WASHINGTON (Commodity Online): The US Government plan to substantially increase taxation of domestic oil and gas taxes for both upstream and downstream.
The government has justified the move on three counts- (1) to eliminate the current level of “excessive” investment in domestic oil and gas operations and return the industry to a more neutral tax regime; (2) to reduce carbon emissions and encourage the use of renewable fuels; and (3) to redirect tax “subsidies” from the oil and gas sector to “more productive uses.”
A US energy policy think-tank Energy Policy Research Foundation Inc (EPRINC) has pointed out that the move will not achieve the intended benefits and on the other hand will Lead to increased imports of Crude Oil and petroleum products apart from increasing greenhouse gas emissions.
In addition to a wide-ranging set of taxes which will provide no incentive to boost US production and treat independent, integrated domestic and international oil and gas companies differently.
Trading platform that even a 5 year old can trade. Join now
”Repeal of intangible drilling cost expensing will apply both to independents and the majors. But given that independent oil and gas companies drill the majority of the nation’s oil and gas wells, the tax largely falls on smaller companies,” EPRINC said in a report.
Taxes on upstream and downstream operations alone seek to raise $31.5 billion over 10 years by “reclaiming” a series of so-called “oil and gas company preferences" that have been granted in previous years. 1 These taxes would repeal the deduction on domestic manufacturing income for the petroleum industry, eliminate expensing of intangible drilling costs, eliminate the percentage depletion allowance for oil and Natural Gas production, charge new fees on nonproducing federal leases, and possibly make additional adjustments to royalties paid on federal leases.
Regarding the next 10-20 years, the likelihood of transitioning into an environment of much lower petroleum imports is low. As a result, it is difficult to identify a scenario under which lower domestic oil production will not Lead to higher imports. In its 2009 Annual Energy Outlook (AEO 2009), EIA projected U.S. liquid fuels consumption at 20.2 mbd in 2020 and 21.7 mbd in 2030. If the Energy Independence and Security Act of 2007 (EISA 2007) is met in 2022, it will contribute just 2.35 mbd of renewable transportation fuels. The remainder of projected U.S. liquid fuels consumption will presumably be supplied by domestic Crude Oil production (currently 5 mbd) and crude oil imports.
EPRINC opined that US Treasury has not taken into account potential loses in domestic production that may occur due to new taxes. Larger tax burden will fall on independents who produce bulk of the refined oil. The U.S. is a mature petroleum province and much of the domestic crude oil resource is relatively costly to produce. A large volume of domestic oil and gas production comes from independent companies. Smaller independents typically have limited access to borrowed funds – and rely on internally generated free cash flow to finance drilling and production investment. Independent producers account for approximately 68 percent of U.S. crude oil production and 82 percent of U.S. Natural Gas production.
EPRINC also concluded that the tax proposals will lead to greater emissions of GHGs as domestic natural gas production is curtailed in favor of greater Coal use in the generation of Electricity - at least in the very near term. Additionally, recent reforms in corporate tax treatment to place U.S. manufacturers from a variety of industries on a level playing field with foreign manufacturers would be repealed for the petroleum sector under the Administration's tax proposal. These new taxes would assist foreign refiners in gaining an even greater share of the domestic market for gasoline. The share of the U.S. Gasoline market now claimed by foreign refiners has tripled over the last nine years and likely will continue to grow as refiners face higher costs from the loss of the manufacturers' tax credit. The Administration's tax proposal does not call for removal of the manufacturers' tax credit from other sectors of the economy. (Courtesy: PRWeb)
