President Obama's $3.77 trillion budget for fiscal year (FY) 2014, unveiled Wednesday, for the fourth time seeks to repeal tax breaks for oil and natural gas producers. It also would tack on new fees for operations on federal lands and increase oil and gas royalties to fund renewable fuel development.
While Obama's efforts in previous years to repeal oil and natural gas incentives never got past square one, those benefits are more vulnerable now because of pressure to control the budget, said a spokesman for the Independent Petroleum Association of America (IPAA).
The budget proposes to unwind annually $4 billion oil and gas tax incentives, which have been part of the tax code since the 1920s, said IPAA's Jeff Eshelman, He noted that the tax provisions allow oil and gas producers to deduct certain expenses so that they can reinvest in other projects. Repealing the benefits would impact smaller producers the most, he said.
The Obama budget specifically targets eight tax benefits for oil and gas producers, including expensing intangible drilling costs (IDC), percentage depletion and the 199 manufacturing deduction, which allows energy firms and other companies to deduct 6% of their qualifying incomes. The administration estimates that the roll-back, which is in the Department of Energy (DOE) proposed budget for FY 2014, would raise $44 billion over the next decade.
IDCs are all the costs involved in drilling a well, including drilling contractors, ground-clearing work, hauling and supplies, and are typically 65-80% of the well cost. Calling IDCs a subsidy is a mischaracterization, since IDCs involve deductions of business expenses, not subsidies, contend producers and producer groups.
And percentage depletion was specifically intended to encourage the participation of small natural gas and oil producers. The deduction has been part of the tax code since 1926 and is only available on the first 1,000 boe/d. By allowing for the recovery of capital investment over time, it is essential to meeting the costs of operating marginal wells, said the producer group.
Since the White House has essentially recycled its budget from last year, the American Petroleum Institute recycled its 2012 statement on the budget. API President Jack Gerard expressed disappointment with the proposed tax increases, especially in light of the president's apparent endorsement of more domestic oil and natural gas development in his State of the Union address.
The administration also seeks to increase fees on nonproducing leases on federal lands. The budget in addition would hike oil and gas permit processing and other administrative fees, so that industry would share some of the cost of federal permitting and regulatory oversight for these activities. It also would repeal a law that has allowed offshore producers to escape payment of royalties in past years.
In addition, the president's budget includes $18.6 million for Interior to continue participating with the Environmental Protection Agency and DOE in research efforts on hydraulic fracturing, said Interior Deputy Director David Hayes.
Congress also is called on in the budget to create a trust fund using $2 billion in royalties from oil and gas production on public lands, to promote the research into advanced vehicles. Another $71 million in funding is proposed for the Interior's U.S. Geological Survey to study climate change.
Overall, the president has proposed $28.4 billion for DOE in FY 2014 and $11.9 billion for Interior. Of the total Interior budget, $771.6 million was earmarked for conventional and renewable energy programs, up by $97.5 million over 2012.