Obama’s proposed fiscal 2016 budget recycles oil tax increases

US President Barack Obama has proposed his federal budget for fiscal 2016 that he said was designed to help a beleaguered middle class take advantage of a strong economic recovery. It also included proposals from previous years to close what the administration considers oil and gas tax loopholes and the industry regards as necessary provisions to offset ongoing business expenses.

“These proposals will put more money in middle-class pockets, raise wages, and bring more high-paying jobs to America,” Obama said. “To pay for them, the budget will cut inefficient spending and close tax loopholes to make sure that everyone pays their fair share.”

But its proposals to repeal several tax-code provisions would affect the US oil and gas industry. Its plan to modify rules for dual capacity taxpayers, which would raise a projected $533 million in fiscal 2016 and nearly $10.32 billion over 10 years, would hit firms operating overseas that use the foreign tax credit.

Independent producers would be hit hardest by proposals to repeal expensing of intangible drilling costs (IDCs) (nearly $2.27 billion in 2016 and $15.5 billion by 2025), end percentage depletion for oil and gas wells ($1.12 billion in 2016 and $13.25 billion by 2025), and increase geological and geophysical amortization from 5 to 7 years ($91 million in 2016 and $2.87 billion by 2025).

The budget also calls for making the oil and gas industry ineligible for the domestic manufacturing deduction under Section 199 of the American Jobs Creation Act. The provision was enacted to help US businesses offset foreign governments’ subsidies for their countries’ industries. This would primarily affect refiners and raise an estimated $647 million in 2016 and $11.9 billion over 10 years.

Oil and gas industry association leaders quickly criticized the proposed moves. “Historically, raising taxes on energy raises costs for consumers,” American Petroleum Institute Pres. Jack N. Gerard said. “This industry is the poster child for middle class economics.”

Strong, bipartisan opposition

There’s strong and bipartisan opposition to Obama’s proposals, Gerard said. “The president’s annual call to raise taxes on US oil and gas development would hurt job creation, infrastructure investment, the federal deficit, seniors on fixed incomes, and domestic manufacturing,” he said.

Independent Petroleum Association of America Pres. Barry Russell said the president’s proposals to increase oil and gas taxes arrive at an uncertain time. “[His] call to repeal the industry’s ‘subsidies’ mischaracterizes the tax provisions and disregards the way the tax code has influenced energy development for decades,” he said. “These are the same deductions provided to a wide array of other industries from manufacturing to accounting.”

American Exploration & Production Council Pres. Bruce Thompson said, “The president’s actions today speak louder than his words. His job-killing, antigrowth proposals risk squandering the huge competitive advantage this industry has provided to our nation by the recent and continuing development of game-changing amounts of domestic energy resources.”

Leaders of the Republican-controlled 114th Congress also responded frostily to the administration’s proposed fiscal 2016 budget. “President Obama promised in the State of the Union to deliver a budget filled with ‘ideas that are practical, not partisan,’” Senate Majority Leader Mitch McConnell (Ky.) said. “Unfortunately, what we saw this morning was another top-down, backward-looking document that caters to powerful political bosses on the Left and never balances—ever.”

What Interior would receive

At the US Department of the Interior, the administration’s proposed fiscal 2016 budget would increase the US Bureau of Land Management’s oil and gas program funding by 20% from the fiscal 2015 enacted level.

Coupled with implementation of a new automated permitting system that eliminates paper applications, it would improve responsiveness to permit requests while strengthening onshore inspection capabilities, DOI said.

“BLM’s costs would be partially offset through new inspection fees totaling $48 million in 2016, requiring the onshore industry to share in the cost of managing the program from which it benefits, just as the offshore industry currently does,” it added.

In a teleconference with reporters, Interior Sec. Sally Jewell said the proposed inspection fees are necessary. “Just a week ago, I was in Carlsbad, NM, at a BLM office that’s been a pioneer in automating its permit processing with parallel instead of sequential procedures,” she said. “We will not be a barrier to increased oil and gas production on federal lands. But we need a more robust inspection program. We cannot continue to develop without also upholding the safe and responsible side of our portfolio. If we do, we’ll be able to support increased oil and gas production without putting our communities and ecologies at risk.”

She said the proposed budget calls for replenishing the Land and Water Conservation Fund with a small percentage of revenue from oil and gas development from federally managed lands and waters.

“It provides nearly $80 million in funding to protect sagebrush habitat across the West to BLM, the US Fish & Wildlife Service, and the US Geological Survey,” Jewell said. “It will sustain cooperative efforts with states and local stakeholders to protect habitat for species such as the Greater Sage Grouse.”

Offshore management

Interior said the proposed budget also would support increased oversight of offshore oil and gas operations with $170.9 million for the US Bureau of Ocean Energy Management and $204.7 million for the US Bureau of Safety and Environmental Enforcement.

“The president’s 2016 request fully reflects the administration’s continued emphasis by ensuring that development of the nation’s vast offshore energy resources is conducted in a safe and environmentally responsible manner,” BSEE Director Brian Salerno said. The agency will use funds to recruit expert engineers, scientists, inspectors, and oil spill prevention specialists, he said.

Within its Office of Natural Resources Revenue, DOI said the budget proposes a package of legislative changes to bolster administrative actions focused on advancing royalty reforms, encouraging diligent development of oil and gas leases, and improving revenue collection processes.

“The budget proposes to work with Congress to redirect the distribution of expanded revenue payments expected to start in 2018 for Gulf of Mexico oil and gas leases to programs with broad natural resource, watershed, and conservation benefits for the entire nation; help the federal government fulfill its role of being a good neighbor to local communities; and support other national priorities,” it said.

Collectively, these and other proposed revenue and savings proposals would save the US Treasury $5.6 billion over 10 years, DOI said.

Jewell said that BLM is “very close to coming out with our hydraulic fracturing regulation, and you can expect that in the next few weeks.” She said, “It will take a little more time to formalize Arctic standards, but we’ve been working through problems with the industry, particularly Shell which has indicated it will be going back to work there this summer. We expect Shell to adhere to those standards.”

Contact Nick Snow at nicks@pennwell.com.

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