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Landrieu Plans 'Course of Action' to Tackle Producer Tax Hikes

Sen. Mary Landrieu (D-LA), a centrist and friend of oil and natural gas producers, has indicated that she is working with senators from other energy-producing states to map out a strategy to try to trim President Obama's proposed $30 billion in tax hikes on producers when budget legislation comes to the Senate floor.

Landrieu "is having conversations with other oil and gas state senators to determine [the] course of action" to take, said the senator's spokesman, Aaron Saunders. "She has no specific approach or legislative language at this point. In the coming weeks Sen. Landrieu will work with her Senate colleagues to discuss how best to address some of President Obama's proposed changes to the oil and gas tax regime," he said.

"I am particularly concerned about changes to the oil and gas tax regime. It was only eight months ago that oil reached $150 a barrel because our domestic supply was tight. Due to the economic crisis, the price of oil is temporarily low. In these tough times, we must make sure that we do not disadvantage our domestic industry," Landrieu said.

Landrieu and other senators from oil- and gas-producing states are considering offering amendments to the budget legislation, Environment and Energy Daily reported last Wednesday. The Senate may take up budget legislation before the April recess.

The president's budget blueprint, 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) (see NGI, March 2).

The administration's budget also proposes 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.

Sen. Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee, last week said he supported a review of the Section 29 manufacturing tax credit to see whether it should be revoked for oil and natural gas production.

The Section 29 tax credit was put in place to "encourage domestic manufacturing. It's hard to argue that producing oil [and gas] is manufacturing. But the definition of what was eligible for Section 29 got very expanded...I think it's appropriate to look at that and see whether that's still appropriate to maintain as a domestic manufacturing incentive," he said on E&E TV.

Bingaman further said he supported an excise tax on Gulf of Mexico production, which would be offset by royalties paid by a producer. "That [tax] would be a way to ensure that for all of the production of oil and gas in that area the taxpayer receives something by way of royalties or excise tax. I think that's [an] appropriate provision...We tried to pass it on the floor. We [were] not able to in the last Congress."

In June 2007 the Senate blocked a tax package that sought to impose a 13% excise tax on oil and gas produced in the Gulf of Mexico. The purpose of the excise tax was to recover revenues from offshore producers who claimed that their produced volumes were exempt from royalties under the Deep Water Royalty Act of 1995. The tax package also would have revoked a manufacturing credit for major integrated companies for income attributable to domestic oil and gas production (see NGI, June 25, 2007). The two proposals alone would have required oil and gas producers to pay more than $20 billion in additional taxes over the next 10 years, according to the Joint Committee on Taxation.

The Obama administration's proposed $30 billion tax hike on producers, coming at a time of falling prices and rising capital costs, could spell disaster for the natural gas market and impede the transition to renewable fuels, said energy analysts at Wachovia Capital Markets LLC.

"While the political motivation -- go after them that's got it -- is clear, this broad-brush approach [to levying taxes] could spell disaster for the domestic natural gas sector," said Wachovia analysts Samuel Brothwell and Jonathan Lefebvre last Monday in an equity research report. "Despite the current economic challenges, we've remained positive on gas given its unique ability to solve a myriad of energy, economic and environmental challenges. [But] that thesis will be completely undermined if Washington goes hunting with a bazooka."

Of all of Obama's proposed producer-related tax measures, the elimination of the tax deduction for intangible drilling costs (IDC) "could do some serious damage and actually undermine both energy independence and the renewable transition," said the Wachovia analysts.

"Natural gas is bridging the transition to renewables and the more intelligent and efficient use of energy while making positive contributions to cutting emissions of everything from sulfur to carbon...We believe losing the IDC deduction could kill the nascent reemergence of natural gas at a time that the country needs it most, costing American jobs, energy security and state and federal tax revenues as well."

The proposed repeal of the IDC deduction -- on top of sharply lower gas prices and higher capital costs -- "could significantly accelerate the decline in drilling activity currently being experienced," the analysts noted. It "could potentially deal a knockout blow for some producers at a crucial time."

Independent producers, who produce most of the domestic natural gas, would suffer the most. "A body blow to the smaller guys would have some serious unintended consequences, including forced reliance on the major and foreign oil companies for imported liquefied natural gas, a shift in power generation economics to favor coal, and sharp increases in utility bills -- three outcomes that we seriously doubt the administration wants to see."

The proposed tax hike on producers came only weeks after the Obama administration placed a hold on a Bush-era leasing plan that would open previously banned offshore areas, and overturned the results of an oil and gas lease auction in Utah that was held in the final days of the Bush administration (see NGI, Feb. 16, Feb. 9).

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