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SPCC Plan Basics (Power Point file) For more information on SPCC Plans, contact Alliance President Alex Mills at alexm@texasalliance.org
10 Essential Principles For Sound Energy Policy
Negative Economic Empact 2010 Federal Budget Proposals on Oil and Gas Extraction
RAPPS
Presentation by
Mark Metzler
Chairman of the Board
Texas Alliance of Energy Producers
U.S. House of Representatives
March 19, 2009
Distinguished members, it is a pleasure for me to present to you my analysis of President Obama’s proposed 2010 budget which calls for the repeal or change of several key tax provisions for small, independent, oil and natural gas producers in the United States.
I’m here as President of Felderhoff Production Company, an independent oil and natural producer based in Gainesville, Texas and as Chairman of the Texas Alliance of Energy Producers, an organization representing over 3200 members, most of which are small producers like myself with 10 employees or less. It should be noted that despite our Company size, independent producers drilled 96% of the wells in Texas in 2008.
The Obama budget changes provisions that have been in place for these small energy companies for decades. Previous Congresses passed the tax provisions so independents could compete with major oil companies and to stimulate capital investments in our very risky business. Obama’s tax provision should raise an estimated $31 billion from independents over the next 10 years by:
· repealing percentage depletion and expensing of intangible drilling costs (IDCs), and removing the passive loss exception for working interest owners;
· removing the tax credits for marginal wells, enhanced recovery and the manufacturing tax credit
· increasing the amortization of geological and geophysical costs from two to seven years.
If these provisions are enacted, the drilling rig count would likely drop to between 500 and 800 active rigs within a 12 month period. The current rig count is about 1,170. A decline in the rig count means that the industry will not be replacing reserves and the independent sector of the industry will begin to slowly go out of business. This decrease in domestic production will occur much faster than our nation’s ability to replace oil and gas with renewable energy sources. As a consequence, expensive imported energy will be required to replace the energy we could produce here.
The job loss will be staggering. We estimated that our industry will lose about 300,000 jobs across the United States in the drilling and production sector of the business. Lower product prices are adversely affecting independent producers and removing the tax deductions that are so critical would be a death blow. I stress that the Companies being impacted by these budget provisions aren’t the Exxons or the major oil companies of the energy industry, they are small businesses that derive their income from drilling for and producing energy in the United States. They provide hundreds of thousands of quality jobs and drill the vast majority of the new wells in The United States. Most recently, the spike in domestic natural gas production was achieved almost entirely because of the success by independents exploiting new resource plays. We
are the Exploration and Production business in this country. Profits made by independents are taxed here and free cashflow is used to drill more wells here.
In closing, I would like to thank you for allowing me to make this presentation, and to alert you to the damage that will be caused by the proposed budget provisions. It is my hope that we can find a way to preserve an industry employing Americans here at home rather than increase reliance on foreign energy sources. I would be delighted to answer any questions you may have for me.
Oil/Gas Tax Provisions In President Obama’s Proposed 2010 Budget
Intangible Drilling and Development Costs (IDC) – IDC tax treatment is designed to attract capital to the high risk business of natural gas and oil production. Expensing IDC has been part of the tax code since 1913. IDC generally include any cost incurred that has no salvage value and is necessary for the drilling of wells or the preparation of wells for the production of natural gas or oil. Only independent producers can fully expense IDC on American production. Eliminating IDC expensing would remove over $3 billion that would have been invested in new American production.
Percentage Depletion – All natural resources minerals are eligible for a percentage depletion income tax deduction. Percentage depletion for natural gas and oil has been in the tax code since 1926. Unlike percentage depletion for all other resources, natural gas and oil percentage depletion is highly limited. It is available only for American production, only available to independent producers, only available for the first 1000 barrels per day of production, limited to the net income of a property and limited to 65 percent of the producer’s net income. Percentage depletion provides capital primarily for smaller independents and is particularly important for marginal well operators. Eliminating percentage depletion would remove over $8 billion that would have been invested in maintaining and developing American production.
Geological and Geophysical (G&G) Amortization – G&G costs are associated with developing new American natural gas and oil resources. For decades, they were expensed until a tax court case concluded that they should be amortized over the life of the well. In 2005 Congress set the amortization period at two years. Later, Congress extended the amortization period to five years for large major integrated oil companies and then extended the period to seven years. Early recovery of G&G costs allows for more investment in finding new resources. Extending the amortization period would remove over $1 billion from efforts to find and develop new American production.
Marginal Well Tax Credit – This countercyclical tax credit was recommended by the National Petroleum Council in 1994 to create a safety net for marginal wells during periods of low prices. These wells – that account for 20 percent of American oil and 12 percent of American natural gas – are the most vulnerable to shutting down forever when prices fall to low levels. Enacted in 2004, the marginal well tax credit has not been needed, but it remains a key element of support for American production – and American energy security.
Enhanced Oil Recovery (EOR) Tax Credit – The EOR credit is designed to encourage oil production using costly technologies that are required after a well passes through its initial phase of production. For example, one of the technologies is the use of carbon dioxide as an injectant. Given the increased interest in carbon capture and sequestration, carbon dioxide EOR offers the potential to sequester the carbon dioxide while increasing American oil production. Currently, the oil price threshold for the EOR tax credit has been exceeded and the oil value is considered adequate to justify the EOR efforts. However, at lower prices EOR becomes uneconomic and these costly wells would be shutdown.
Manufacturing Tax Deduction – Congress enacted this provision in 2004 to encourage the development of American jobs. All US manufacturers benefitted from the deduction until 2008 when the oil and natural gas industry was restricted to a six percent deduction while other manufacturers will grow to a nine percent deduction. While many producers’ deductions are capped by the payroll limitation in the law, it is another tax provision that provides capital to America’s independent producers to invest in new production.
Excise Tax on Gulf of Mexico Production – American independent producers hold 90 percent of the OCS leases in the Gulf of Mexico. Offshore federal lands produce 27 percent of America’s oil and 15 percent of America’s natural gas. Producers pay royalties as high as 16.67 percent on their production. A portion of this production is produced without royalty payments until it reaches a set volume that was designed to encourage – and effectively so – development of deep water areas. Creating a new tax designed to add a $5 billion burden on US offshore development will drive producers from the US offshore reducing new American production of natural gas and oil.
Passive Loss Exception for Working Interests in Oil and Gas Properties – The Tax Reform Act of 1986 divided investment income/expense into two baskets – active income/loss and passive income/loss. The Act exempted working interests in oil and natural gas from being part of the passive income basket and the treatment of IDC’s, in particular, was deemed to be an active loss that could be used to offset any type of active income. If, in the future, income/loss, arising from the ownership of oil and natural gas working interests, is treated as passive income/loss, the primary reason for individuals to invest in oil and gas working interests would be significantly diminished. | 
