President Obama’s proposed $41 billion-plus in tax hikes and fees on oil and natural gas producers would reduce by as much as 35% the capital available for U.S. production, ultimately resulting in less government revenue and royalties, said an official with the Western Energy Alliance (WEA) Thursday.
“Imposing tax increases hits western producers especially hard since they already must spend more capital dealing with extra red tape on federal lands,” said Kathleen Sgamma, WEA director of government and public affairs, during a briefing on the president’s budget by the WEA and the American Petroleum Institute (API) in Washington, DC.
Developing federal lands is an “extremely time-consuming and expensive process,” she said. Environmental reviews often take seven years or more and are then followed by a permitting process that can take years. “While states process drilling permits in about a month, on average, the federal government routinely takes six months to two years,” Sgamma said.
“Tax increases will take more capital away from finding and producing energy, and will likely render many supply fields in the West noneconomic, particularly for natural gas.” This could significantly impact members of Denver-based WEA, a group of more than 400 oil and natural gas companies that operate in the West that produce 27% of the nation’s natural gas and 14% of its oil, Sgamma said.
“I’ve lost track of how many times we’ve seen these same tax proposals from the administration, but they continue to be bad policy.” She specifically singled out the president’s proposals repealing the expensing of intangible drilling costs (IDC) and percentage depletion.
Sgamma said the administration has mistakenly characterized IDCs as a subsidy. “IDCs, which have been part of the tax code since 1913, are all costs involved in drilling a well, including drilling contractors, ground-clearing work, hauling and supplies, and are typically 65-80% of the cost of a well. The mischaracterization of IDCs as a subsidy is disingenuous, since IDCs involve deductions of business expenses, not subsidies. Every other business and individual is able to deduct business expenses from their tax liability,” Sgamma said.
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 thousand barrels per day of oil equivalent. By allowing for the recovery of capital investment over time, it is essential to meeting the costs of operating marginal wells.”
API Chief Economist John Felmy echoed many of the same sentiments. “More taxes on an industry that already supplies more than $86 million a day to the federal government and pays income tax at an effective rate of 41% compared with 26% for the rest of the S&P [Standard & Poor’s] industrials isn’t remotely fair,” he said.
Asked if he thought the proposed tax hikes would get through Congress, Felmy said, “We’re not in the business of handicapping Capitol Hill.” He said the tax package “is a repeat of mistakes” that occurred in the past.
Sgamma also slammed the president’s proposed new fees on oil and gas producers. Obama’s proposal to impose a fee on nonproducing acreage “defies logic,” especially since the federal government’s red tape is to blame for much of the production delay, she said. The Obama administration “continues to tout the fee as a way to incentivize production on federal acreage, yet making it even more expensive to operate on federal lands obviously does not…encourage development.”
Sgamma said that “for an estimated half of the nonproducing acreage, the Interior Department itself is the entity holding up diligent development of federal leases and delaying productive economic activity.”
For every dollar the administration spends on administering the onshore oil and gas program, it receives $40.50 in royalties and leasing revenue, according to Sgamma. So the Obama administration’s proposal to “charge a ‘cost recovery fee’ is another confusing government concept as the government already recovers its costs 40 times over.”
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