The Obama administration’s proposals to repeal tax breaks for oil and natural gas producers in the fiscal 2010 budget “are aimed at crippling our industry,” Devon Energy Corp. CEO Larry Nichols told a Senate Finance subcommittee Thursday.
“These proposals are based on myths rather than facts,” he said during a hearing on the Obama tax proposals held by the Senate Energy, Natural Resources and Infrastructure Subcommittee.
Natural gas prices have plunged 75%, while oil prices have fallen 50%, and “now the administration proposes to further weaken an industry that is already suffering,” he said. Sen. Jim Bunning of Kentucky, the ranking Republican on the subcommittee, echoed the sentiment, saying that “with America in the midst of a recession now is not the time to impose new taxes on oil and gas.”
An Obama administration document says the current tax system encourages over-production of oil and natural gas, which is detrimental to the long-term security of the nation, Nichols said. “That’s absurd. I have never heard anyone reading this document think that we had a problem with producing more oil and gas,” he said. “It makes absolutely no sense to discourage production from our leading sources — oil and gas.”
Nichols, also chairman of the American Petroleum Institute (API), further told the subcommittee that “increased taxes represent real increases in the cost of doing business” for producers. They will mean fewer jobs, less exploration, fewer wells and higher consumer prices, he said.
“Congress’ choice is straightforward: reduce American oil production by 20% and its natural gas production by 12% or retain the current historic tax policies that have encouraged American production,” said H.G. “Buddy” Kleemeier, chairman of the Independent Petroleum Association of America and CEO of Oklahoma-based Kaiser-Francis Oil Co.
Stephen Brown, a nonresident fellow with the Washington, DC-based think tank Resources for the Future, and Sean Krueger of the Treasury Department agreed that repealing the producer tax breaks would have a “very small” impact on prices and production. Brown noted that the repeal of the tax breaks would account for less than 1% of the projected $3.4 trillion the industry would earn over the 10-year period.
Nichols estimated that the Obama administration proposals call for more than $80 billion in new taxes for the oil and gas industry over the next 10 years (see Daily GPI, April 2). An estimated $30 billion of the proposed tax hikes would be aimed directly at producers, while several indirect tax hike proposals — such as reinstatement of the Environmental Protection Agency’s Superfund tax, repeal of last-in-first-out accounting and reform of the international tax policy — would push the tax burden up even further for producers.
With respect to the tax hikes directly targeting producers, 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); the deduction for tertiary injectants ($62 million); the expensing of intangible drilling costs ($3.35 billion); the Section 29 manufacturing credit for oil and gas companies ($13.29 billion); and the passive loss exemption for working interests in oil and gas ($49 million); and repeal the percentage depletion for oil and gas ($8.25 billion). The proposed tax hikes would take effect Jan. 1, 2011 (see Daily GPI, May 8).
The fiscal 2010 budget also 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.
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