On Monday, the White House submitted its federal budget to Congress after previously releasing its proposed budget early last year. The repeal of several key tax incentives for the oil industry has remained in place from the proposed budget to the budget submitted to Congress. We continue to think that independent producers who primarily operate within the U.S. stand to be hurt the most. The bottom line remains the same: Cash taxes appear to be headed higher, which points to higher oil and natural gas prices in the longer term. With a higher cost structure, we wouldn't expect U.S. producers' profits to move in lockstep.

Here's a summary of the key oil and gas-related tax changes:

As it pertains to the budget, the biggest-ticket items include the repeal of the Gulf of Mexico royalty relief, the expensing of intangible drilling costs (IDCs), the manufacturing tax deduction, and the percentage of depletion method for oil and natural gas.
The Gulf of Mexico Royalty relief calls for lower royalties when commodity prices are below certain thresholds. Given the long investment cycle, large investment, and geological risk associated with offshore drilling, producers claim the royalty relief is necessary to reduce capital impairment risk. The budget also provides for a fee on nonproducing leases on federal lands (primarily offshore)--basically a "use it or lose it" clause.