Obama budget could hurt Niobrara oil, gas production

President Barack Obama’s proposal to end tax breaks for oil and natural-gas companies could hurt the industry’s operations in Northern Colorado.

Submitted to Congress earlier this month, Obama’s fiscal 2013 budget seeks to repeal more than $4 billion in annual tax subsidies to oil, gas and other fossil fuel producers. At the same time, Obama’s budget provides important incentives for renewable energy, including for the development of advanced vehicles, biofuels and electricity generation.

While it’s unlikely the current Congress will approve the rollback of these credits, little of the president’s proposal was sitting well with the oil and natural-gas companies.

Increasing the industry’s tax burden as it faces record-low natural gas prices imperils jobs at a time of high unemployment, Encana spokesman Doug Hock said. Encana drills natural gas wells near Erie in the D.J. Basin.

“We need all the sources of energy,” Hock said. “This is in a sense using the tax code to pit one source against another. It inhibits overall development of domestic energy.”

The natural-gas industry provides nearly 138,000 direct and indirect jobs in Colorado, according to America’s Natural Gas Alliance, an industry advocacy organization. The state ranks No. 5 in natural-gas employment with almost 31,000 workers within the industry.

Oil and gas producers benefit greatly from the intangible drilling cost tax credit enacted in 1913. Aimed at attracting investment to the high-risk industry, the credit allows independent producers like Encana tax deductions on some costs related to drilling.

The credit has become more important considering the high costs of services related to hydraulic fracturing, said Matt Marshall, manager of crude oil analysis for Evergreen-based analyst BENTEK Energy.

As an example, if a company drills a $4 million horizontal well in the Niobrara formation in the D.J. Basin, it could immediately deduct more than $2 million of the intangible costs that include expenses related to services such as trucking.

“That means you can knock down your taxable income,” he said.
If the tax credit were repealed, oil and gas companies would owe more income tax and stop drilling marginally profitable wells, he said.

“You would risk slowing down development of unconventional oil plays, such as the Niobrara shale,” he added.

A loss of another deduction known as the domestic manufacturing tax credit also would hurt the industry. Enacted in 2004 by Congress, the credit is supposed to keep manufacturers inside the United States.

It’s unclear exactly how much companies like Encana have to lose, but Hock estimated losses of “thousands of dollars” per well in addition to job cuts.

The loss of the tax credits particularly would affect independent oil and gas producers, or those that participate only in exploration and production of oil. Unlike major oil and gas producers like ConocoPhillips and Exxon, which also are involved in refining and marketing, independents like Encana lack “downstream” assets.

A lot is at stake for them. Independent producers develop 95 percent of domestic oil and gas wells and produce 68 percent of domestic oil and 82 percent of domestic natural gas, according to the Independent Petroleum Association of America.

Despite the proposed elimination of fossil fuels subsidies, the White House said another $12 million would fund research to reduce environmental, health and safety risks of hydraulic fracturing.

In addition, Obama’s budget increases the Pipeline and Hazardous Materials Safety Administration Budget by $76 million to $248 million “to ensure the highest safety standards for the U.S. pipeline system.” The spending will double the number of federal pipeline safety inspectors, modernize pipeline data collection and analysis, improve investigations of pipeline accidents and enhance a public education program.

Obama’s budget also offers $770 million for the Office of Nuclear Energy.

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