• Energy Tax Facts
  • 14 Feb 13

Administration wrong on oil and natural gas tax provisions

**Originally featured in The Hill**

The role America’s energy producers play in advancing our economy continues to be alternately ignored and mischaracterized. Recent comments from the Administration on oil and natural gas tax provisions demonstrate a deeply flawed understanding of the U.S. tax code as it pertains to the thousands of independent producers that ensure the continued development of the job-creating energy our nation relies upon.

Despite the common misuse of terms like “subsidies” and “giveaways,” America’s oil and natural gas producers do not receive a single dollar in government subsidies. In fact, tax deductions provided to America’s  independent oil and natural gas producers are no different than those provided to farmers for fertilizer, to technology companies for research and development, and to manufacturers for steel and pipe. Even bakeries have deductible costs. Their supplies—sugar, flour, eggs—are all tax deductible raw materials, along with ovens and spoons, and expenses attributed to storage and labor costs.  This makes sense because these are all upfront costs with no guaranteed return on investment – and without these tax deductions, no business could ever open its doors.

Repealing these historic business deductions aims at the heart of independent oil and natural gas producers who drill 95 percent of the nation’s wells. But drilling a well does not guarantee production. It does not guarantee revenue or resource. These tax provisions allow America’s independent producers to continue investment and exploration, with all the inherent uncertainly that comes from drilling unsuccessful dry holes, which provide no return on investment.

One of the most commonly discussed tax provisions is a deduction known as intangible drilling costs (IDCs). Since 1913, this has been an important element of the American tax code, attracting capital and enabling investment in exploration and development of the nation’s energy resources. IDCs include the costs that are necessary for the drilling and preparation of America’s oil and natural gas wells, the expenses for labor and services related to drilling a well that carry no salvage value whether the well is productive or dry. Dismantling this long-proven and successful structure will strip away 25 percent of capital available to independent producers for exploration and production – crippling their ability to continue with these incredibly capital intensive activities.

The United States is experiencing expanding production levels, the majority driven by independent producers’ investment in shale development across the U.S. Just within the last few weeks, newspaper accounts have highlighted the billions of dollars in royalties from expanded American production that are transforming lives of landowners across the nation. Ending these historic tax provisions will mean that many independents may find themselves without the capital needed to continue current drilling budgets, which will threaten the growth of American energy production, billions in federal and state revenues, and thousands of good-paying American jobs. The country needs policies that will grow the economy and create federal revenue, not threaten jobs and American energy production.

By Barry Russell, president and CEO of the Independent Petroleum Association of America (IPAA)