Oil, Gas Take Hits on Proposed Budget

On Feb. 1 President Obama launched the federal appropriations season with the release of the fiscal year 2011 budget, outlining his priorities for the coming federal fiscal year (Oct. 1, 2010 to Sept. 30, 2011).

The budget hit the headlines with eye-popping deficit projections at 11 percent of GDP in FY2011. And more dramatically, wrote the New York Times, “By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years,” and turn higher at the end of the decade.

To prevent a larger deficit this year and in its projections for the decade, the president proposed numerous measures to raise additional revenue and trim government spending. Oil and natural gas activities were targets on both sides of the federal income statement.

On the revenue side, the president has proposed to repeal a series of oil and natural gas tax “preferences.” This is essentially the same proposal the president made last year, but which Congress did not adopt. The Office of Management and Budget estimated that eliminating these tax measures would net $36.5 billion over 10 years.

The measures include repealing for oil and natural gas companies the expensing of intangible drilling costs, percentage depletion for oil and natural gas wells, the exception of passive loss limits for working interests on oil and natural gas wells, a domestic manufacturing tax deduction available to all other industries and extending the amortization of geological and geophysical expenses for independents to seven years.

It also repeals several other provisions: the enhanced oil recovery and marginal well credits, and a deduction for tertiary injectants.

If implemented, these measures would severely disrupt the petroleum industry, both majors and independent oil and natural gas producers. AAPG’s view on taxes is articulated in its statement on tax reform:

“ … AAPG supports [tax] policies which serve to encourage petroleum exploration and production …”

The president’s proposals certainly do not meet this standard, and run counter to a sound national energy policy.

Turning to the expense side of the federal income statement, the president’s budget proposed $200 billion in spending cuts to discretionary programs. These cuts were spread across federal agencies.

At the Department of Energy (DOE) the proposed cuts included the oil and natural gas research and development (R&D) programs. In doing so, President Obama followed in the footsteps of President Bush, who also repeatedly “zeroed out” these programs.

The petroleum-oil technologies R&D program was unfunded in FY2010. Instead of restoring funding for this program, as it had in previous years, Congress reprogrammed $20 million for a new unconventional fossil energy technologies program.

The administration is not seeking FY2011 funding for either of these programs.

The natural gas technologies R&D program also was eliminated for FY2011. Funding in FY2010 was $17.8 million. Most of this was dedicated to methane hydrates research, which will shift to DOE’s Office of Science.

Carbon sequestration research at DOE focuses on carbon capture technologies and geologic storage. The FY2011 funding request is down about 7 percent to $143 million. The regional sequestration partnerships continue their Phase III projects, with nine injection sites looking to inject at least one million tons of carbon dioxide over three years.

The DOE geothermal program continues to see increased funding requests. The FY2011 budget request is $55 million, an increase of 25 percent. The focus of this program is research, development and deployment of technologies to realize the potential of enhanced or engineered geothermal systems to contribute significantly to base load power generation in the United States. The program will continue its efforts in deploying a public geothermal database, international cooperation, low-temperature geothermal systems research – including produced water from oil and natural gas wells – and the challenges of induced seismicity and water usage.

  • Shifting to the U.S. Geological Survey (USGS), its budget proposal included a 9 percent increase for the Energy Resources program, to $30.8 million. This increase is to provide the scientific support the Department of Interior needs to foster wind development on public lands.
  • The Minerals Resources program faces a 2.5 percent decrease in funding to $52.5 million due to some reprogramming of funds. But the administration deserves credit for recognizing the value of the minerals program. It had been under continuous threat during the previous administration.
  • The National Cooperative Geologic Mapping program budget request is up a fraction at $28.3 million, and the USGS data preservation program is expected to also remain flat at $1 million.

There were no surprises in the president’s budget, at least for the programs we track. DOE oil and natural gas programs are perennially under pressure, while carbon sequestration and geothermal present real opportunities for applied geoscience researchers. At USGS chronic underfunding hampers the data preservation program.

The proposed tax changes have caused great consternation among AAPG members, because of their destructive potential if implemented. It is up to us to explain to our elected officials, friends and neighbors why these tax proposals are bad public policy and why the federal government should be involved in oil and natural gas R&D.

Now is not the time for panic. Now is the time for AAPG members to get personally engaged.

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Washington Watch

Washington Watch - David Curtiss

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

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Washington Watch - Creties Jenkins

Creties Jenkins is a past president of the EMD.

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Washington Watch - Dan Smith

Dan Smith is chair of the Governance Board.

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Washington Watch - Peter MacKenzie

 Peter MacKenzie is vice chair of the Governance Board. 

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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