Obama Budget Hits Oil, Gas Cos with New Fees,Taxes

WASHINGTON (Dow Jones Newswires), Feb. 27, 2009

The Obama administration Thursday proposed raising at least $31.5 billion over 10 years from oil and gas companies, reflecting a repeal of tax breaks for domestic production and new charges on oil and gas production in the Gulf of Mexico.

The plans, outlined as part of a fiscal 2010 budget proposal, revive long-standing Democratic efforts to turn to the oil and gas industry as a source of funding for other priorities. Among other things, the Obama budget plan calls for about $13 billion over 10 years in new charges on oil and gas companies from the repeal of a tax deduction for domestic production.

"It's a concerning area, of course, because as you put more royalty and tax burdens on the industry, particularly a cyclical industry, you just have to be cognizant of the potential impact it has on investments," said Marvin Odum, the president of Royal Dutch Shell's (RDSA) U.S. operations, after meetings with various lawmakers about energy policy. "That's not something you can put real definition to, but I think it's a concern."

Oil companies have been fighting to maintain the tax treatment, which they say keeps jobs in the U.S. by encouraging domestic production. Congress scaled back the tax deduction last year to help pay for an extension of tax breaks for the solar and wind industries, but stopped short of eliminating it entirely.

The Obama administration also proposed a new excise tax on oil and gas production in the Gulf of Mexico, saying it would raise about $5 billion over the next 10 years. The White House said that the new tax, along with plans to charge user fees to oil companies for processing oil and gas drilling permits on federal lands, would "ensure that federal taxpayers receive their fair share" and "close loopholes that have given oil companies excessive royalty relief." The tax "will begin in 2011, after the economy has had time to recover," the White House said.

Democrats have been battling oil firms to get royalty payments from Gulf of Mexico leases signed in the late 1990s, years when the government apparently accidentally left price triggers out of contracts. Government auditors say that the omission could ultimately short change taxpayer coffers by billions of dollars.

Six companies -- including BP PLC, Royal Dutch Shell, ConocoPhillips and Marathon Oil Corp. - - originally agreed to pay royalties on the leases for production from October 2006, but not on past output. But that agreement wasn't finalized, and negotiations stalled after lawmakers pressed for payment on past output and after a court ruling in favor of the oil industry. The firms only represented a fraction of the total lease owners.

Around 40 companies representing 80% of the production haven't agreed to re-negotiate the leases, including Exxon Mobil Corp., Total SA, Chevron Corp. and Anadarko Petroleum Corp., according to Interior Department data.

Interior Secretary Ken Salazar and key Congressional Democrats have promised to reform the structure of fees and royalties on public lands, and a senior Office of Management and Budget official said the new oil industry taxes would help to "re-balance the tax system."

"This budget begins that process, that conversation on finding ways to rebalance the tax system over so that we can get at the $1.3 trillion deficit that we inherited," the official said.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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