“The only certainty in life is death and taxes.”
— Mark Twain.
The death of a company may not be as certain as a human’s, but taxes are an everyday occurrence for corporations and humans alike. In the most recent budget proposal from the Obama administration, companies in the energy space could see a big increase in that certainty.
Let’s take a quick look at the gory details and see what the industry gets out of it.
Just give it to me, doc
To determine the exact effects of the new budget proposal, you have to do some pretty deep digging. The reason is that the tax increases are spread out over several different departments. For instance, there is a proposal to increase the taxes by $64 million a year starting in 2014 to pad the Oil Spill Liability Trust Fund, but it’s only noted as a line item buried deep in the summary tables.
When all of it is tallied up, the FY2014 budget calls for an additional $90 billion over the next 10 years from the energy sector, or more specifically, from fossil fuels. Some of these include direct taxes on the industry, such as repealing the ability to expense intangible drilling costs and the Enhanced Oil Recovery Credit. Others are more indirect methods, like repealing the Last In-First Out accounting method.
Certainly, some of these moves will hurt certain parts of the oil and gas industry harder than others. For example, Denbury Resources Inc. (NYSE:DNR) is an Enhanced Oil Recovery specialist, so the EOR tax credit would hurt it much more so than others. Another example is a shortening of primary lease terms for federally auctioned land. This would shorten the time an exploration and production company has to start producing from federal lands before the lease expires. A move like this would certainly hurt companies with lots of undeveloped land on their books (Chesapeake Energy Corporation (NYSE:CHK), anyone?).
Overall, this could be a pretty hard pill to swallow. Right now, the oil and gas industry in the US pays about $86 million in taxes to the federal government every day. If all of these proposals were to pass, it would roughly add $24 million per day in taxation to the entire industry. According to a Wood Makenzie study back in 2011, these types of tax hikes would have a pretty hefty effect on the entire industry. Its calculations predict that by 2020, an increase in taxes would cost the industry about 700,000 less barrels of oil equivalent per day.