Budget Games: R&D, Tax Breaks in Play

American Association of Petroleum Geologists (AAPG)

“Winning the future,” is how President Barack Obama characterized the challenge facing the United States in his State of the Union address. And while his goal lacked the specificity of President John F. Kennedy’s charge to put a man on the moon, Obama clearly wanted to mobilize the country.

“We need to out-innovate, out-educate, and out-build the rest of the world,” he said.

One area where the president wants to do this is energy – specifically, clean energy. He has crisscrossed the country calling for innovation and extolling the wealth- and job-creating benefits of these technologies.

“We need to get behind this innovation,” the president told Congress. “And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies … I don’t know if you’ve noticed, but they’re doing just fine on their own. So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”

The president’s fiscal year (FY) 2012 budget proposal – titled “Winning the Future” – seeks to do just that. In it he asks Congress to repeal eight oil and gas tax preferences currently in the tax code, including intangible drilling cost expensing, the passive loss limitations exception and the domestic manufacturing deduction. The projected savings to the federal treasury are just under $3.5 billion for the FY.

For scale, that’s 0.32 percent of the projected $1.1 trillion deficit.

Research and development (R&D) programs for oil and natural gas are slated for elimination in the FY2012 budget. This includes the Natural Gas Technologies ($17.3 million in FY2010) and the Unconventional Fossil Energy Technologies ($19.4 million) programs at the Department of Energy (DOE).

In addition, the president asked Congress to terminate the Section 999 program authorized by the Energy Policy Act of 2005. This $50 million program funded annually is divided between the National Energy Technology Laboratory and R&D programs managed by the non-profit Research Partnership to Secure Energy for America, focused on ultra-deepwater and unconventional resources.

The justification for both the repeal of the tax preferences and cutting oil and natural gas R&D is a pledge to “end fossil fuel subsidies” agreed by leaders of the G-20 nations, the world’s largest developed and developing economies, at a 2009 summit in Pittsburgh.

In total the DOE fossil energy program faces a 45 percent cut in the FY2012 budget. R&D sees a 31 percent reduction and is refocused exclusively on clean coal technologies, ranging from combustion research to carbon capture and storage.

Carbon storage is the biggest applied geology R&D activity in the federal R&D portfolio. It would decline from $154 million appropriated in FY2010 to a request for $115 million in FY2012.

One notable increase in the president’s budget is the requested 135 percent bump for DOE’s geothermal technologies R&D program. If fully funded the program would be just under $102 million and further expand and diversify the geothermal program to include low-temperature and co-produced resources and enhanced (or engineered) geothermal systems.

As an aside, the potential for oil and natural gas developers to harness geothermal energy alongside petroleum resources is of great interest to DOE, and is the subject of an Energy Minerals Division short course titled “An Overview of Geothermal Energy,” which will be offered at the AAPG Annual Convention and Exhibition in Houston this month.

Over at the U.S. Geological Survey (USGS), funding for the energy program is flat at $27 million. Distressingly, the budget eliminates $1 million the federal government has been spending annually on preservation of geological and geophysical data.

The USGS minerals program faces an 18 percent cut to $44 million. According to the budget justification the cuts would come from eliminating lowest priority research and assessments and delay completion of the National Mineral Resource Assessment.

Hold on a minute.

For the past several years the country has been talking about critical minerals and the importance of rare earth elements for clean energy technologies – a key component of the president’s agenda – and we’re trimming the USGS minerals program budget, the only source of this information in the federal government?

Well, there’s an annual game played in Washington, where the White House proposes cuts or reductions to programs to gain political advantage – look at all the cuts we’ve offered! – knowing that Congress will restore them.

A similar dynamic is at work with the proposed oil and gas tax changes. Conventional wisdom in Washington is that Congress doesn’t have the appetite to remove the oil and gas tax preferences from the tax code.

But that could change quickly: Deficit reduction is one possible driver, and potential “wind fall” profits due to high oil prices is another.

“So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s,” the president said.

It is snappy political rhetoric, but it’s not the whole story. The problem with President Obama’s budget and his administration’s energy policy is that it is based on a false choice.

Petroleum transformed our world in the 20th century. To that extent it is yesterday’s energy. But make no mistake, it is also today’s energy, and tomorrow’s, and next week’s and next year’s – and will be for decades to come.

Oil and natural gas makes up more than 60 percent of the U.S. energy portfolio today. In 2035 it still will be more than 50 percent, according to projections by the Energy Information Administration. It is the foundation of the global economic system.

There is no choice between “yesterday’s energy” and “tomorrow’s energy.” There is only the reality of ensuring the affordable availability of the energy Americans use today, and how we diversify that portfolio of energy sources for tomorrow and coming decades.

The president is right to focus on innovation and competitiveness.

But even as we invest in new and alternative energy sources, we must harness innovation and competitiveness to maintain the robust foundation of fossil energy sources that keep the lights on and the wheels of commerce turning. We need policies that encourage resource development, support scientific and technological advancements and ensure greater energy security.

The future will be won by the decisions we make today.

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Washington Watch - David Curtiss

David Curtiss served as the Director of AAPG’s Geoscience and Energy Office in Washington, D.C. from 2008-11.

Policy Watch

Policy Watch is a monthly column of the EXPLORER written by the director of AAPG's  Geoscience and Energy Office in Washington, D.C. *The first article appeared in February 2006 under the name "Washington Watch" and the column name was changed to "Policy Watch" in January 2013 to broaden the subject matter to a more global view.

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