Budget proposal again targets oil and gas tax preferences

Oil and gas companies in the US would face higher taxes on multiple fronts if Congress enacted the federal budget proposed Apr. 10 by the administration of President Barack Obama.

In its treatment of energy in general, the proposal strongly resembles its predecessors.

While denying oil and gas companies the use of industry-specific tax deferrals and deductions available to other industries, raising royalty rates and fees on federal leases, restricting use of the foreign tax credit, and raising or reinstating other fees, the new budget proposal would sharply increase federal spending on nonfossil energy.

The main new feature of the administration’s proposal for fiscal 2014 is a previously announced plan to dedicate $2 billion from federal oil and gas royalties over 10 years to the new Energy Security Trust, which would fund research of alternative transportation fuels. In fiscal 2012, the government collected about $9 billion in fees, royalties, and other payments from oil and gas activity on federal acreage.

In prior years, Congress hasn’t approved the proposals targeting the oil and gas industry.

Clean-energy spending

The budget requests $7.9 billion in spending across the government in fiscal 2014 on programs “to accelerate the transition to a low-carbon economy and position the United States as the world leader in clean energy,” according to documents accompanying the proposal.

The Department of Energy would spend $1.8 billion, 43% more than in 2012, “to advance the state of the art in clean energy technologies such as advanced vehicles and biofuels, industrial and building energy efficiency, and renewable electricity generation from solar, wind, water, and geothermal resources.”

Of the agencies most important to the oil and gas industry, the DOE would receive the largest budget increase from the level enacted in 2012: 8% to $28.4 billion in discretionary spending. The Department of the Interior’s budget would increase 4% to $11.7 billion. The Environmental Protection Agency’s budget would decline by 3.5% to $8.2 billion.

Tax measures

Meanwhile, the proposed elimination of tax preferences would cost the oil and gas industry an estimated $3.9 billion in 2014 and $40.7 billion during 2014-23.

The largest items targeted for repeal in that category are expensing of intangible drilling costs, percentage depletion, and the domestic manufacturing deduction for oil and gas production. Smaller preferences in dollar terms are extension to 7 years for independent producers of the amortization period for geological and geophysical expenses, the deduction for tertiary injectants, and passive loss limitations on working interests in oil and gas properties.

Oil and gas royalty reforms proposed in the budget would cost producers an estimated $2.5 billion over 10 years. They include the setting of minimum rates, increasing the standard onshore rate, testing a price-based sliding scale rate, and repealing legislatively mandated relief for deep gas wells.

The budget proposes to shorten primary lease terms, toughen enforcement of lease terms, and impose a per-acre fee on nonproducing leases. It also would simplify royalty valuation, eliminate interest accruals on company overpayments of royalties, and permanently repeal the Department of Interior’s authority to accept in-kind royalty payments.

Among measures in the budget important to the oil and gas industry but not specifically targeting it is a change, proposed in earlier budgets, in rules for dual-capacity taxpayers related to the foreign tax credit. The move would restrict amounts companies could claim for certain payments to non-US governments.

Also potentially costly oil and gas companies, especially refiners, would be the proposed repeal of the last-in, first-out method of accounting for inventories, which the government estimates would cost US industry in general $80.8 billion over 10 years.

The budget proposes to increase the Oil Spill Liability Trust Fund financing rate by 1% and expand its scope in a move estimated to cost industry $64 million in 2014 and $1 billion through 2023. It also would reinstate Superfund taxation, costing affected companies a total of $1.37 billion in 2014 and $20.2 billion over 10 years.

Among other moves, the budget would repeal research on ultradeeper oil and gas, authorize implementation of the US-Mexico agreement on oil and gas fields straddling the countries’ maritime border, and impose new Bureau of Land Management inspection fees costing producers on federal land an estimated $48 million in 2014.