President Obama’s proposal to scale back $41 billion in oil and natural gas tax breaks as part of his $447 billion jobs stimulus bill will hit both major producers and independents in their pocketbooks, said a tax attorney with a Washington, DC-based law firm (see Daily GPI, Sept. 13).

Many people expected the president to target the oil and gas industry to help pay for his jobs bill, but they thought the proposed tax increases would apply only to the five largest producers in the United States — ExxonMobil Corp., Shell Oil Co., ConocoPhillips, Chevron Corp. and BP plc. “However, each of these provisions, the way they were drafted in their [Obama administration] bill applies to the entire industry. So it affects integrated companies as well as independents,” said Michael Platner, senior tax counsel with law firm Van Ness Feldman.

In the $467 billion pay-for package, which accompanied the jobs bill sent to Congress Monday, Obama proposed repealing or reducing eight tax breaks for domestic oil and gas production, and making revisions to two provisions on foreign tax treatment. The domestic tax breaks that are on the chopping block include intangible drilling costs; deduction for tertiary injection; percentage depletion, disallowance for Section 199 manufacturing credit for oil and gas and their primary products, the marginal well tax credit, and seven-year amortization for geological and geophysical expenditures.

On the international side, the Obama administration proposed modifying the foreign tax credit rules for dual capacity taxpayers, as well as separate treatment for taxes paid on foreign oil and gas income.

The president’s proposal to nix and/or reduce oil and gas tax breaks will assuredly face steep opposition in Congress. The Obama administration has tried to repeal the tax preferences several times over the past three years, but efforts were nonstarters each time (see Daily GPI, April 27; Sept. 14, 2010).

The elimination of these tax provisions would significantly affect U.S. oil and gas production, Platner said. “If they [Congress] start to eliminate many of the provisions in [the current] code that provide for accelerated expensing for the oil and gas industry, that essentially could hurt oil and gas production because it reduces the amount of money the industry has available to go out and look for new prospects,” he said.

“Many of [these] offsets are probably ideas” that members of the Joint House-Senate Select Committee on Deficit Reduction “were contemplating for their own use in obtaining the $1.2 trillion goal,” said Lisa Epifani, a partner with Van Ness Feldman. The president most likely is hoping that his proposed $467 trillion of tax cuts will be rolled into the select committee’s final recommendations, she said.

The joint select committee, or super-committee, was created as a result of a deficit-reduction package hammered out by Obama and congressional leaders in August (see Daily GPI, Aug. 15). Its goal is to identify an additional $1.2 trillion in cuts to the deficit by Nov. 23, with Congress to vote on it by Dec. 23.

Platner thinks major tax reform is out of the question this year. “While the joint committee will spend some time talking about tax issues and looking at tax expenditures, I don’t expect them to be able to include a tax reform plan in their final legislation. It would be an almost impossible task for the committee to agree upon and develop a comprehensive…tax proposal” this year.

Epifani recommended that producers put some “creative solutions” on the table to get what they want from Congress. For example, they could propose that a “sliding scale for oil and gas incentives [be] tied to the price of oil, or even the elimination of those [tax] provisions in exchange for expedited permitting and increased leasing opportunities in the onshore and offshore.”

These are “purely hypothetical,” but they are “worth exploring,” she said. If not, the oil and gas industry could find itself on the outside looking in, she warned.

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