The markers have been set on a potential overhaul of the federal tax code, and the oil and gas industry hasn't found much to like.
A proposal floated Wednesday by House Ways and Means Chairman Dave Camp, R-Mich., would do away with several oil and gas industry tax provisions, though smaller natural gas companies would fare better than the oil majors because the plan preserves a key incentive used to quickly write off expenses.
The draft comes two months after then-Senate Finance Committee Chairman Max Baucus, D-Mont., now the ambassador to China, called for much of the same. The blueprint could spell trouble for the oil and gas sector, as the suggestions are similar to those of the Baucus plan and could steer the direction of future discussions.
"Tax reform reminds me of WWI trench warfare — you never know when a lethal attack is coming but you have to assume it always is," Stephen Brown, vice president of government affairs with refining firm Tesoro Corp., wrote in an email.
The Baucus and Camp plans, while not likely to get passed this year, could lay the groundwork for the next Congress. That's when newly minted Senate Finance Chairman Ron Wyden, D-Ore., who previously led the Energy and Natural Resources Committee, and Rep. Paul Ryan, R-Wis., who is expected to take over Ways and Means for the term-limited Camp, will assume control of the effort.
The Camp plan also takes whacks at the wind and solar industries. It doesn't extend the wind production tax credit and reduces its value 2.3 cents per kilowatt-hour to 1.5 cents for projects receiving it through 2024. A 30-percent investment tax credit for solar energy projects also would be repealed after 2016. Left untouched, its value would fall to 10 percent that year.
While that will upset Democrats, they also will find much to like about Camp's plan when it comes to the oil and gas sector, as it does away with many of the $4 billion in annual industry incentives that are currently baked into the federal tax code. Democrats, including President Obama, have said such provisions are unnecessary for an industry that claims billions in profits each year.
Much like the Baucus plan, the Camp draft does away with an incentive known as percentage depletion, a taxable deduction that the industry says is key for keeping wells nearing the end of production afloat. Also gone is a "last in, first out" accounting method that can reduce income taxes by assuming the oldest assets are sold first.
On top of that, the Camp plan would end the oil and gas industry's ability to claim a manufacturing incentive, which is known as a 199 deduction. The Baucus plan had not made a recommendation on the incentive, though his staff was fielding suggestions on it.
Jack Gerard, chief executive of the American Petroleum Institute, said those recommendations amounted to "serious flaws" that could stymie future oil and gas production — though the Camp plan does call for lowering the corporate tax rate to 25 percent, down from 35 percent, which API has been advocating.
Smaller, independent drillers — which drill a majority of the nation's wells, including those credited with driving the shale energy boom — were more pleased with the Camp plan than the oil giants Gerard's group represents.
That's because it left intangible drilling costs intact, an incentive that allows companies to write off costs for preparing a well. The provision would be stretched out over five years under the Baucus proposal, which industry groups say would choke cash flows to companies with thin operating margins.
"While we have several misgivings about the impact of the broader proposal on our members and our industry allies, this plan appears to recognize the importance of the current treatment of intangible drilling costs," Dan Whitten, a spokesman with America's Natural Gas Alliance, said in an email.
Still, Julia Bell, a spokeswoman with the Independent Petroleum Association of America, said her group had concerns with the overall Camp plan. She warned that the mere existence of some of its proposals could create momentum for doing away with the industry's tax provisions.
"IPAA is concerned even [those] proposals [not passed into law] ... will hurt America's independent producers," Bell said in an email. "That's because such proposals could act as a starting point from which to move forward on tax reform in the future."