Urgent Legislative Concerns for Royalty Owners

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Urgent Legislative Concerns for Royalty Owners

• How will proposed changes affect you?

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Promises About FY 2010 Budget

• this budget does not raise the taxes of any
  family making less than 250,000 a year by a
  single dime.
• --President Obama, March 17, 2009

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The reality of the proposed budget

• The Administrations budget as currently
  proposed WILL raise your taxes as royalty owners,
  even if you make under 250,000 total income, and
  it WILL hurt the economy, especially an already
  sluggish energy sector.

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Direct Tax increase for Royalty Owners

• The Depletion Tax allowance, part of the law
  since the 1920s, will be taken away from Royalty
  Owners under the currently proposed budget,
  regardless of income level, according to the
  Obama Administrations Office of Management and
  Budget (OMB).
• In other words, a

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• Tax
• Increase
• on Royalty
• income!

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Direct Tax Increases on the Energy Industry in
the Budget Include, Among Others

• The expensing of intangible drilling costs (IDCs)
  will no longer be allowed.
• The domestic manufacturing deduction for all oil
  and gas producers will be eliminated.

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• The exception to passive loss limitations for
  working interest owners is eliminated
• The deductions for tertiary recovery method costs
  are disallowed
• An excise tax will be imposed for outer
  continental shelf drilling

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• The enhanced oil recovery credit
• The marginal well credit

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Price of oil per barrel from 1997 to mid 2009
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• The price of natural gas has not yet seen clear
  signs of recovery, and has actually fallen
  further since June 09 when the following charts
  timeline ends, actually dipping below 3.00/mcf.
  (Was once 400 higher)

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• The Price of Natural Gas in /mcf, from June 2000
  to June 2009

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• According to the Energy Information
  Administration(EIA), as of July 2009, both the
  total number of rotary rigs and the number of
  on-shore rotary rigs in operation are less than
  half of their 2008 levels. This is shown on the
  following EIA charts (red circles around key
  values have been added).

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Crude Oil and Natural Gas Drilling Activity
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The Impact of Budgetary Tax Hikes

• the proposed changes would raise 31.5 billion
  over 10 years. - Senator Jeff Bingaman (D),
  Chairman, Senate Finance Subcommittee on Energy,
  Natural Resources Infrastructure, September 10,
  2009
• When the Presidents tax increases on oil and
  gas are combined with other tax increases in the
  Presidents budget, this amounts to an 80 billion
  dollar tax hike on oil and natural gas. -
  Senator Jim Bunning (R), Ranking Member, Senate
  Finance Subcommittee on Energy, Natural Resources
  Infrastructure, September 10, 2009

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• If the budget is passed in its current form, some
  estimates say the number of active drilling rigs
  could be halved again, down to 480 nationally
  within 1 year!
• -- Texas Alliance of Energy Producers

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Insights into the Administration

• Statements by Alan Krueger, Assistant Secretary
  for Economic Policy and Chief Economist at the
  Treasury Department
• The tax subsidies that are currently provided to
  the oil and gas industry lead to inefficiency by
  encouraging an over investment of domestic
  resources in this industry.  
• removing this distortion would improve overall
  economic efficiency.

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• Statements by Peter Orszag, Director of the
  Presidents Office of Management and Budget
  (OMB)
• Given the dependence on foreign oil that exists,
  we can either try to heavily subsidize and
  promote to beyond what the market would otherwise
  produce in domestic production or we can try to
  move toward a cleaner energy future in which
  overall dependence of oil is reduced and that
  then has the very significant benefit of reducing
  our dependence on foreign oil. The budget
  chooses the latter course, because I think that
  is the more sustainable path to choose.

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• U.S. Treasury Secretary Geithner said
• U.S. oil and natural gas producing companies
  should not receive federal subsidies in the form
  of tax breaks because their businesses contribute
  to global warming.
• We dont believe it makes sense to significantly
  subsidize the production and use of sources of
  energy (like oil and gas) that are dramatically
  going to add to our climate change (problem). We
  dont think thats good economic policy and we
  think changing those incentives is good for the
  country.

