Obama’s proposed fiscal 2017 budget includes $10/bbl crude oil tax

US President Barack Obama proposed a $10.25/bbl crude oil tax to fund transportation improvements in addition to doubling federal clean energy research and development outlays in the final federal budget proposal of his presidency. Oil and gas associations immediately said the plan could jeopardize the nation’s relatively new position as a leading global energy producer.

The proposed fiscal 2017 budget, which requires congressional approval and is subject to change, retained repeals of tax provisions independent producers consider essential to offset operating costs that were part of Obama’s seven previous federal budget requests. It also included a proposal to modify the dual capacity rule that lets US companies operating overseas claim a credit for taxes they pay foreign governments, and exclude refiners from a manufacturers’ tax credit to offset foreign government subsidies to overseas competitors.

“To speed our transition to an affordable, reliable, clean energy system, my budget funds Mission Innovation, our landmark commitment to double clean energy research and development funding,” Obama said in his budget message on Feb. 9.

“It also calls for a 21st Century Clean Transportation initiative that would help to put hundreds of thousands of Americans to work modernizing our infrastructure to ease congestion and make it easier for businesses to bring goods to market through new technologies such as autonomous vehicles and high-speed rail, funded through a fee paid by oil companies,” he added.

The crude oil tax is essential for financing transportation system improvements and ongoing maintenance of the nation’s highways, the White House said when it originally announced it (OGJ Online, Feb. 4, 2016). It said the plan also would provide assistance to families to relieve energy cost burdens, including a focus on helping those in the US Northeast as they make a transition from heating oil to cleaner forms of energy to stay warm each winter.

The tax would raise an estimated $7 billion in fiscal 2017, its first year, rising gradually to $43 billion in fiscal 2025, according to the proposed budget. It said the tax’s receipts over 10 years would total a projected $319 billion.

‘Dead on arrival’

Congressional Republicans said on Feb. 4 that the proposed tax would not be enacted soon after it was announced. US House Speaker Paul D. Ryan (Wis.) pronounced it “dead on arrival,” adding, “We’re not going to let President Obama make hard-working Americans pay for his radical climate agenda.”

The Senate Energy and Natural Resources Committee’s majority staff on Feb. 9 released a Congressional Research Service report it commissioned on the proposed tax’s potential impacts.

“Analysts are likely to be concerned with the macroeconomic effects of the oil fee,” it said. “These effects might include those on employment and jobs, economic growth, and inflation. Key relationships need to be specified in the current economic environment of a weak oil market characterized by low prices, and a domestic economy which is encountering economic headwinds from a weakening Chinese economy.”

US Sen. Lisa Murkowski (R-Alas.), the committee’s chair, said the report was only the beginning of the majority staff examination of the administration’s crude oil tax proposal.

Top officials from national oil and gas trade associations, meanwhile, responded critically on Feb. 9 to other parts of Obama’s fiscal 2017 federal budget request as well as the proposed crude oil tax.

“No longer constrained by electoral considerations, the administration has shifted from a balanced all-of-the-above strategy on energy to an extreme policy objective: to choke off America’s energy renaissance and keep fossil fuels in the ground at the expense of consumers,” American Petroleum Institute Pres. Jack N. Gerard said.

‘Increasingly hostile campaign’

“The $10/bbl tax hike proposal and other higher taxes on American production proposed in the budget are just the latest expressions of what has been an increasingly hostile campaign against American consumers and our nation’s economy,” he said.

Obama’s proposed budget places the US at a clear disadvantage against global oil cartels and unfriendly nations following a 5-year transition from energy scarcity and dependence to security and abundance, Independent Petroleum Association of America Pres. Barry Russell warned.

“America’s policies should promote our abundant energy riches,” Russell said. “Strengthening—not degrading—American oil and gas production is a much better option for our country. This budget fails to strengthen America’s global energy leadership and instead creates new, unnecessary taxes for industry and energy consumers alike.”

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

Thompson said, “Moreover, the critical importance to our nation of these new domestic energy resources in terms of national security and reduced energy dependence on foreign sources of energy is even more important in today’s uncertain world. The need for a strong, vibrant domestic energy industry has never been more obvious or more critical.”

The administration’s fiscal 2017 federal budget request retained proposals from its predecessor to repeal federal tax provisions that let independents expense intangible drilling costs (which it estimates would raise $10.05 billion over 10 years), claim a percentage depletion allowance ($4.99 billion), use an enhanced oil recovery credit ($8.8 billion), and claim percentage depletion costs ($4.99 billion). The time frame in which producers amortize geological and geophysical expenses would be increased to 7 years ($1.52 billion).

Other ‘tax preference’ concerns

Tax provisions to be repealed, which the administration labeled “tax preferences” and oil and gas producers consider costs comparable to other businesses’ routine operating expenses, also included excluding refiners from the federal tax code’s Section 199 provision, which Congress enacted in 2004 to help US manufacturers claim 9% of their qualifying income to offset government subsidies their foreign competitors receive. Oil and gas industry deductions under this rule are limited to 6%. Repealing it would raise an estimated $9.15 billion over 10 years, the proposed budget said.

API also expressed concern about the proposed budget’s plan to modify the dual capacity rule, which allows US companies operating overseas to claim a credit for taxes they pay foreign governments ($9.64 billion over 10 years), and repeal last-in, first-out accounting, which companies anticipating inflation or rising prices use to determine book and taxable income ($28.4 billion).

When it came to what the president has described as clean energy, however, his budget request called for 10-year outlays of $24.14 billion to modify and permanently extend renewable energy production and investment tax credits; $2.21 billion for additional tax credits for property investments for a qualifying advanced energy manufacturing project; $1.34 billion to extend the tax credit for second generation biofuel production; and $1.94 billion to provide a tax credit for production of advanced technology vehicles.

The proposed budget did not contain a tax for production from marginal oil wells, which was removed a few years ago. National Stripper Well Association (NSWA) Pres. Mike Cantrell still saw problems with it. “Knowing the president’s dislike for men and women in the oil industry, I have to say we expected this,” he said in Oklahoma City.

‘Recession to depression’

“We have gone from a recession to a depression,” Cantrell lamented. “While the Saudis’ strategy of reducing production from American shale producers will eventually work, their ‘dumping’ of excess oil into the market is impacting the small family-owned oil production companies around the country the most.”

NSWA estimates that 250,000 b/d of stripper well production has been lost, Cantrell said. “Hopefully it’s not all lost forever, but a portion certainly will be,” he said.

National Ocean Industries Association Pres. Randall B. Luthi also questioned the proposed budget’s provisions aimed at the oil and gas industry. “From the new energy taxes to the elimination of gulf state revenue sharing for offshore energy production, this budget proposal is just the latest in a series of all-out regulatory assaults on American energy and US consumers,” he said.

Luthi said the president proposed funding the Land and Water Conservation Fund (LWCF), yet did nothing to encourage offshore oil and gas exploration and development which are the source of LWCF’s budget. “In addition, his administration has proposed an overly prescriptive well control rule that could increase risk offshore and lead to a de facto moratorium in the Gulf of Mexico, thereby reducing the very source of revenue for the LWCF,” he said.

“The US is the global leader in oil and gas production, and yet the president has abandoned his balanced ‘all-of-the above’ energy philosophy and his administration is holding back our nation’s energy independence through regulations and policies that deter the very industry innovations that make our nation’s energy success possible,” Luthi said.

“The president should broaden his vision by encouraging all forms of energy to further our nation’s position as the global energy leader, strengthen our economy, and keep energy affordable for American consumers,” Luthi said.

Contact Nick Snow at nicks@pennwell.com.

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