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Not that I think it will matter a flip to you, Dexter, but those tax deductions also have benefits for the nation, not just the industry. Let me point out a few:
Percentage Depletion – This tax break applies only to the small independent US oil companies—the mom & pop firms that do most of the exploration drilling in the mature US—not "Big Oil" like Exxon, Chevron, or BP. The upfront cost for exploring and developing oil and gas is extremely high, more so than any other industry I can think of (we're talking millions of dollars per well, billions when you go offshore in deepwater, and something like 10 years or more from the time they do the initial seismic exploration until the first barrel of oil or Mcf of gas is produced and sold). The depletion allowance helps small oil companies reduce these upfront costs, so they can drill more wells and develop more fields as the underlying mineral is produced. Switching to cost depletion will increase costs for small producers through a more complicated tax system and put more of them out of business.
Tax credits for enhanced oil recovery and for marginal wells. Most of the onland oil wells in the lower 48 states are what they call marginal wells whose production life is nearing an end so that they produce only 10 b/d or less—mostly less. Cumulatively, however, that’s still a hell of a lot of oil being squeezed out of those old wells. Enhanced oil recovery is where one uses chemicals or steam or water downhole to enhance production from a well that is either marginal from long production or that has low porosity in the rock, making it harder to produce the oil. These tax credits were established to ensure continued production when oil prices drop to low levels as in 1986 when Saudi Arabia jacked up its production and dropped the price of oil to $10/bbl. But there is also a mechanism build into these tax reductions that eliminates the credit when oil prices are above a certain level (well below what the price of oil is today, believe me). Eliminating these credits would entirely disregard the cyclical nature of oil prices and penalize marginal or tertiary production when prices are depressed and these marginal wells lose value. In times of low prices, these marginal wells will be the first to be shut in because the value of their production would drop below the cost of producing them. That means US wells being shut in, not reducing imports from the Middle East where production costs are much lower anyway. Once shut in, a marginal well rarely can be brought back into production because the cost of going in and reworking a well to get say 5 b/d of oil is prohibitive. Shut these wells in and they’re gone forever.
Tax credits for expensing of tertiary injectants. As I said earlier, the US is a mature oil producing region but still contains many viable fields whose lives are extended through the use of tertiary injectants, using chemicals downhole to increase oil production in aging wells. This deduction supports using carbon dioxide in enhanced oil recovery projects, one of the primary methods by which carbon dioxide is currently stored to prevent its release into the atmosphere, so it has environmental benefits, too. This technology and the tax deduction that helps support it keep many fields active and many production companies in business. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies.
Geological and geophysical amortization – Before drilling a well, geologists and geophysicists study the area for clues as to whether there might be any oil or gas below and, if so, the optimum place to drill for it. This is time-consuming and very expensive. The amortization helps recover those upfront costs for tax purposes and is important to continued exploration that in time will lead to more domestic oil and gas, so that we import less from overseas.
International Reform/Dual Capacity - Proposals to restrict the use of deductions and foreign tax credits on foreign earnings ignore the multinational nature of the US economy and particularly the oil industry. Such restrictions would penalize industries like oil and gas that must seek foreign markets to grow. Efforts to subject the oil and natural gas industry to double taxation of its foreign earnings—once in the host country and again in the US—will hinder expansion of US oil companies in the world marketplace. Contrary to statements made by the administration, these proposals will not create US jobs and could even result in US job losses. (It takes several US workers to support an overseas project.)
Another proposal is to repeal the last-in-first-out accounting method, which far from being a tax loophole is merely a way to determine income for companies that anticipate inflation or rising prices over the course of their operations. The system has been in use for over 70 years. Repealing LIFO has no real basis in tax policy and would require companies to redirect cash or sell assets in order to cover the tax payment – potentially destroying some businesses.
Sec. 199 for oil and natural gas companies – A tax deduction established to help US manufacturers maintain and create well-paying US jobs. The oil and natural gas industry supports 9.2 million jobs. A full repeal of this deduction for just the oil and gas industry places a number of those jobs at risk and undermines efforts to reduce our dependence on foreign oil.
Expensing of intangible drilling costs – US producers have had the option to expense IDC since the inception of the tax code. It is designed to help companies continue exploring for and producing oil and gas by reducing drilling and development costs. Repealing this deduction will trigger a jump in those costs, resulting in less drilling, less development, fewer US jobs, greater dependence on foreign oil, and in time less revenue to the US government for oil and gas not found and brought to market. These deductions have played a crucial role in advances in technology and spurring transformations in the US economy and America’s energy sector. Similar to the research and development costs for other industries, the intangible drilling and development cost deductions for oil and gas companies have identical policy goals: to promote innovation, foster development of new products and resources, and promote economic growth.
Let me also point out that back before Obama shut down drilling in the Gulf of Mexico, royalties and fees paid on offshore wells throught the old Minerals Management Service was the second greatest source of federal revenue after the income tax.