Don’t Believe The Hype: Tax Increase on Oil and Gas Companies Unlikely

A few days ago House Speaker Boehner told ABC news he was open to the idea of raising taxes on oil and gas companies. Boehner said that while “everybody wants to go after the oil companies” for gas prices that are climbing above $4 per gallon in many regions of the country, the industry also has “got some part of this to blame.”

“Listen, they’re gonna pay their fair share in taxes, and they should,” Boehner said. Boehner also said he does not believe “the big oil companies need to have the oil depletion allowances” and that “we certainly oughta take a look at” proposals to do away with some industry incentives.

Naturally, this has created a lot of buzz. However, a meaningful tax increase on oil and gas companies remains unlikely. Here’s why…

What you haven’t heard as much about is that Boehner’s spokesman quickly made clear that the congressman’s comments were not a change from his previous position, which is generally representative of many House Republicans and contains no real commitment to tax increases. Despite the hype following Boehner’s comments, there’s virtually no support among House Republicans for raising taxes on energy companies along the lines of the Obama proposals:

OBAMA ENERGY TAX HIKES

Proposed Tax/10 Year Federal Tax Revenue
Elimination of domestic
manufacturing deduction / $18.3B

Eliminate expensing of
intangible drilling costs / $12.5B

Eliminate percentage
depletion for oil and
natural gas wells / $11.2B

Increase geological and
geophysical amortization
period for independent
producers to seven years / $1.4B


In fact, far from tax increases, the House is likely to consider two bills next week that promote domestic production of oil and gas. Legislative analysts are also quick to point out that the Senate has voted on some of the tax increases favored by Obama and other Democrats twice in the past year and both times they failed to win even a simple majority (never mind 60 votes). Back in February a Senate vote on raising taxes on oil and gas companies received only 44 votes.

Unless something dramatic happens in the short term, those votes aren’t going anywhere.

Let me hear your opinion on which way the legislative wind is blowing! Please give us your comments.

China Unplugged

I recently returned from two weeks in China where, among other things, I participated in the China-U.S. Energy Summit. China is a veritable ant hill of activity. As anyone who reads a paper (or a blog) or watches the TV news already knows, China is booming. Besides the constant honking from Chinese drivers, the one constant during my trip was the sound of construction. Not surprisingly, China is also replete with newly minted millionaires and billionaires who have made their money from the expanding economy. Like their western counterparts, wealthy Chinese are eager to expand and diversify their portfolios. However, Chinese culture, and a traditional distrust of anything but "hard asset" investments, has lead many wealthy Chinese to place money into real estate. Of course, as recent experience shows, real estate is not all it's cracked up to be as an asset class. It should be a "no-brainer" then for these folks to want to invest in oil and gas right?

Wrong.

To my surprise, even some of the wealthiest and most sophisticated Chinese investors were unaware that private oil and gas investment was even available. A history of state (mainly military) control over natural resources has left would-be oil and gas investors ignorant of the potential upside of such an investment. Add to that the substantial restrictions on individual Chinese citizens for converting their currency, and you have a frustrated, yet potentially huge source of capital for new oil and gas development projects.

The good news for companies seeking capital is that there are some exceptions to the restrictions on private Chinese foreign investment, and potential investors are intrigued by the potential of oil and gas projects. For the companies with the patience to develop the long term relationships Chinese investors demand, literally billions await.