?If President Obama’s budget and tax proposals are enacted as now proposed, most favorable tax incentives and deductions (some dating back 50 years or more) used by the U.S. energy industry will disappear, and new taxes will be imposed.


The net effect will be “devastating,” says Bruce Vincent, president and director of Swift Energy Co. in Houston, and vice chairman of the IPAA. He made his remarks in a webinar, “A View from the Corner Suite,” hosted by OilandGasInvestor.com.


Vincent recently returned from a trip to Washington, D.C., where he and several other IPAA members met with Congressional representatives or their staffs for IPAA’s call-up, an annual effort to educate politicians on the energy industry’s challenges and needs.


“We were shocked when these proposals were unveiled. We were flabbergasted,” Vincent said. “The net effect of this looks like it is going to be much better for foreign oil sources.


“And I will tell you, they are very serious about all this; they are not just throwing every idea out there to see what sticks. The administration has a clear belief that all hydrocarbons are bad. They naively believe they can switch to alternative fuels in four years. At best this is naïve, and at worst, this is potentially going to be self-destructive to America. This will make energy costs go up.”


According to IPAA, under the Obama budget the government would raise dollars from the oil and gas industry in these amounts, from these tax changes, over the next 10 years:


• $5.3 billion, from imposition of an excise tax on Gulf of Mexico oil and gas,­­
• $3.4 billion, from repeal of expensing of intangible drilling costs,
• $62 million, from repeal of the deduction for tertiary (EOR) well injectants,
• $49 million, from repeal of passive loss exception for working interests in oil and natural gas properties,
• $13 billion, from repeal of the manufacturing tax deduction for oil and natural gas companies,
• $1 billion, from the increase to seven years of the geological and geophysical (G&G) amortization period for independent producers.
In addition, these changes affecting businesses in general, would also affect the energy industry:
• $17 billion for reinstatement of the Superfund taxes,
• $24 billion to tax carried-interest as income,
• $5 billion to codify the “economic substance doctrine,”
• $61 billion to repeal LIFO accounting,
• $210 billion for international enforcement, reform deferral, other tax reform,
• $4 billion for information reporting for rental payments, and
• $882 million to eliminate the advanced earned income tax credit.


Vincent said natural gas is part of the solution to wean America off foreign oil, yet the proposals would hurt independents that produce 82% of the natural gas in the U.S. Most are small entrepreneurs employing 20 people or less, he added, so although the tax changes may be meant to punish “Big Oil,” they in fact will hurt producers of every size and could cost many jobs.


Drilling capital is a fungible commodity that will flee to locations outside the U.S. if domestic tax laws make drilling in this country uneconomic, Vincent said.


It will be particularly adverse if the IDCs are no longer deductible, as they make up 20% or more of the total cost of drilling, or more if a well is fracture stimulated. These costs include water hauling, trucking, and perishable supplies.


“If you are not allowed to capitalize that over time, you’ll have less capital to invest and you’ll drill fewer wells and we’ll have less oil and gas production in America. The whole E&P and service industry is built around these deductions.”


Vincent said most politicians do not seem to be aware that E&P companies have been taking huge losses from reserve write-downs, or that the U.S. rig count has declined by half since last fall due to low oil and gas prices. Too, they seem to think the economy will be better by 2011, and are making “incredibly optimistic projections,” he said.

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