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• Secretary Geithner told the Senate Finance
  Committee that the new taxes can be absorbed by
  the oil and gas industry.
• He said the impact of these subsidies are very
  small relative to revenues produced by U.S. oil
  and gas producers.

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• The majority (something over 70) of the minerals
  in the U.S. are owned by individuals and leased
  to companies for development.
• The average royalty payment check is 500 a
  month or less!
• For a senior citizen living on the combination of
  social security and a meager royalty payment,
  taxing more of their check CANNOT be absorbed.
  It is too much to ask!
• Remember the Presidents promise about the budget?

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this budget does not raise the taxes of any
family making less than 250,000 a year by a
single dime. --President Obama, March 17, 2009
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• As royalty owners, we oppose raising our taxes
  and the taxes of the oil gas industry at a time
  when prices remain static after a severe drop,
  and when drilling activity in the U.S. is
  literally halved from levels just one year ago!

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• The Treasury Secretary is right when he says that
  we need to wean ourselves off of our dependence
  on foreign oil. What he is wrong about is how
  that can feasibly be done, and in what time
  frame.
• As shown on the following chart, only 7 of our
  total national energy consumption currently comes
  from renewable sources.

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• Of that 7 of our energy consumption that is
  renewable, several of the energy sources are
  limited from expansion
• Hydro-electric power is geographically limited to
  high flow rivers. Even where it is plausible,
  building more electricity generating dams has met
  with much opposition. Scientists are concerned
  with the environmental impact of the dams, and
  have argued that the dams are responsible for
  declining populations of Salmon.

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• Geothermal power is even more geographically
  limited, only plausible near certain hot spots in
  the earths crust. Any opportunities to expand
  geothermal power are very limited.

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• Biomass holds some promise, but it is still a
  developing technology. The U.S. has been focusing
  our subsidy dollars on ethanol made from corn, so
  a disproportionately high share of our ethanol
  production comes from corn. This has resulted in
  food price increases that have literally caused
  starvation in some third world countries.

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• Some countries, Brazil for instance, are
  investing more heavily in research that looks at
  making ethanol from switch grass, a non-food
  crop. But, the fact remains that growing energy
  crops competes for acreage that could be growing
  food crops. In the end, we are limited by the
  amount of biomass fuel that can be grown.

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• Since Hydroelectric, Geothermal, and biomass are
  not able to rapidly or significantly expand as
  energy sources, the only remaining sources of
  renewable energy are solar and wind.

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• Combined, solar and wind currently account for
  only 6 of the renewable energy consumed
  nationally. 7 of the total U.S. energy
  consumption is renewable. Therefore, 6 of 7,
  or 0.42 of our total energy currently comes from
  wind and solar combined.

These technologies are worth developing, but
since our solar and wind infrastructure is
currently providing less than half of 1 of our
consumption, they are nowhere near capable of
filling the energy needs of America.
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Oil, natural gas, and coal still provide 84 of
our energy consumption. Our wind and solar
infrastructure will have to produce 200 times
more power than it currently does to replace our
current use of fossil fuels.
Along with the challenge of increasing the size
of the infrastructure by 200 times, we still lack
the storage capacity or transmission grid to make
this power useful.
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• It will undoubtedly take decades to undergo this
  massive transition from fossil fuels to wind,
  solar, or whatever other technologies are
  developed in the mean time.
• The goal of becoming less reliant on foreign
  energy is one that NARO shares with Secretary
  Geithner. Energy independence will likely be
  augmented by the construction of more nuclear
  fission power plants. But, as of now, we are
  beholden to many nations to supplement our energy
  needs beyond our own level of production.

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• The bottom line is our national security is
  undeniably linked to our ability to produce our
  own energy at home. The following slide is a
  chart from EIA showing trends in oil imports from
  1910 to 2008.

