	Background

In a speech on April 22, 2009 (Earth Day), President Obama linked the importance of winning the technological race to develop clean energy sources with the economic problems associated with U.S. dependence on an oil-based society. Many of these measures also have the effect of equalizing the treatment of the independent oil producers to that of the major oil companies. The repeal of the expensing of intangible drilling expenses, and the rescinding of the manufacturing tax deduction for the oil industry, would increase the industry's tax payments by $25 billion through 2020. Repeal of the deduction, or less favorable tax treatment of the expenses, would be likely to reduce output if the profit margin on oil were low. Repeal Passive Loss Exception for Working Interests in Oil Properties

Repeal of the passive loss exception for working interests in oil and natural gas properties is a relatively small item in terms of deficit reduction contribution—$98 million from 2011 to 2015. Increase Geological and Geophysical Amortization Period

Geological and geophysical expenses are necessarily incurred during the process of oil and natural gas resource development. The Independent Petroleum Association of America estimates that independent producers would likely reduce exploration and development activities on a one-to-one dollar basis as a result of altering this tax provision. The Administration projects that repeal of the percentage depletion allowance would yield approximately $4.3 billion in deficit reduction over the period 2011 to 2015, and over $10 billion through 2020. Department of the Interior Budget

The Department of Interior (DOI) budget proposal contains several changes in fees and other revenue-generating items that would affect the oil and natural gas industries. In addition, the budget proposal includes a $4-per-acre fee on nonproducing leases. These same proposals, from an alternate point of view, can also be considered to be the elimination of tax preferences that have favored the oil and natural gas industries over other energy sources and made oil and gas products artificially inexpensive, with consumer costs held below the true cost of consumption, when the costs associated with climate change and energy dependence, among other effects, are included.
President Obama, in a speech on April 22, 2009 (Earth Day), addressed the linkage between the problems he associated with U.S. reliance on oil, especially imported oil, and the importance of a future based more on alternative energy sources. To move in the direction of accomplishing these goals, the Administration, in the FY2011 budget proposal, proposes that certain tax expenditures designed to increase domestic production of oil and natural gas be revised, thus reducing what the Administration sees as favorable treatment of the oil and natural gas industries.
The FY2011 budget proposal outlined a set of proposals, framed in terms of deficit reduction, or termination of tax preferences, that would potentially increase the taxes of the oil and natural gas industries, especially the independent producers. These proposals included repeal of the enhanced oil recovery and marginal well tax credits, repeal of the expensing of intangible drilling costs, repeal of the deduction for tertiary injectants, repeal of passive loss exceptions for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increase of the amortization periods for certain expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers. In addition, a variety of inspection fee increases and a per-acre fee on unused leases were proposed to generate revenue for the Department of the Interior (DOI).
The Administration estimates that the tax changes would provide $18.2 billion in deficit reduction, or new revenues, over the period 2011 to 2015. The changes, if enacted, also would reduce the tax advantage enjoyed by independent oil and natural gas producers over the major integrated oil companies. On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers, likely achieving the intended effect of reducing consumption of those fuels.
This report will be updated as events warrant.