U.S. House Ready to Vote on Oil Tax, Royalty Plan

The stage is set for the first major energy policy vote of the 110th Congress this week with the House expected to debate and likely ratify a Democratic bill that would repeal oil industry tax breaks and ensure royalty payments on deep water Gulf of Mexico production.

The legislation, introduced Friday, would plow the revenues into a new "Strategic Energy Efficiency and Renewables Reserve." A House Democratic leadership aide said the bill will save taxpayers an estimated $13 billion.

The bill does not spell out in detail how the new funds for alternative energy will be spent. Instead, it says the reserve will offset the costs of subsequent legislation to speed up development and use of renewable energy, alternative fuels, energy efficient products and conservation.

The bill is the last item set for consideration during the Democratic leadership's opening 100-hour legislative showcase. The House Rules Committee has scheduled a meeting this afternoon to set the terms for debating the bill on the floor. This morning, several environmental groups are holding a press conference and "day of action" to support the measure.

Environmentalists say the bill is a sound way to speed development of alternative energy. U.S. PIRG called it a "180 degree shift from energy policies that line the pockets of polluting industries" and a "clear signal that Congress is ready to start solving our energy problems."

The bill, which drew nearly 200 cosponsors, is expected to easily clear the House Thursday but proceed more slowly in the Senate.

Jim Presswood, an energy expert for the Natural Resources Defense Council, said a strong House vote would help the bill across the Capitol. "I would imagine there will be a strong showing for this bill in the House and that will help prospects over in the Senate," he said.

But the bill has drawn fast attacks from oil industry groups, who warn it could discourage domestic production and thereby undercut efforts to enhance energy security. The Independent Petroleum Association of America took aim at provisions including repeal of the industry's eligibility for deductions on income from domestic manufacturing.

"This measure is purely political with the goal of punishing an industry that has low favorability on Capitol Hill," said Barry Russell, the group's president. "But the result actually punishes the consumer and our national interest of secure, domestic energy supplies."

New revenues

The Joint Committee on Taxation estimates that ending the oil and gas sector's eligibility for the manufacturing income deduction would bring in roughly $6.5 billion over 10 years. Tax breaks for domestic manufacturing were included in 2004 tax legislation.

Much less is expected from another provision that rolls back tax breaks for certain oil exploration costs. Specifically, it would move the timeline for writing off "geological and geophysical" expenses for the five largest oil companies from five to seven years, leaving a two-year schedule intact for other companies. This will raise $103 million over 10 years, according to the committee.

Other revenues are expected from provisions that would alter and repeal royalty incentives.

The bill aims to ensure royalty payments from Gulf of Mexico producers who hold late 1990s leases that currently allow royalty-free production regardless of energy prices. Leases in 1998 and 1999 were mistakenly issued without clauses that suspend "royalty relief" when prices are high, an error that could cost the government an estimated $10 billion in lost royalties if not corrected.

The bill would bar companies holding these leases from buying new gulf leases unless they renegotiate the contracts to include the thresholds, or agree to a new "conservation of resources" fee of $9 per barrel of oil and $1.25 per million British thermal units of natural gas.

Industry groups have attacked these royalty provisions, which are similar to proposals that were approved in the House last year but never became law. Oil and gas industry representatives have argued repeatedly they violate the idea of "contract sanctity" and compare them to moves by governments in Bolivia and elsewhere to unilaterally change contracts.

"Many companies will choose to work with the federal government on a reasonable solution. That is a business and legal decision for each individual company. However, sanctity of contracts is a cornerstone of America," Russell said.

A handful of companies -- including majors Shell and BP -- have already reached agreements with the Interior Department to include price thresholds in their leases from those two years. But critics say the department has not made enough progress and have called its reliance on only voluntary agreements to ensure the payments needlessly weak.

Other language would repeal royalty incentives included in the Energy Policy Act of 2005, including new deep water royalty incentives and incentives for tapping "deep gas" in shallow gulf waters. It also strips an EPAct provision that had prevented the Bush administration from increasing fees for processing onshore drilling permit applications.

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