Russell: President’s Budget Is Wrong on Oil and Natural Gas, Again

Posted April 18, 2013 at 3:04pm

As Congress begins its annual budget process, oil and natural-gas production continues to increase across the United States, giving us a chance to reinvigorate our economy while finally reversing our dependency on sources of energy from unstable regions of the world. Unfortunately, the president’s 2014 budget proposes to reverse this progress by eliminating critical energy tax provisions that stimulate investment in safe domestic-energy production.

Despite the administration’s rhetoric, Congress should know that the tax policies that govern independent producers are not credits, subsidies or handouts. These provisions and deductions, which are available to nearly every American industry, enable continued investment in U.S. energy exploration and production. Independent energy producers — companies with an average of 12 employees, which drill nearly 95 percent of the nation’s oil and gas wells — are at the heart of America’s great energy revival. The current provisions in the tax code that promote continued American energy production are key to the success of these small operators.

So to better educate lawmakers and the public about energy taxes and their effect on U.S. production, we are launching the Energy Tax Facts campaign. Energy Tax Facts will explain the often complicated tax provisions and policies that apply to American independent oil and natural-gas producers and why some of these provisions are so critical.

Take, for instance, the intangible drilling costs (IDC) deduction, which the administration’s budget targets for elimination. IDC are expenses that operators incur at the well site that don’t by themselves produce a physical asset for the producer. These costs include things such as labor and site preparation and equipment rental fees — costs that have no salvage value after they are spent. These are the same tax deductions available to many American industries: to farmers for fertilizer, technology companies for research and development, even bakeries for sugar and eggs. These are all upfront costs with no guaranteed return on investment facing nearly every American small-business owner, no matter the industry.

This tax provision has been around for 100 years because even a century ago Congress realized this deduction was a normal business expense. Removing this provision from the tax code would not only strip away roughly 25 percent of the capital available for independent producers to continue looking for new oil and natural gas but also diminish the many economic benefits created by those activities including the 4 million direct, indirect and induced jobs supported by America’s independents in the lower 48 states.

Exploration and production of American energy is a capital-intensive process, and drilling a well does not guarantee resource production or return on investment. Historical provisions, such as the IDC deduction, are key to allowing independent producers to continue investment and exploration here in the United States. While the president’s 2014 budget says that cutting these deductions would provide $4 billion in government revenue, independent producers’ onshore upstream taxes alone generated $67.7 billion in 2010. Many members of Congress understand that removing these tax provisions would lead to less industry activity and could actually generate less total government revenue.

America’s independent producers play a pivotal role in advancing our national security and supporting our economy by reinvesting 150 percent of their capital budgets into new energy projects — creating jobs and providing the energy we all rely on every day. I urge the president and members of Congress to visit and learn about how the provisions the administration proposes to eliminate are actually stimulating American economic growth, job creation and energy independence. Any responsible budget plan must not start with harming U.S. small businesses and energy security.

Barry Russell is president of the Independent Petroleum Association of America in Washington, D.C.