• Energy Tax Facts
  • 12 Aug 14

Survey: IDCs Critical to Continued Energy Production

IPAA recently released its 2012-2013 Profile of Independent Producers, a compilation and survey of the key characteristics of independent oil and natural gas companies and the issues they face. These energy producers – companies with an average of 12 employees who drill 95 percent of America’s oil and gas wells – continue to develop energy across the country, creating jobs and economic opportunities along the way.

Yet despite the great work and output of these companies, whose efforts help the U.S. lessen its dependence on imported oil, some lawmakers want to dis-incentivize their continued energy production. A major challenge to these companies continued operations are proposals to repeal the Intangible Drilling Cost (IDC) deduction, a century-old tax provision that enables independent oil and gas producers to deduct certain non-salvageable costs. IDCs include things like site preparation, labor, renting drilling rigs – the same type of deductions available to many American industries from farmers for fertilizer to technology companies for research and development.  Unfortunately, the Obama Administration and others have repeatedly threatened to repeal this tax provision at the cost of independent producers and domestic energy production.

According to the survey:

“Intangible drilling costs are overwhelmingly the most important tax issue for independent E&Ps; 57% of respondents said that IDCs were the most important tax issue for their business and another 24% said IDCs were their second or third most important tax issue.”

Exploring for and producing oil and natural gas is a highly capital intensive process, and the IDC deduction is critical for independent oil and gas companies to continue their operations. This deduction ensures that America’s independent operators can continue to invest in oil and gas production here at home, supporting the economy and American energy security. In fact, the average independent oil and natural gas company reinvests 150 percent of their cash flow into new U.S. production.

As the survey highlights, “if IDCs were repealed, the impact on capital budgets could be significant – more than two-thirds of respondents reported that their capital budgets would decrease by 20% or more.” That decrease means less American energy production, fewer jobs, and less revenue sent to government treasuries.

As IPAA President Barry Russell stated in the Oil and Gas Journal in March 2014, “Without deductions like intangible drilling costs, the American energy revolution the president often touts would not exist as it currently does.” As the United States reaches new records of energy production, while supporting thousands of good-paying jobs across the nation, the importance of this critical tax provision to the continued operation of America’s independent oil and gas producers cannot be overlooked.