Don't Penalize the Oil and Natural Gas Industry

Mark Green
Posted July 26, 2010

Editor's note: In a Roll Call op-ed that ran today, API President and CEO Jack Gerard urges Congress not to make hasty, legislative and regulatory decisions following the Deepwater Horizon incident that could unfairly penalize oil and natural gas companies. Jack's comments are below:

The oil spill in the Gulf of Mexico has created understandable new concerns over offshore oil and natural gas operations, and Americans are right to demand assurances that offshore operations are safe and not detrimental to our environment.

The oil and natural gas industry understands that, and our pledge from the very beginning has been to work day and night to help BP stop the leak, clean up the spill and find out what happened so we can put in place lasting solutions. Only then can Americans once again have full confidence in our industry.

This tragic incident has also created something of a reaction in some quarters that could have a long-lasting detrimental effect on our nation's economy--and on the lives of every single American--in the form of an unprecedented campaign against America's oil and natural gas industry.

The aim of this campaign by some special interest groups, officeholders and commentators is not, as one might expect, to hold the industry accountable and ensure that it does what it has pledged to do to make certain that offshore exploration and production are safe. Rather, the goal appears to be to inflict as much damage as possible on the industry by imposing billions of dollars in higher taxes on America's energy companies.

These proposed revenues would not be for cleaning up the Gulf or paying for damages to Gulf Coast residents--BP has already committed to do that--but rather to pay for unrelated programs and to punish an industry they have long opposed.

Their premise is that the oil and natural gas industry is not paying its fair share of taxes and that it receives lucrative "tax breaks" that result in profits of a magnitude unseen by other industries.

The facts say otherwise.

In 2009, the last year for which figures are available, the effective tax rate for the industry was 48.4 percent versus 28.1 percent for the rest of the Standard and Poor's Industrials. Oil and natural gas earnings are in line with the average of other major U.S. manufacturing industries.

The latest published data shows the industry earned 7.3 cents for every dollar of sales, slightly below the average for all U.S. manufacturing, which earned 7.8 cents for every dollar of sales. While some people argue that profits are large, they reflect the size of the industry, not unfair tax advantages. And they are earnings that companies must have to be able to compete globally.

That leaves the "giveaways" argument, with the implications that the incentives are unique to the oil and natural gas industry. One of the most-cited examples is Section 199 of the Tax Code, which allows the deduction for all U.S. manufacturers to encourage them to keep jobs in the United States and create new ones.

In fact, unlike other manufacturers, oil and gas activities cannot claim the full deduction percentage, and the proposal to repeal this deduction for only the oil and gas industry would only end up threatening the economic livelihood of millions we employ.

Another example is the "dual capacity" tax provision, which enables all U.S. companies to operate and produce goods and services in other countries without having their profits taxed twice. This provision, which is actually more restrictive than the general foreign tax credit rules, levels the playing field for U.S. companies with foreign competitors.

Oil industry critics love to point to a government claim that the industry's investment tax rate is only 9 percent. However, that number accounts for just the drilling equipment. It does not consider the hundreds of millions of dollars spent on gaining the leasehold and is recovered over a long period of time. While the cost of the equipment might be recovered more quickly, it is but one part of the overall investment in an oil and gas play. Companies do not purchase just equipment, and the accelerated recovery helps address the risk of these substantial investments.

Most working Americans understand that our industry can be counted on to provide them with the energy they need, when they need it and at affordable prices. They get the role the industry has in supporting millions of jobs across the country, and they are aware of the billions of dollars the industry pours into the federal treasury every year.

And they understand that this industry--with its focus on the spill, safe operations, job creation and the economic recovery--is not our economy's enemy.

I hope their common sense will prevail over any short-sighted effort to use the spill as an excuse to punish American oil and gas companies, knowing that if it doesn't, they as consumers will be forced to bear the burden.