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In 1970, we imported 24 of our oil. Today, it's
more than 65 and growing. America needs
Americas Oil!
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• We strongly disagree with the idea held by some
  in the Administration, and summed up by Assistant
  Treasury Secretary Krueger, that the tax
  subsidies that are currently provided to the oil
  and gas industry lead to inefficiency by
  encouraging an over investment of domestic
  resources in this industry.
• We instead contend that encouraging investment in
  a domestic and necessary energy source is an
  investment in our own national security. It is
  also an investment in the financial security of
  many of our senior citizens who depend on their
  royalty checks.

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Repeated once more

• The majority (something over 70) of the minerals
  in the U.S. are owned by individuals and leased
  to companies for development.
• The average royalty payment check is 500 a
  month or less!
• For a senior citizen living on the combination of
  social security and a meager royalty payment,
  taxing more of their check CANNOT be absorbed.
  It is too much to ask!

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Yet more taxes?
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Cap and Trade

• Cap and Trade is a system wherein companies that
  emit pollutants must have permits for the volume
  they emit.

Such permits are limited to a maximum national
level, and they can be bought, sold, and traded
between the emitters.
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• The Waxman-Markey bill, HR 2454, seeks to
  introduce a cap and trade system on CO2. It has
  passed the House of Representatives as of June
  26, 2009, and will now be taken up by the Senate.
• It has been called the largest tax increase in
  recent history by David Kreutzer Ph.D. and Karen
  Campbell Ph.D. of The Heritage Foundations
  Center for Data Analysis.

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• The Waxman-Markey bill, HR 2454, is also known as
  The American Clean Energy and Security Act, or
  ACES

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• This will create an entirely new market for CO2
  permits (aka CO2 allowances). The allowances
  will be auctioned off by the government each
  year, in ever reducing amounts. After bought at
  auction, the allowance holders can either use the
  allowances up, or take them to the new market.

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• The market will be ran like a commodities
  exchange, wherein the allowances, and likely
  complicated financial devices resembling
  commodity futures, will be bought, sold, and
  traded.

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• One key difference is that some permits will be
  set aside by law only for certain groups. CO2
  permits would be GIVEN away by the federal
  government to certain groups. Some of the
  permits would also be auctioned off to other
  select bidders that fall into various
  pre-selected categories, chosen by administrative
  regulators.

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• Some of the money taken in by auctioning the
  allowances would be redistributed as follows.
  From 2012 to 2025
• 55 of the money taken in from auctioning
  allowances will be used to protect consumers from
  energy price increases 19 will be used to
  assist trade-vulnerable and other industries make
  the transition to a clean energy economy

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• 13 will be used to support investments in clean
  energy and energy efficiency and 10 will be
  used for domestic adaptation, worker assistance
  and training, prevention of deforestation, and
  international adaptation.

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• By redistributing so much money, this bill leaves
  too much room for political manipulation of the
  CO2 market it seeks to create. It could
  unfairly benefit those who are friendly to
  whatever party happens to be in power in
  Washington.

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• An article from The New York Times by John M.
  Broder says this
• Cap and tradeis almost perfectly designed for
  the buying and selling of political support
  through the granting of valuable emissions
  permits to favor specific industries and even
  specific Congressional districts.

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• CO2 is the same gas you exhale every time you
  take a breath, and it is what plants absorb and
  convert into Oxygen.
• CO2 is neither carcinogenic, nor has man-made CO2
  been proven to be harmful to the environment. It
  is completely benign.

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• The lack of conclusive science has not stopped
  the House of Representatives from passing this
  gargantuan new tax.

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• The following slides are the results of a study
  conducted by Professors David Douglass and Robert
  Knox of the Physics Department in the University
  of Rochester, New York, and published by the
  Science and Public Policy Institute (SPPI)

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• According to the UNs theory80-90 of all
  manmade greenhouse warming should accumulate in
  the upper 400 fathoms of the oceans.
• The University of Rochester study found that
  since the late 1960s there has been no build-up
  of heat in that climate-crucial upper layer.

