Pelosi Wants Early Action on Oil Taxes, Royalties

House Democrats over the next several weeks hope to quickly repeal several oil industry tax breaks and channel the revenues into alternative energy development, immediately putting "Big Oil" on the defensive in a Congress also likely to feature increased oversight of the sector.

Incoming House Speaker Nancy Pelosi (D-Calif.) has vowed votes on the tax plan within the first 100 legislative hours of the new Congress that convenes Thursday. While legislation has not been formally unveiled, Democratic leaders generally plan to remove targeted tax breaks enacted in recent years but avoid more sweeping proposals such as a "windfall profits" tax.

The forthcoming plan is among several issues -- including ethics and the minimum wage -- targeted by House Democrats to showcase the direction of their new majority. Several observers expect the energy tax plan to pass in the House.

"This is a really critical time for them to show they can get something done, and most of these Democrats are not going to have any trouble rolling back subsidies for an industry that has had record profits," said Norm Ornstein, a congressional expert with the American Enterprise Institute.

One tax break Democrats may target is an Energy Policy Act of 2005 provision that allows companies to amortize oil and gas exploration costs over two years. Congress already made the treatment less attractive for large integrated oil companies -- or Big Oil -- in 2006, spreading the period to five years in tax reconciliation legislation. Beyond that, it was not clear at press time what specific changes to tax treatment of geological and geophysical exploration costs might be on the table in the 100-hour plan.

The Democratic leadership may also target oil companies' eligibility for the so-called manufacturers deduction. The tax break, enacted in 2004, allows deductions on income from products made in the United States, and includes the oil and gas sector.

Pelosi has also said she wants the legislation to address problems in the federal royalty relief program. Currently several dozen companies hold deep water Gulf of Mexico leases issued in 1998 and 1999 that allow royalty-free production regardless of energy prices. The lease contracts were mistakenly issued without provisions that end the royalty waivers when oil prices surpass roughly $35 per barrel.

The Interior Department has already announced deals with five companies -- including Shell and BP -- to ensure price thresholds apply to production from these leases that occur after October 2006. But Democrats say Interior has made too little progress and want to address the issue with legislation rather than voluntary negotiations.

The precise mechanism is uncertain. Pelosi has also said she may seek to address the problem with a new fee on production from leases that are not subject to price thresholds. A similar idea was contained in GOP-backed offshore drilling legislation that was approved in the House last year, but the provision did not make into the final offshore drilling plan Congress passed just before adjourning.

Another plan that surfaced in the last Congress would deny new offshore leases to companies holding the 1998-1999 leases unless they agree to inclusion of the price triggers. This plan, offered by Reps. Ed Markey (D-Mass.) and Maurice Hinchey (D-N.Y.), already cleared the House last year on an Interior spending bill, but the spending bill never became law.

Drew Hammill, a spokesman for Pelosi, said specifics on the tax and royalty plan were not yet available, but he confirmed it would address the 1998-1999 leases and "a few other targeted oil and gas tax subsidies," some of which were in the 2005 energy law. He said there was not yet a specific revenue figure from the plan but added it would amount to billions of dollars.

The exact timing of the energy plan was unclear at press time. The new Democratic House leadership plans to begin its opening 100-hour legislative push this week with an ethics reform package and complete its 100-hour agenda before the president's State of the Union address.

Funding alternative energy

Hammill said the House plan would create an "energy reserve" that steers the revenues into renewable energy and energy efficiency projects, but he did not provide details about how it would function.

Kate Johnson of U.S. PIRG said the group expects to support the plan. "It is a big priority of ours to see it [the revenue] go toward clean energy programs," she said.

Ana Unruh Cohen, the environmental policy director at the Center for American Progress, said she expects Democrats to continue linking oil industry profits and alternative energy. "That's what the American people want. They want us to get to the point where we use less foreign oil and more renewable energy," she said.

Coupling industry profits and renewables already has currency among key Democrats. Likely presidential contender Sen. Hillary Rodham Clinton (D-N.Y.), in a high-profile speech last year, called for a new tax on oil company profits to fund development of advanced biofuels and other renewable fuels and power sources.

And John Edwards, former Democratic senator of North Carolina, in announcing his plan to run again for the White House, last month called for a windfall profits tax to fund technologies that help address global warming and curb reliance on oil imports.

Industry opposition

Oil industry groups say the forthcoming plan could potentially stymie efforts to expand domestic supplies. "It is going to reduce the amount of capital that goes into U.S. production," said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America, which represents smaller oil and gas drillers.

Mark Kibbe, a senior tax policy analyst with the American Petroleum Institute, said last week that the House plan could make some projects uneconomical and prompt companies to look overseas. "If Congress really wants to promote domestic production, then taking these items away is a bad idea," he said.

Industry sources concede a House tax and royalty package is likely to pass. But the issue is expected to proceed more slowly in the Senate, where legislation often faces a rockier procedural path. "The Senate is a whole different beast because of the narrowness of the margin and the institution of the Senate itself," Cohen said.

And incoming Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) said last month that he is wary of changing tax treatment of oil and gas exploration costs. "If the tax incentives are changed in ways that cause them to go overseas to drill, I don't know that that's to our advantage," Bingaman told the Associates Press. Bingaman is also a member of the Senate Finance Committee.

The likelihood that the Senate will act more cautiously will provide industry a chance to lobby there against changes they call detrimental. "What happens in the Senate, that is another ball game," Kibbe said in an interview last week. "The Senate will take an independent look at what the House is proposing."

Focus on royalties

Regardless of how the House measure fares in the other chamber, the newly Democratic Congress is also expected to undertake more aggressive oversight of the oil industry and the Bush administration's relations with it.

The Interior Department's royalty collection program in particular has been under fire over the past year. Beyond the uncorrected flaws with the royalty relief program, the department has been hit with a series of allegations that its overall royalty assessment and collection program is in disarray.

For instance, a recent report by Interior's inspector general found that Interior's Minerals Management Service is failing to verify company-reported data, raising the risk of underpayments (Greenwire, Dec. 7).

An Energy Committee hearing on royalty issues is expected to be among the first called by Bingaman.

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