Budget proposal is harmful

The Independent Petroleum Association of America rarely gets this upset about a new government policy. However, on Feb. 26, the Obama administration delivered a body blow to the industry when it proposed a colossal $30 billion tax increase (as part of the 2010 budget) on US energy producers. IPAA management and staffers were livid that the President would attempt to derail domestic oil and natural gas production at a time when the economy is in shambles and the country is importing more and more of its energy needs.
So much for energy independence.

There is faint hope that Congress will modify the proposed budget and remove some of the more loathsome provisions. However, any such changes would have to come in the Senate because the House leadership likely helped craft the budget proposal or at least contributed in some way to the anti-oil tax provisions.

The IPAA exists to help protect the interests of independent oil and gas producers – not so-called Big Oil, but the many small- and mid-sized companies that drill roughly 90% of the nation’s oil and natural gas wells. These companies produce 68% of American oil and 82% of our natural gas supplies, and in case the government hasn’t noticed, they are suffering along with the rest of America in the current economic turmoil.

A tax increase such as the administration has proposed would have a devastating effect on US producers, and it would run counter to the needs of the country. It could shut down thousands of domestic oil and gas wells and increase the need for imports. The government would ultimately lose much more in tax and royalty revenues than it would gain by such a proposal, and the loss of jobs would be catastrophic in petroleum-producing states. With the current unemployment rate at its highest level in years, this could not come at a worse time.

Without going into too much detail, here are some of the items in the budget proposal:

* Repeals expensing of intangible drilling costs (fuel, repairs, etc.);
* Repeals percentage depletion (without this provision, many small, barely economic wells will be shut down);
* Repeals marginal well tax credit (an important safety net);
* Repeals enhanced oil recovery credit;
* Eliminates expensing of geological and geophysical amortization costs;
* Imposes an excise tax on Gulf of Mexico production; and
* Repeals manufacturing tax deduction for oil and gas industry, a provision that is allowed other US manufacturers.

It is worth noting that this budget proposal slams the petroleum industry at the same time that Interior Secretary Ken Salazar has decided to cancel the planned oil shale lease sale. An earlier government study revealed that nearly 800 billion barrels of crude oil lay untapped in oil shale deposits in several Western states, and now it appears that they will remain unexploited.
In a conference call announcing the cancellation, Salazar commented: “Those who believe oil shale is a panacea for America’s energy needs have been living in a fantasy land.”

To that I would say: those who believe that alternative energy alone can fuel our vehicles, heat and cool our homes and businesses, and provide the necessary energy for American industry to thrive have followed Alice down the rabbit hole. This kind of thinking will cripple our energy infrastructure.

Earlier this year, Salazar said his office would “rework” the five-year offshore oil and gas leasing plan that proposed opening up parts of the Outer Continental Shelf, which have been closed to hydrocarbon development for decades. I can hardly wait to see the revised proposal.
Writing in the Wall Street Journal recently, BP CEO Tony Hayward noted that America needs to stop looking to others for its energy needs and develop its own hydrocarbon endowment. He said, “Even with the rapid growth of alternatives, fossil fuels will continue providing most of the energy Americans consume for decades to come.”

Oil imports, said Hayward, have more than doubled in the past 35 years – from 30% in 1973 to around 65% today. This figure needs to get smaller – not bigger.

With declining energy demand due to the recession, Hayward noted that now is the ideal time for Congress and the Obama administration to work with energy producers to craft an energy policy that creates jobs, expands and diversifies the nation’s energy supply, generates government revenue, and protects the environment.

We agree. Unfortunately, the current budget proposal is a step in the wrong direction.