- Energy Tax Facts
- 10 May 13
Oil & Gas Journal: US Government fiscal year 2014 budget: Impact on oil and gas industry
By: Deborah Byers and Greg Matlock, Ernst & Young LLP
On April 10, 2013, the Obama administration (Administration) released the Fiscal Year 2014 Budget of the US Government (Budget). The Budget acclaims various initiatives toward its enunciated goals of building a clean energy economy and improving energy security. To that end, the Budget echoes the President’s previously stated commitment to an “all-of-the-above” strategy to energy policy through, in part, the investment in clean energy research and development; the promotion of energy efficiency in cars, homes and businesses; and the encouragement of responsible domestic energy production. As in prior years, however, the Budget provides for the proposed repeal of certain US federal income tax incentives currently available to certain oil and gas companies. According to the Budget, the elimination of certain fossil fuel incentives would reduce the deficit by $44 billion over 10 years.
The Budget also sets a goal of continuing to invest in energy security through, in part, cutting US oil net imports in half by 2020 (relative to 2008 levels), as well as making energy project permitting more robust. Through increased funding, a goal has been set to improve the permitting process for oil and gas, infrastructure uses of Federal lands and renewable energy. Additionally, although no new land areas are proposed for oil and gas leasing, various reforms are aimed at promoting responsible oil and gas development on Federal lands (as well as the establishment of an Energy Security Trust).
In a break from prior Administration budgets, the Budget does not propose to extend a number of expired or expiring energy tax extenders, certain of which relate to renewable or alternative energy provisions. Additionally, the Budget proposes to exempt certain foreign pension funds from the application of the Foreign Investment in Real Property Tax Act, in an effort to enhance “the attractiveness of investment in US infrastructure and real estate to a broader universe of private investors.”
Impact on the oil and gas industry
A portion of the Budget’s overall expenditure would be offset by repealing (or otherwise eliminating) or modifying a number of US federal income tax incentives that currently directly benefit certain oil and gas companies. Certain of the provisions proposed are as follows: repeal expensing of intangible drilling and development costs, repeal percentage depletion for oil and natural gas wells, repeal the domestic manufacturing deduction for oil and natural gas companies, increase the geological and geophysical amortization period for independent producers to seven years, repeal the exception to passive loss limitations for working interests in oil and natural gas properties, repeal the enhanced oil recovery credit, repeal the credit for oil and gas produced from marginal wells and repeal the deduction available for tertiary injectants.
Additionally, the Budget proposes increasing the Oil Spill Liability Trust Fund tax by one cent and proposes to update the law to include other sources of crudes, and proposes to repeal the ultra-deepwater oil and gas research and development program. The Budget also includes a number of provisions directly aimed at the coal industry.
Indirect impact on the oil and gas industry
The Budget also includes the following provisions that, if enacted or eliminated, may negatively impact the financial condition and results of operations of certain oil and gas companies: reinstatement of the Superfund taxes, repeal of the last-in/first-out method of accounting for inventories, modification of the rules for dual capacity taxpayers and certain other international tax reform measures. While broad in application, such provisions would have a material impact on oil and gas companies, if enacted.
Reform of Federal oil and gas management
Notably, the Budget also proposes to reform the management related to oil and gas development on Federal lands and waters. Stating that recent studies have found that “taxpayers could earn a better return through policy changes and more rigorous oversight[,]” the Budget includes various reforms to onshore and offshore Federal oil and gas programs. The reforms fall into three broad categories: advancing royalty reforms, encouraging diligent development of oil and gas leases and improving revenue collection processes. Collectively, the Budget estimates that the proposed reforms on federal oil and gas management will generate approximately $2.5 billion in net revenue over 10 years.
If enacted, a number of the provisions contained in the Budget could have a direct and indirect impact on certain oil and gas companies. The impacts would be acutely felt in connection with capital investment, as a number of the proposals could have a real and meaningful impact. Taxpayers should pay close attention to the possible effects of the changes and should analyze the potential incremental costs in connection with future capital expenditure planning. Continued monitoring is necessary to determine whether the provisions in the Budget may be included in future legislation.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.