Oil and Natural Gas Industry Tax Issues in the FY2012 Budget Proposal

Robert Pirog
Specialist in Energy Economics

The Obama Administration, in the FY2012 budget proposal, seeks to eliminate certain tax expenditures that benefit the oil and natural gas industries. Supporters of these tax provisions see them as comparable to those affecting other industries and supporting the production of domestic oil and natural gas resources. Opponents of the provisions see these tax provisions as subsidies for a profitable industry the government can ill afford, and impediments to the development of clean energy alternatives.

The FY2012 budget proposal outlines a set of proposals, framed in terms of deficit reduction, or termination of tax preferences, that would potentially increase the taxes on the oil and natural gas industries, especially those of the independent producers. These proposals include repeal of the enhanced oil recovery and marginal well tax credits, repeal of the current expensing of intangible drilling costs, repeal of the deduction for tertiary injectants, repeal of the passive loss exception for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increasing the amortization period for certain exploration expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers. In addition, a variety of increased inspection fees and other charges that generate more revenue for the Department of the Interior are included in the budget proposal.

The Administration estimates that the tax changes outlined in the budget proposal would provide $22.8 billion in revenues over the period 2012 to 2016, and over $43.6 billion from 2012 to 2021. These changes, if enacted by Congress, also would reduce the tax advantage enjoyed by independent oil and natural gas companies over the major oil companies. On what would likely be a small scale, the proposals also would make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.


Date of Report: March 3, 2011
Number of Pages: 12
Order Number: R41669
Price: $29.95

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Keystone XL Pipeline Project: Key Issues

Paul W. Parfomak
Specialist in Energy and Infrastructure Policy

Neelesh Nerurkar
Specialist in Energy Policy

Linda Luther
Analyst in Environmental Policy

Vanessa K. Burrows
Legislative Attorney

Canadian pipeline company TransCanada has filed an application with the U.S. Department of State to build the Keystone XL pipeline, which would transport crude oil from the oil sands region of Alberta, Canada, to refineries in the U.S. Gulf Coast and Midwest region. Keystone XL would have the capacity to transport 700,000 barrels a day (bpd) and can deliver crude to the oil market hub at Cushing, OK, and further to points in Texas. The project is expected to cost approximately $7.0 billion, of which an estimated $5.4 billion would be spent on the U.S. portion of the pipeline. TransCanada is also planning to build a short additional pipeline so that oil from the Bakken formation in Montana and North Dakota can be carried on the Keystone XL pipeline.

Facilities such as the Keystone XL pipeline which are intended to import oil from a foreign country need a Presidential Permit from the State Department. Such a permit requires that the State Department assess potential environmental consequences, through an Environmental Impact Statement (EIS), weighing them against potential benefits of the project. The U.S. Environmental Protection Agency (EPA) found the State Department’s draft EIS on the Keystone XL project to be inadequate. The State Department is still reviewing comments by the EPA, other agencies, and the public. The project may not proceed until the State Department publishes a final EIS and issues a Record of Decision on whether or not to grant a Presidential Permit. Regardless of the State Department’s decision, legal challenges appear likely.

Opponents to the pipeline, primarily environmental groups and affected communities along the route, object to the project principally on the grounds that it supports “dirty” Canadian oil sands development, that it could pose an environmental risk to groundwater, and that it promotes continued U.S. dependency on fossil fuels. Arguments criticizing the greenhouse gas emissions of oil sands production are based to some degree on the belief that limiting pipeline capacity to U.S. markets may limit output from Canada’s oil sands.

Proponents of the Keystone XL pipeline, including Canadian agencies and petroleum industry stakeholders, point to energy security and economic benefits, such as job creation. Some contend that the Keystone XL project secures growing Canadian oil supplies for the U.S. market, which could offset imports from other, less dependable foreign sources. They also claim that if oil sands output cannot flow to the United States, infrastructure to export it to Asia will develop. Further, having recently permitted the original Keystone pipeline, the State Department could face a consistency challenge if it were to come to a different conclusion on similar environmental issues for the Keystone XL permit.

