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Colorado Governor Pleases Critics in Call to Retain IDC Credit

Colorado Gov. Bill Ritter last week urged Congressional leaders to retain the Intangible Drilling Costs (IDC) tax deduction, which he said is critical to support the state's now-struggling natural gas producers.

Ritter, who joins Oklahoma Gov. Brad Henry in requesting Congress maintain the tax deduction, sent letters to the chairmen of the Senate Finance and House Ways and Means committees.

"The current economic climate is driving significant cutbacks in drilling activity across the nation, and repeal or significant limitation of the existing deduction for intangible drilling costs would create an additional disincentive for new exploration and development," Ritter said.

Colorado's gas industry, he said, "is one of our most important economic sectors and is a key part of [the state's] New Energy Economy," said Ritter. "I am committed to doing all I can to help increase demand of clean-burning natural gas as we lead Colorado forward and position the state for a strong recovery."

The state, Ritter noted, earlier this year asked the Federal Energy Regulatory Commission to expedite approval of El Paso Corp.'s Ruby Pipeline Project, which would carry gas from the Rockies basins to West Coast markets (see NGI, April 13). "We are talking with private companies about different ways to expand the use of natural gas as a transportation fuel and a home energy fuel. And retaining this federal deduction will represent a significant investment" not only for the state, but also for the nation, he said.

"Our own preliminary analysis of how a policy change on IDC deductions would affect independent producers in Colorado gives us cause for concern," said Ritter. "We estimate that in the next year, these companies would make approximately $4 billion in capital investments (a figure that itself reflects a significant retrenchment in activity), and the vast bulk of those investments would be in drilling and completion of new wells."

Colorado's fiscal year 2010 budget proposal, said the governor, indicates "that intangible drilling and development costs would be capitalized as depreciable or depletable property in accordance with the generally applicable rules. Under this proposal, the Colorado-based industry would stand to lose a minimum of $1 billion in tax benefits. That, in turn, will likely reduce cash flow available to domestic producers by 30-50% and will adversely affect the companies' rates of return, which will likely affect these companies' decisions whether to invest capital in new drilling activity.

"I am further concerned by this potential development because we are likely to see an increase in demand for gas as our economy recovers and even further increased demand for gas as the rules of the road become clearer on climate policy. When these factors are taken into account, I am concerned that such a change in tax policy that adversely affects investment decisions could lead to reduced supplies and higher costs for consumers."

The letter from Ritter, who has been viewed by some as an opponent to drilling in his state, was welcomed by the Colorado Oil & Gas Association (COGA) and the Independent Petroleum Association of Mountain States (IPAMS).

"We're very encouraged that he's taking proactive steps to help business and the consumers of Colorado with their future energy needs," said IPAMS Executive Director Marc Smith. Repealing the IDC "would substantially reduce the cash flow available for investment among our member companies."

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