Eliminating intangible drilling costs and depletion allowance deductions from the federal tax code, as President Biden proposes in the budget he has submitted to Congress, would not hurt major oil companies, as many of Biden’s environmentalist supporters believe, but only independent producers.
That’s according to the Independent Petroleum Association of America and the Permian Basin Petroleum, Texas Oil & Gas, National Stripper Wells and Texas Independent Producers & Royalty Owners associations, who say IDCs and the depletion allowance encourage vital investments.
IPAA President-CEO Jeff Eshelman said Biden’s oil and natural gas tax ideas “are a direct attack on America’s smaller independent producers who develop most of the nation’s natural gas and oil wells, particularly the small marginal operators.
“Many of these provisions such as the deduction of IDCs are not subsidies but are important tax provisions that promote investment, job creation and growth,” Eshelman said from Washington, D.C. “Repealing this provision and raising taxes on oil and gas taxpayers is a reckless policy proposal.
“IPAA continues fighting to preserve industry tax treatment, particularly IDCs and percentage depletion allowances, and to prevent new taxes that would hinder independents’ ability to operate and produce energy for the American people and our allies.”
PBPA President Ben Shepperd said Tuesday that eliminating IDCs “would limit companies’ cash flow, which in turn would likely impact investments in new drilling projects and other operations.
“Intangible drilling costs are a capital investment category,” Shepperd said. “While IDCs are unique to the oil and gas industry, intangible costs in general are not unique to our industry and federal tax incentives are eligible for intangible costs in other industries.
“Federal law requires Congress to produce a budget each fiscal year. The president recommends what he would like to see in the budget to Congress, but it is up to Congress to debate and finalize a budget through the passage of appropriations bills.
“With a strong presence currently in the House of Representatives that supports energy production in the United States, there is still a chance the budget that ultimately gets sent to the president protects IDCs. We are continuing to work with our partners in Washington, D.C., to help make sure this happens.”
TXOGA President Todd Staples said such changes in the tax code would be counter-productive.
“At a time when we need a steady, stable supply of domestic oil and gas, changing tax policy that negatively impacts the dynamics of operators only discourages expansion and growth,” Staples said from Austin. “Oil and natural gas should be treated as an asset, not a liability.
“Rather than looking at punitive measures, Congress should look at ways to expand domestic production and the benefits and jobs that come with it.”
Representing small or marginal producers, National Stripper Wells Chairman Nick Powell said from Mission, Kan., that Biden’s proposed rescission of IDCs and the industry’s 15-percent depletion allowance would cut American drilling by 30 percent.
Powell said the tax breaks are a necessity because wells typically start waning after they go into production and companies need the breaks to drill more wells.
TIPRO President Ed Longanecker said the proposal to eliminate intangible drilling costs “would not only severely limit the capital available to independent producers, it illustrates policymakers’ flawed understanding of this tax code provision.
“At a time when we should be fully embracing and supporting American energy companies, policymakers are instead choosing to wrongfully punish independent energy producers, which would raise energy costs for families and businesses across Texas,” Longanecker said from Austin. “U.S. tax law has long allowed oil and gas companies to deduct IDCs, or expenses for labor and services related to drilling a well, at the time they are incurred versus depreciating those costs over time.
“Eliminating those deductions would have dramatic consequences on domestic energy production and small businesses in particular because 90 percent of all wells in the U.S. are drilled by independent energy producers, most of whom are small or mid-sized companies. This effort is not new, but some policy leaders believe this will hurt Big Oil when in fact only independent producers can fully expense IDCs on American production.”
Longanecker also said IDCs are not a tax break because drillers pay the full amount of taxes owed.
“Removing this provision would not only strip away 25 percent of the capital available for independent producers, it would also diminish the many economic benefits created by domestic exploration and production activities and ultimately make our country more reliant on foreign sources of energy,” he said.
