April 30, 2011

Analysis: Obama energy tax proposals target domestic drilling

Chris Casteel

The Oklahoman

Washington – Long before the recent spike in gasoline prices, the Obama administration sought to eliminate tax deductions peculiar to the oil and gas industry. The goal: to reduce investment in domestic production of fossil fuel-based energy.

And though President Barack Obama this week publicly linked “Big Oil” to his proposal to eliminate the tax breaks, a true target of the plan is independent companies. In fact, the administration wants to eliminate some of the deductions partly because they’re biased against big oil companies that produce oil and sell gasoline at retail stores.

It’s not a secret. The administration’s policy — aimed at reversing decades of incentives for producing domestic oil and gas — has been spelled out explicitly in budgets and in testimony on Capitol Hill.

“The administration believes that it is no longer sufficient to address our nation’s energy needs by finding more fossil fuels, and instead we must take dramatic steps towards becoming a clean energy economy,” Treasury Department official Alan B. Krueger told a Senate subcommittee in 2009 while testifying on the proposed tax changes.

That was the first year the president proposed to eliminate industry tax breaks worth more than $43 billion over 10 years.

One of the tax breaks targeted then — and in the two budgets submitted by the president since 2009 — was the deduction for intangible drilling costs, which cover many of the expenses related to drilling a well. The deduction is only available for domestic exploration.

According to the Treasury Department, the justification for eliminating the deduction is:

“To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security and is also inconsistent with the administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade program.”

The explanation doesn’t elaborate on what constitutes “overproduction of oil and gas.”

Another of the targeted tax breaks is the deduction for percentage depletion, which allows those with an interest in a well to deduct a certain percentage of the income, up to a set limit of production. It’s advantageous because those qualified for the deduction can continue to claim it even after all of the capital costs have been recovered.

It is not available to integrated companies — Big Oil — and hasn’t been since 1975.

In fact, the Treasury Department says that deduction subsidizes “an inefficient amount of investment in the oil and gas industry” and causes distortions in the oil and gas industry by favoring investment in independent companies.

“Because of the large subsidy provided by percentage depletion and full expensing of intangible drilling costs, the size of the distortion for non- integrated firms is especially large,” the department says.

Boren says Obama is misleading nation

The president’s proposals on the tax breaks were defeated overwhelmingly in a Senate vote last year; they received little consideration before or since.

The proposals got new life this week when House Speaker John Boehner told ABC News this week that he was open to looking at the tax breaks amid rising gasoline prices.

“I don’t think the big oil companies need to have the oil depletion allowances,” Boehner (R-OH) told ABC News. “But for small, independent oil and gas producers, if they didn’t have this, there’d be even less exploration in America then there is today.”

The fact is that big oil companies already don’t get the depletion allowance.

But independent producers definitely agree with the speaker’s statement about less exploration.

Mike Cantrell, the chairman of Cantrell Energy Corp. in Ada and president of the Domestic Energy Producers Alliance, said 93 percent of the wells in the United States are drilled by independent companies.

The tax deductions targeted by the administration, he said, give independent companies the capital to do it. Historically, he said, the independents put their cash back into drilling.

“They don’t want to lose the deductions because they want to drill for oil — that’s what they do,” Cantrell said.

Boehner’s comments prompted a letter from Obama to congressional leaders urging them to repeal the deductions.

Obama said that the CEOs of major oil companies “have made it clear that high oil prices provide more than enough profit motive to invest in domestic exploration and production without special tax breaks.”

House Democratic leader Nancy Pelosi (D-CA) called on Boehner “to hold a vote next week to end the billions of dollars in taxpayer subsidies to Big Oil.”

Rep. Dan Boren (D-OK) said Obama was misleading the country by talking about Big Oil since it wasn’t eligible for some of the targeted tax breaks.

Reducing the deductions for intangible drilling costs and percentage depletion, he said, would reduce drilling by an estimated 30 to 40 percent.

“For every CEO of a major company, there are literally thousands of blue collar jobs that are affected by his administration’s energy policy,” Boren said. “It is a policy that is very inadequate and has left so many on the Gulf Coast unemployed.”

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