An amendment to strike a key tax break for major oil and natural gas exploration and production companies fell four votes short on Tuesday as Senate Republicans along with a few Democrats shot down the cloture motion.
The amendment, which was proposed by Sen. Ben Nelson (D-NE) as part of the Small Business Jobs and Credit Act of 2010, sought to strike a tax break for producers and manufacturers. The Section 199 manufacturing domestic deduction has been available for six years for major producers as an incentive to promote operations and employment. The vote was 56 to 42, four votes shy of cutting off debate on the issue and moving forward to a final vote. The amendment was billed as a way to ease an Internal Revenue Service reporting requirement under the new health care plan while also freeing monies for other spending.
"We are pleased the Senate failed to approve this shortsighted amendment that sought to unfairly repeal a job-creating tax provision for a handful of oil and natural gas companies," said American Petroleum Institute (API) Tax Manager Stephen Comstock. "Had it passed, the provision would have raised taxes and killed jobs, something the nation cannot afford, especially when so many Americans are out of work. While we are disappointed that the Senate was unable to fix the 1099 reporting requirements in the small business bill with an amendment offered by Sen. Mike Johanns [R-NE], we are pleased the majority turned back the effort to increase taxes on the oil and natural gas industry, which ultimately could have cost American jobs."
In a 46-52 vote the Senate on Tuesday also defeated the amendment from Johanns, seen as an alternative to Nelson's amendment, which would have removed a tax-reporting provision from the health care legislation passed earlier this year.
Termination of the tax incentives for oil and gas producers has been a hot topic over the last few months as industry has rallied to defend the initiative. Tax hikes on the domestic oil and natural gas industry could put production at significant risk next year and through the coming decade, according to an August study commissioned by API and conducted by Wood Mackenzie (see Daily GPI, Aug. 18).
The study, "Evaluation of Proposed Tax Changes on the US Oil & Gas Industry," targeted changes to the intangible drilling costs (IDC) and the domestic production activities deduction (Section 199) incentives as having the greatest impact on industry. If passed, the break-evens for the average gas and oil development would shift from $5.40/Mcf and $47/bbl to $6/Mcf and $52/bbl, respectively, according to the study.
Under the proposed revisions to IDC and Section 199 deduction pending in Congress, the study said 88 of the 230 plays/fields considered for this analysis fell below a 15% internal rate of return (IRR) threshold. Higher taxes could reduce domestic oil and gas production next year and cut it by as much as 10% in 2017, the study concluded.
"Total resources not produced could reach as high as 27 Tcf of gas and 700 MMbbl of oil over the next 10 years," the study concluded. "Almost half of the gas plays we consider to have future development potential are at risk under the proposed tax changes. The gas plays that become sub-economic are not only great in number, but represent more than 10% of the gas that will be produced over the next 10 years."
A recent IHS Cambridge Energy Research Associates study "concludes the existing tax regime for oil and natural gas companies places them at a competitive disadvantage with their foreign competitors," Comstock said in August (see Daily GPI, Aug. 19). "The most recent tax proposal in the Senate would upend an already unlevel playing field, weakening an industry that currently supports more than 9.2 million American jobs.
"It's shortsighted to raise taxes and kill jobs, especially when so many Americans are out of work. Unwinding tax policy that has created thousands of high-paying jobs across the country -- just for the top few U.S. oil and natural gas companies -- will slow this engine of economic growth and prosperity."
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