The market and media have been so transfixed with the imbroglio over the reform of our nation's healthcare, that other policies being contemplated by the Obama Administration have been ignored. These include some tax proposals that would reduce the incentive to drill for oil and gas in the U.S. These proposals are explained in a 130-page document issued by the Treasury Department in May 2009 entitled "General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals," which explains the rationale for dozens of proposed changes in government tax policy.

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The section on Energy tax policy contains several tax changes affecting the oil industry that may have a detrimental impact on our already pathetic attempt to increase domestic supplies of oil. All involve the repeal of tax credits that are used to incent the industry to drill or keep older wells on line.

Leaking Oil
The first tax credit the industry would lose is for enhanced oil recovery (EOR) projects. EOR projects are those that "involve the application of one or more of nine listed tertiary recovery methods" that are used to increase the amount of recoverable crude oil.

One tertiary recovery method is the injection of Carbon Dioxide (CO2) into older wells, conducted by companies like Denbury Resources (NYSE:DNR) on its fields in Mississippi. EOR techniques are critical for many of the mature oil fields in the U.S.

Anadarko Petroleum (NYSE:APC) started using EOR techniques on a field in Wyoming several years ago, and now expects the field to produce for another 30 years and yield another 150 million barrels of oil.

The large international oil companies also use EOR on its older fields. Royal Dutch Shell (NYSE:RDS.A) injected steam into a field in California in the 1960s, and the field is still producing today. It's not clear why the Obama Administration is opposed to this tax credit as it was phased out last year due to the high price of oil.

The second tax credit to be repealed is for production from marginal wells. This is a $3 a barrel credit for wells that produce less than 2 barrels oil equivalent (BOE) per day and are at least 95% water. While this may not impact most public companies, there are nearly 400,000 of these wells in the U.S., also called stripper wells. They accounted for 28% of oil production in the lower 48 states in 2007.

Other tax changes would repeal expensing of intangible drilling costs, and the deduction for tertiary injectant expenses.

In Agreement
One proposal that I agree with is to levy tax on production from the Outer Continental Shelf (OCS) - an area that currently has no federal excise tax.

The recent Tiber discovery by BP Inc. (NYSE:BP) was on the OCS and this multi billion-barrel discovery certainly would have proceeded regardless of a small federal tax on production.

The Obama tax proposals on the energy industry might have the effect of increasing our dependence on imported oil - something that I would have thought all political parties, whether on the right or left, would be opposed to. (To learn more, read Oil And Gas Industry Primer.)

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Tickers in this Article: DNR, APC, NYSE:RDS-A, BP

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