• Energy Tax Facts
  • 18 Jul 17

IPAA Submits Comments to Senate on Tax Reform

This week, the Independent Petroleum Association of America (IPAA) submitted comments to the Senate Finance Committee on upcoming tax reform efforts in Congress. IPAA’s comments focus on the role of the U.S. tax code in ensuring the continued production of abundant American natural resources and the future of the small businesses that support this job-creating development.

As companies that produce roughly 54 percent of American oil and over 75 percent of American natural gas, independent producers have a critical role to play in supporting our nation’s economy and energy security.  Yet many of these 9,000 plus companies are small businesses. In fact, the median IPAA member employs 12 full-time and 2 part-time employees and has been in business for 23 years – making many of these companies small, longstanding, community businesses. In turn, reforming the tax code cannot simply look at change for reforms sake, but rather must take into account the unique considerations of the thousands of small businesses behind this critical American industry.

IPAA’s comments look at a number of issues up for debate as tax reform moves forward, including the role of capital recovery provisions.  As the comments highlight, access to these provisions is critical to enabling companies to continue to invest in new production. From the report:

“The American shale revolution, spurred by horizontal drilling and hydraulic fracturing, has propelled the United States to become one of the biggest oil and natural gas production countries in the world, creating profound economic, trade and geopolitical advantages for the country. This remarkable American energy revitalization could end if tax reform legislation limits independent producers’ access to capital by changing oil and natural gas tax provisions. As such, the associations submitting these comments urge you to preserve the current tax treatment of capital formation and recovery provisions such as the expensing on IDC, the Percentage Depletion deduction and the passive loss exception for working interests. For this component of industry, capital recovery provisions are more critical than the tax rate.”

The Intangible Drilling Cost deduction is one of the many important provisions in the tax code that enables continued investment into new development. Similar to R&D costs for an array of industries, IDC’s represent all the expenses an operator may incur at the wellsite that don’t – by themselves – produce a physical asset for the producer. This century-old deduction allows producers to recover these costs and quickly reinvest them in new development.  Removing this provision from the U.S. tax code would have serious ramifications for industry. From IPAA’s comments:

“Only independent producers can fully expense IDC on American production. Loss of IDC for independent producers, especially at the current time when sales prices for oil and natural gas are likely to be low during the ‘flush’ production years, will have significant effects on capital development budgets. A Raymond James analysis in 2009 reported that the loss of IDC would result in capital drilling budgets being reduced by 25 to 30 percent. This compares with information provided to IPAA by its members indicating that drilling budgets would be cut by 25 to 40 percent. Regardless of the exactness of the assessments, clearly, the consequences would be significant.

“Additionally, changes to IDC expensing could be perilous for smaller independent producers. Unlike larger oil and natural gas companies, smaller independent producers are unable to attract financing from institutional investors or even community banks. The advent of Dodd-Frank has increasingly made lending to smaller producers impossible. As such, smaller producers must finance their drilling operations with cash flow generated from the wellhead. Changing the ability to immediately expense IDC will drastically curtail drilling budgets for all independent producers and will be especially impactful for smaller producers. Eliminating IDC would result less American investment and fewer wells being drilled in the United States each year.”

As IPAA’s comments summarize, “As sound as the benefits of lower tax rates are, for industries like American oil and natural gas production that is driven by recovering capital and reinvesting it in America, no likely lower tax rate that can be developed in tax reform would offset the loss of the capital recovery provisions that have so effectively encouraged American production.”  Read IPAA’s full comments HERE.