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New Natural Gas and Oil Tax Proposal

TexasBred

Well-known member
New Natural Gas and Oil Taxes Would Crush America’s Clean Energy and
Energy Security
Natural gas and oil provide 65 percent of America’s energy. New wind energy and solar energy
require new natural gas turbines to run when the wind doesn’t blow and the sun doesn’t shine.
American natural gas is essential to meeting any clean energy agenda associated with global climate.
American natural gas and oil are essential to any energy security plan.
America’s independent natural gas and oil producers develop 90 percent of US wells, produce 82
percent of US natural gas and produce 68 percent of US oil. Independent producers reinvest over 100
percent of American oil and natural gas cash flow back into new American production. Lower natural
gas and oil prices and the tight credit market are limiting investment capital; drilling activity is down
over 25 percent since a year ago.
The Obama Administration’s budget request would strip essential capital from new American natural
gas and oil investment by radically raising taxes on American production. American natural gas and
oil production would be reduced. It runs counter to the Administration’s clean energy and energy
security objectives.
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.
Taken together, these tax changes would strip over $30 billion from US natural gas and oil production
investment. As President Obama has said:
The energy challenges our country faces are severe and have gone unaddressed for far
too long. Our addiction to foreign oil doesn't just undermine our national security and
wreak havoc on our environment – it cripples our economy and strains the budgets of
working families all across America.
America needs an energy policy that recognizes the roles that all forms of energy supply can play.
American natural gas and oil are essential elements – natural gas should be part of any clean energy
initiative; natural gas and oil should be part of any energy security strategy. The Administration’s
budget request could cripple the American producers that are pivotal in developing US natural gas and
oil.
 

Tex

Well-known member
The best thing the U.S. could do with energy policy is to get off of the roller coaster of the world market. Every time demand goes up, because it is an inelastic commodity, the price really shoots up. Add limits of supply by the international oil cartel and you really see the prices soar.

The price of natural gas was up to 14 and 15 dollars per million btus. Today it is around $3.86. Oil was around $150 per barrel and now it is less than a third of that price.

A more stable oil and energy price will do a lot more to increase domestic spending than this roller coaster of prices we have seen.

The substitution by Congress of industry perks and tweaking rather than having a real energy policy is squeezing the little guys out of the business and giving advantages to the big boys with the money like Exxon. The little guys are going bust all over and rigs have slowed way down due to the "low" prices at this time.

Higher intermittent energy prices will not allow us to substantially increase energy production because it takes time to drill and put energy "in the pipeline". Making the small guys go bust because of this roller coaster sets up the big guys to still be in biz and get the lion's share of extraordinary profits. Concentrated industry mean concentrated profits. We all lose when this happens.

We need a real energy policy to have a vibrant producing energy sector, not this sorry roller coaster "free market" (not free at all--the Oil Cartel makes sure of that) ride we have been on.
 

TexasBred

Well-known member
I live on NG royalties...I'd much rather have a steady liveable price than the huge swings you mentioned and yes it's dropped dramactially..last checks paid just over $4.00 net.
 

Steve

Well-known member
We need a real energy policy to have a vibrant producing energy sector,

just a few thoughts..

putting a tax on it doesn't make it stable.. just higher priced.

disallowing drilling off the coast eliminates potential supply.. disallowing drilling at all puts US at the mercy of suppliers,.. as we have a stable demand.

hoping for another answer or an alternative fuel is not a plan...
 
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