dollars in royalties on production from the flawed deepwater leases that were issued by the Department of Interior in 1998 and 1999. "Those leases were signed in good faith, and industry is being blamed for what the federal government wrote in those contracts," Eshelman said, in opposing the provision.

The bill also includes a new provision, sponsored by Colorado Democratic Reps. March Udall and John Salazar, that would prohibit natural gas well drilling on the Roan Plateau in western Colorado. This "undermines a year-long effort that local governments have gone through to look at that plateau" and the prospects for drilling, Eshelman said.

The ACC contends that blocking access to the Roan Plateau will deny the country of nearly 9 Tcf of new natural gas supply, enough gas to heat nine million homes for nine years.

Gas pipelines were concerned over a provision that gives the Commerce Department more time to rule on industry appeals of state decisions blocking pipe projects under the Coastal Zone Management Act.

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