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• the UN models have erred in predicting
  relentless heat accumulation in the oceans. The
  study recorded Heat loss of 0.15 Watts per
  square meter from 1960-1975, and a gain of the
  same amount from 1976-2000, and a slight loss in
  heat since then.
• The conclusion is that No influence from manmade
  global warming is present.
• --SPPI Monthly CO2 report, August 2009

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• According to the National Oceanic and Atmospheric
  Administration (NOAA), CO2 is rising, but at a
  rate up to half of that predicted by the IPCC
  models.
• The NOAA data shows that the increase is not only
  drastically less, it is also linear, not an
  increasing curve.

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• Change in atmospheric CO2 recorded over the last
  decade, in parts per million by volume per 100
  years (ppmv/century).

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• Data from SPPIs Global Temperature Index
  actually shows that the last seven years have
  seen global cooling!

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• Professor Mojib Latif of Germany's Leibniz
  Institute is a renowned author for the U.N.s
  Intergovernmental Panel on Climate Change (IPCC),
  and is a climate physicist at the University of
  Kiel, Germany. He has recently come to the
  following conclusion.

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• While he still believes that the world is,
  overall, experiencing a long term warming trend,
  he thinks it likely that the climate will
  actually be cooling over the next 10-20 years.

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Some days, do you feel like this?
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• NARO supports any measure resulting in sound
  environmental stewardship, but Waxman-Markey
  would arbitrarily and capriciously force
  industries to reduce CO2 emissions to 3 below
  2005 levels by 2012, and to 83 below 2005 levels
  by 2050.

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• Many climate change theories like those of IPCC
  have gained notoriety, but there remains no
  scientific consensus on the impact of CO2
  generated by human activity and technology on
  climate change.

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The Cost of Cap and Trade

• The Congressional Budget Office (CBO)
  estimates that the net annual economy-wide cost
  of the cap-and-trade program in 2020 would be22
  billionor about 175 per household.
• --from CBO document titled The Estimated
  Costs to Households From the Cap-and-Trade
  Provisions of H.R. 2454
• June 19, 2009

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• But, CBS News reported on 09/15/2009 that an
  analysis prepared by the U.S. Department of
  Treasury says the total in new taxes would be
  between 100 billion to 200 billion a year. At
  the upper end of the administration's estimate,
  the cost per American household would be an extra
  1,761 a year. This was divulged only after a
  FOIA document demand.

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• The Treasury Department numbers multiplied over 8
  years could amount to 1.6 trillion dollars in new
  taxes!
• Some 8 yr. projections from The Heritage
  Foundation suggest 1.9 trillion, significantly
  higher than the Treasury department number.

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Further Heritage Foundation analysis of the
economic costs are summarized as follows
(adjusted for inflation to 2009 dollars)

• Single-year GDP losses reach 400 billion by 2025
  and will ultimately exceed 700 billion

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• Cumulative gross domestic product (GDP) losses
  from 2012 (when the law kicks in) to 2035 are
  9.4 trillion

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• The Net job losses per year approach 1.9 million
  in 2012 and could approach 2.5 million by 2035.
  Manufacturing loses 1.4 million jobs in 2035 (See
  chart on next slide).
• The annual cost of emissions permits to energy
  users will be at least 100 billion by 2012 and
  could exceed 390 billion by 2035.

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(Continuing with Heritage Foundation numbers)

• A typical family of four will pay, on average, an
  additional 829 each year for energy-based
  utility costs
• Gasoline prices will rise by 58 percent (1.38
  more per gallon) and average household electric
  rates will increase by 90 percent.

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• An Aug. 2009 study commissioned by the National
  Association of Manufacturers and the American
  Council for Capital Formation says
• By 2030
• Lost jobs equal up to 2.4 million
• 50 percent higher prices for residential
  electricity
• 26 percent higher prices for gasoline.

