• Energy Tax Facts
  • 21 May 13

Independents Support Record U.S. Energy Output

This week, the International Energy Association (IEA) released a report stating that North American energy development is redefining our global energy outlook, and “reaching all recesses of the global oil market.” More American energy is displacing OPEC supplies and enhancing national energy security while boosting the economy and altering the geopolitics of global oil supply – in large part because of the work being done by America’s independent producers.

Yet if Congress chooses to alter the current U.S. tax code, this breakthrough development may be in jeopardy. Historic tax provisions – like the intangible drilling costs deduction, percentage depletion, and passive loss exception – are crucial to the continued development of American Energy.  In different ways, these provisions help to offset the risk of investing in American energy production – a capital intensive process with no guaranteed success from drilling. As such, these tax policies allow independent producers to continue developing the nation’s vast oil and natural gas reserves, providing jobs and opportunity along the way. Yet if these deductions are repealed, the impact on American energy development – and in turn national security – could be drastic.

Deborah Byers and Greg Matlock of Ernst & Young LLP explain in the Oil and Gas Financial Journal:

“If enacted, a number of the provisions contained in the Budget could have a direct and indirect impact on certain oil and gas companies. The impacts would be acutely felt in connection with capital investment, as a number of the proposals could have a real and meaningful impact.”

As Ms. Byers explained in Forbes last year, eliminating these deductions has an immediate impact on the cash-flow of independent producers – companies with an average of just twelve employees yet drill nearly 95 percent of America’s oil and natural gas well. As she explains:

“Without the ability to expense these costs, many independents’ cash flow would be significantly diminished and they would have to immediately reduce their drilling budgets since they lack the cash flow to fund these operations internally and their cost of capital would otherwise increase. And as producers scale back, production from shale oil and natural gas, which is heavily driven by independents, will be at risk.

“In recent years, the shale boom has played a major role in providing jobs, boosting domestic supplies and increasing state and federal tax revenues.  It is not an exaggeration to say that the IDC provision is one of the factors that has allowed the ‘shale revolution’ to ramp up so quickly.”

By 2018, IEA predicts North America will provide 40 percent of new global oil supplies with OPEC supplies down to only 30 percent. Repealing these historic provisions – deductions provided to a wide range of other industries — will not only impact producers and their ability to create more energy; it will reduce our national energy security.