International pipeline projects like Keystone XL are not subject to the direct authority of Congress, but numerous Members of Congress have expressed support for, or opposition to, the pipeline proposal because of its potential environmental, energy security, and economic impacts. Congress may have an oversight role to play stemming from federal environmental statutes that govern the pipeline’s application review process.


Date of Report: March 4, 2011
Number of Pages: 19
Order Number: R41668
Price: $29.95

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Energy and Water Development: FY2011 Appropriations

Carl E. Behrens, Coordinator
Specialist in Energy Policy

The Energy and Water Development appropriations bill provides funding for civil works projects of the Army Corps of Engineers (Corps), the Department of the Interior’s Bureau of Reclamation, the Department of Energy (DOE), and a number of independent agencies.

Key budgetary issues for FY2011 involving these programs may include the following: 

• the distribution of Corps appropriations across the agency’s authorized planning, construction, and maintenance activities (Title I); 
• support of major ecosystem restoration initiatives, such as Florida Everglades (Title I) and California “Bay-Delta” (CALFED) and San Joaquin River (Title II); 
• alternatives to the proposed national nuclear waste repository at Yucca Mountain, Nevada, which the Administration has abandoned (Title III: Nuclear Waste Disposal); 
• several new initiatives proposed for Energy Efficiency and Renewable Energy (EERE) programs (Title III); and 
• funding decisions in DOE’s Office of Environmental Management. 

Funding for FY2010 Energy and Water Development programs is contained in H.R. 3183, which the House passed July 17, 2009. The Senate passed its version of H.R. 3183 July 29. The conference committee issued its report (H.Rept. 111-278) September 30, and the House passed the conference bill October 1, and the Senate October 15. The President signed the bill October 28 (P.L. 111-85).

President Obama’s proposed FY2011 budget for Energy and Water Development programs was released in February 2010. On July 15, 2010, the House Appropriations Subcommittee on Energy and Water Development approved a bill to fund these programs. In the Senate, the Energy and Water Development subcommittee approved a bill on July 20, and the full Appropriations Committee reported out S. 3635 (S.Rept. 111-228) on July 22. On September 30, the Senate and the House passed H.R. 3081 (P.L. 111-242), a continuing resolution that funded government programs at the FY2010 level through December 3. Most recently, P.L. 111-322 extended funding through March 4, 2011. On February 14, 2011, H.R. 1 was introduced, continuing funding through the rest of FY2011 at the FY2010 level, but with many specified exceptions in which funding was reduced. On February 19 the House passed H.R. 1 by a vote of 235-189.


Date of Report: February 25, 2011
Number of Pages: 57
Order Number: R41150
Price: $29.95

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Energy and Water Development: FY2011 Appropriations

Carl E. Behrens, Coordinator
Specialist in Energy Policy

The Energy and Water Development appropriations bill provides funding for civil works projects of the Army Corps of Engineers (Corps), the Department of the Interior’s Bureau of Reclamation, the Department of Energy (DOE), and a number of independent agencies.

Key budgetary issues for FY2011 involving these programs may include the following:

• the distribution of Corps appropriations across the agency’s authorized planning, construction, and maintenance activities (Title I);
• support of major ecosystem restoration initiatives, such as Florida Everglades (Title I) and California “Bay-Delta” (CALFED) and San Joaquin River (Title II);
• alternatives to the proposed national nuclear waste repository at Yucca Mountain, Nevada, which the Administration has abandoned (Title III: Nuclear Waste Disposal);
• several new initiatives proposed for Energy Efficiency and Renewable Energy (EERE) programs (Title III); and
• funding decisions in DOE’s Office of Environmental Management. 