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The burdens on our economy and citizens created
by this bill are too great in light of the
poorly defined, unproven environmental benefits
it supposedly creates. But even if
Waxman-Markey fails to pass in the Senate, there
remains concern about new potential regulation by
the Environmental Protection Agency (EPA).
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• In the Senate, Senators Barbara Boxer and John
  Kerry are working on their version of a draft
  climate bill.
• The New York Times cites sources claiming they
  expect Boxer to start legislative hearings in
  her Environment and Public Works Committee
  during the week of Oct. 5, with a tentative
  markup penciled in for the week of Oct. 12.

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The EPA and CO2
?

• Until now, CO2 emissions have never been
  regulated.
• The Supreme Court has now upheld an EPA finding
  from April 2009 that, as a matter of law,
  categorizes CO2 as a pollutant which is
  dangerous to human health.

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• According to a September article from The Wall
  Street Journal, the current laws which direct the
  EPAs authorities and duties say that the agency
  is required to regulate any source of a dangerous
  pollutant which emits more than 250 tons
  annually.

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• How much is 250 tons a year?
• 250 tons annually is a very low limit forCO2,
  and so would capture schools, hospitals, farms,
  malls, restaurants, large office buildings and
  many others.
• The EPA realizes this, and it has drafted a
  tailoring rule which would target the new
  rules only to major industrial sources of carbon
  emissions, such as power plants, refineries,
  factories and the like.

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• To exempt smaller, non-industrial sources, the
  tailoring rule unilaterally boosts the rule for
  greenhouse gases from 250 tons to 25,000 tons, an
  increase of two orders of magnitude.
• The tailoring rule essentially rewrites clear
  statutory language of the Clean Air Act by
  bureaucratic decree.
• Of course, an independent regulatory agency like
  the EPA does not have the authority to rewrite
  any legislation, including the Clean Air Act.

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• Assuming that Cap and Trade fails to pass in the
  Senate, the EPA will take over regulation of CO2
  by default.
• The EPAs tailoring rule will almost certainly be
  challenged in court by the environmental lobbies,
  which would seek to force the EPA to enforce the
  250-ton emission standard.

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• Since the EPAs authority and duties are directed
  by The Clean Air Act, which is explicit about
  the 250-ton threshold for any pollutant, the
  environmental lobbies would likely win.
• The EPA would then be forced to regulate any CO2
  source over 250 tons a year, whether a power
  plant or an elementary school.

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How much more red tape are we talking about?

• The EPA has 16,000 permits now, and under new
  provisions that would jump to an estimated
  550,000. How is the EPA going to handle that?
• -- Mark Boling, executive vice president and
  general counsel for Southwestern Energy.

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Reigning in EPA Regulation is important, but is a
secondary priority to fighting the Cap and Trade
Battle

• After Cap and Trade sees its ultimate conclusion,
  NARO will gear up full steam to mobilize our
  members about unreasonable EPA regulation.

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• Together, we will demand a bill to reign in the
  EPA on its CO2danger finding of April 2009,
  which is not supported by adequate science. We
  want congress to pass legislation retracting the
  unreasonable finding.

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• Another Contentious topic?
• Hydraulic Fracturing
• AKA Hydro-fracing

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Please take action by calling the offices of the
U.S. Congressmen who are in committee positions
key to the following issues!
We will provide a list of names and numbers.
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• When you call, tell them
• I oppose repealing tax deductions for royalty
  owners and oil and gas companies as proposed in
  the 2010 federal budget. I especially oppose the
  repeal of the percentage depletion allowance.

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When you call, tell them 2) The President said
on March 17, 2009 his budget did not raise taxes
on anyone making less than 250,000/year. I make
less than that and this raises my taxes!
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When you call, tell them
3) I oppose all versions of Cap and Trade
legislation.
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