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US House Votes To Rescind Big Oil Tax Breaks

by Mike Godfrey,, Washington

22 January 2007

House Democrats checked another box during their first 100 legislative hours in charge of the 110th Congress last Thursday, after a bill rescinding oil industry tax breaks passed by a comfortable majority.

The CLEAN Energy Act passed 264 to 163, as a group of Republicans joined Democrats to vote for the measures, which will roll back about $7.6 billion in tax breaks and impose an additional $6.3 billion in royalties on companies present in territorial waters in the Gulf of Mexico and off Alaska.

The bill would also create a Strategic Renewable Energy Reserve to invest in clean, renewable energy resources and alternative fuels, promote new energy technologies, develop greater efficiency and improve energy conservation.

Under the repeal of tax provisions, the bill would eliminate a loophole written into a previous international tax bill which allowed oil companies to qualify for a tax provision intended to encourage domestic manufacturing. According to House Democrats, this provided ConocoPhillips $106 million in 2005 in a year that it made a profit of $13.5 billion.

Meanwhile, tax breaks for geological studies for oil exploration for the five largest companies would be rolled back. Under the measure, those companies will write off their exploration costs off over seven years, instead of over five years under the 2005 energy bill.

Another measure strikes energy bill provisions suspending royalty fees from oil and gas companies operating in certain deep waters of Gulf of Mexico by repealing relief for deep gas wells leased in shallow waters of the western and central areas of the Gulf. Additionally, it includes a provision from the President’s FY 2007 budget restoring drilling permit application cost recovery fees; the 2005 Energy bill prohibited these fees. The measure also strikes royalty relief for specific offshore drilling in Alaska, and special treatment for leases in the Alaska National Petroleum Reserve.

The bill also corrects errors in Gulf of Mexico drilling leases signed by the Interior Department in 1998 and 1999 that failed to include 'price thresholds', which trigger a requirement for companies to pay royalties to the federal government when the price of oil and gas exceeds a certain level. Due to this oversight, companies awarded these leases became exempt from paying any royalties. Congressional auditors have said the government has already lost up to $2 billion in royalties, and could lose as much as $10 billion over the life of the leases because of the mistake.

“Today’s vote represents the first step toward a future of energy independence," said House Speaker Nancy Pelosi.

"By rolling back $14 billion in subsidies for Big Oil at time when they have recorded record profits, and investing that money in clean renewable energy, energy efficiency and alternative fuels, we will reduce our dependence on foreign oil," she added.

However, the oil industry argues that the new measures will accomplish precisely the opposite.

"Imposing taxes on the US oil and natural gas industry is contrary to the goal of providing stable and cost-effective supplies of energy for American consumers and discourages the tremendous capital investments needed to meet the nation’s growing energy needs," the American Petroleum Institute said in a statement.

“Repeal of these tax provisions designed to encourage investment in the United States will discourage new domestic oil production and refinery investments, threaten American jobs, and make it less economic to produce domestic energy resources – thereby increasing our dependence on imported crude oil and gasoline."

The API warned that the tax hikes would also have a negative knock-on effect for investors in US oil companies.

“Higher taxes are a cost of doing business and generally result in either higher prices for consumers or reduced earnings for investors. Millions of hard-working Americans have a stake in the success of US oil and natural gas companies through their stock ownership. Americans with retirement or pension accounts, including many state and local pension fund participants, hold 41% of the shares of US oil and gas companies," the API said.

The institute was also harshly critical of the provisions correcting the botched leases.

"Unilaterally forcing changes to existing government contracts through legislation such as HR 6 sets a very bad precedent for the nation and infringes upon the bedrock principle of the sanctity of contracts," the API concluded.

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