US energy sector warns of crippling offshore taxes, restrictions

27 July 2010 20:04  [Source: ICIS news]

WASHINGTON (ICIS news)--A top US energy sector official warned on Tuesday that bills pending in Congress in response to safety issues raised by the BP spill in the Gulf of Mexico would impose crippling liability, tax and operational limits on domestic output.

Jack Gerard, president of the American Petroleum Institute (API), said that various bills pending in Congress that are ostensibly aimed at improving safety in offshore oil and gas exploration are being used as vehicles to impose taxes and chill development.

“We are concerned about what we hear might be part of offshore and energy legislation being developed in the Senate and a revised bill pending in the House,” Gerard said.

He said that if Congress is responding to the BP spill, “then it should focus on response and safety issues, not drag in all sorts of issues that are not related”.

Gerard warned that a newly revised House bill, the “Consolidated Land, Energy and Aquatic Resources (CLEAR) Act” (HR-3534), “raises the costs of energy production, closes areas to production and singles out our industry for tax increases, and this will have a significant impact on jobs and the nation’s economic growth”.

He said that the CLEAR Act, if given final approval by Congress, would establish unlimited liability for energy companies working in US waters of the Gulf.

“The insurance industry has said that unlimited liability would leave only the very largest private firms and huge national oil companies - such as Petrobras in Brazil and China’s national energy company - able to work in the Gulf,” he said.

Insurance industry officials and independent producers have warned that coverage premiums for unlimited liability insurance for spills or other drilling accidents in Gulf waters would be so high as to force all small- and medium-size drillers out of US offshore regions, leaving only private majors such as BP and national energy firms.

He also cautioned that legislative proposals that would require specific and detailed changes in deepwater blowout preventers (BOPs) are premature and if applied could bring an end to innovation in offshore technical advances.

“I find it ironic that Congress is now trying to put restrictive designs on drilling operations and techniques before we know what happened with the BP rig explosion and failure of the blowout preventer,” he said. “This is like going in to do surgery on a patient without a complete diagnosis.”

Gerard was critical of major changes in taxes and tax incentives that the pending legislation would impose on energy companies.

The CLEAR Act would attempt to revisit the reduced royalty incentives enacted by Congress in the 1990s - since affirmed by the US Supreme Court - that were designed to encourage development of US oil and gas resources in deep waters of the Gulf.

“It is inappropriate to try to ‘claw back’ relief that Congress provided in the 1990s,” Gerard said.  “It would further discourage production of oil and gas going forward,” he added, because energy companies would necessarily worry that Congress might unilaterally re-write royalty terms years after they had been set.

He also targeted a proposal that would eliminate manufacturing tax credits for energy firms only, incentives that were enacted in 2004 and meant to stimulate production by all manufacturing industries.

Lastly, Gerard warned that if the Obama administration maintains its current moratorium on deepwater drilling in the Gulf, or if Congress imposes an extended offshore development ban, the US could lose as many as 175,000 jobs each year over the next quarter-century and increase US dependence on foreign energy supplies by 20% or more.

Leaders in both the House and Senate are anxious to pass energy legislation and BP spill remedy bills before Congress begins its month-long recess in August and before campaigning for the November national elections begins in earnest in September.

“Our polling and many other polls show that American voters are most concerned about jobs and the economy,” Gerard said.

“These legislative proposals on unlimited liability, blowout requirements, new taxes and retroactive taxes will have serious economic impact and cause major job losses,” he said.

According to Capitol Hill sources, it is uncertain that congressional leaders can muster enough votes to pass such wide-ranging and complex energy, offshore safety and revenue measures before the month-long recess that begins on 6 August.

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