Funding for FY2010 Energy and Water Development programs is contained in H.R. 3183, which the House passed July 17, 2009. The Senate passed its version of H.R. 3183 July 29. The Conference Committee issued its report (H.Rept. 111-278) September 30, and the House passed the conference bill October 1, and the Senate October 15. The President signed the bill October 28 (P.L. 111-85).

President Obama’s proposed FY2011 budget for Energy and Water Development programs was released in February 2010. On July 15, 2010, the House Appropriations Subcommittee on Energy and Water Development approved a bill to fund these programs. In the Senate, the Energy and Water Development subcommittee approved a bill on July 20, and the full Appropriations Committee reported out S. 3635 (S.Rept. 111-228) on July 22. On September 30, the Senate and the House passed H.R. 3081 (P.L. 111-242), a continuing resolution that funded government programs at the FY2010 level through December 3. Most recently, P.L. 111-322 extended funding through March 4, 2011. On February 14, 2011, H.R. 1 was introduced, continuing funding through the rest of FY2011 at the FY2010 level, but with many specified exceptions in which funding was reduced.


Date of Report: February 16, 2011
Number of Pages: 57
Order Number: R41150
Price: $29.95

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ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options

Phillip Brown
Analyst in Energy Policy

Molly F. Sherlock
Analyst in Economics

Congress created the Section 1603 grant program as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). This program, administered by the U.S. Department of the Treasury, provides cash grant incentives for renewable energy projects. Initially, the Section 1603 grant program was scheduled to expire at the end of 2010. A one-year extension was enacted as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) at an estimated cost of $3 billion. Absent Congressional action, the Section 1603 grant program will expire at the end of 2011.

As of December 6, 2010, grants totaling approximately $5.6 billion had been awarded to 1,495 entities, since Section 1603 became law in February 2009. Wind has received approximately 84% of the grant award value, while solar electric represents approximately 75% of entities that have received grant awards. “Other” technologies (qualifying energy property not represented by wind or solar electricity) have also received grant awards, although the value and number of awards represented by this category is relatively small compared to wind and solar electricity.

Prior to the availability of Section 1603 grants, qualifying renewable energy projects were federally supported primarily through the production tax credit (PTC) or investment tax credit (ITC). It has been common industry practice for renewable energy developers to partner with taxequity investors, where the tax-equity investors offer cash in exchange for project ownership, project cash flows, tax credits, and depreciation benefits. The Section 1603 grant program was motivated by difficult economic conditions and the perceived lack of tax-equity capacity to support renewable energy projects. Analysis of the tax equity marketplace reveals fluctuations in the dollar volume, number of participants, and required rates of return between 2007 and 2010.

Market response, since Section 1603 was established, has been mixed. The solar industry expects a record year of installations in 2010 (approximately 1 Gigawatt), while the wind industry forecasts a 50% decline compared to 2009 (approximately 5 Gigawatts installed in 2010 compared to 10 Gigwatts installed in 2009). It is important to note, however, that many factors influence annual renewable energy installations, the cash grant being just one.

If Congress considers additional extensions to or modifications of the Section 1603 grant program, economic and cost factors may also be taken into account. Grants, as opposed to tax credit, may be a more efficient mechanism for delivering public funds to the renewable energy sector. As is the case with most tax or subsidy programs, however, there are concerns that grants may be going to projects that would have moved forward without added federal incentives.

Finally, this report presents various policy options Congress may want to consider regarding the Section 1603 grant and related tax credits for renewable energy. The first option presented is to allow the grant program to expire. Even if the grant program were to expire, tax incentives would remain available. A second option is to extend the Section 1603 grant program. An extension of the grant program may be considered alongside and extension of the PTC for wind, which is set to expire at the end of 2012. A modification to the ITC and PTC, that could potentially enhance the benefits associated with the existing tax incentives, is presented as a third option.


Date of Report: February 8, 2011
Number of Pages: 38
Order Number: R41635
Price: $29.95

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