Energy industry experts on Tuesday urged the U.S. Senate Finance Committee to keep federal tax deductions for intangible drilling costs (IDC) and consider a uniform corporate rate as it considers comprehensive tax reform.
Continental Resources Inc. CEO Harold Hamm, who also serves as energy advisor to Mitt Romney’s presidential campaign, told the committee his company would cut drilling by one-third if IDC deductions were eliminated.
“If we do away with [IDCs], we’ll stop this march to energy independence that we’ve begun,” Hamm said. “These same tax provisions not only allowed us to survive the disastrous years of the ’80s and ’90s — which eliminated about 50% of the independents within our ranks — but they also allowed us to try and fail and try again.
“And that’s what it took in the Bakken. We drilled about 18 commercial wells up there before breaking the code on producing this mighty oilfield that’s somewhere more than 24 billion bbl. Without that ability [to deduct IDCs], we wouldn’t have been able to do that.”
Hamm said there are currently 18,000 independent oil and natural gas producers in the United States, which collectively drill 95% of the nation’s wells. He added that independents also produce 67% of the nation’s oil and 86% of the nation’s natural gas.
“It’s certainly a great era,” Hamm said. “We’ve had tremendous success in these new resources plays across the country. But if we’re not careful, the unintended consequences of changing these rules could be devastating. We could stop this energy renaissance, and we certainly don’t want to do that.”
The federal government has offered IDC deductions since 1913 to attract investment capital and help mitigate the risks involved with oil and gas exploration.
Former Sen. Don Nickles (R-OK), CEO of the Nickles Group LLC and a board member at Chesapeake Energy Corp., said the Obama administration was mischaracterizing the tax breaks as subsidies for the oil and gas industry (see Shale Daily, March 5).
“What a crazy statement,” Nickles said, adding that he strongly supports a uniform corporate tax rate, not the current system that he said favors manufacturers. “Good tax policy allows expensing of wages, and most of the intangible drilling costs are wages. This is not a credit against taxes.
“This committee hasn’t done a lot on the international tax front. We’ve always talked about it, but it’s really about time. I think a greater consensus in moving toward a territorial system makes sense. We’re becoming a smaller world in international competition. Frankly, we shouldn’t be giving advantages to our international competitors over our U.S.-based companies. You want to have tax rates as efficient [as possible] and raise as much money as they can without doing harm.”
Former Rep. Phillip Sharp (D-IN), who now serves as president of the nonprofit Resources for the Future, concurred. “We rely overwhelmingly on private capital to build, produce and distribute our energy in this country,” he said. “Nobody I’m aware of wants to stop doing that.
“While entrepreneurs are very important, the truth is the government has been very important, too. The tax credit on research and development keeps our private sector entities working [and] keeps our great research institutions [and] national laboratories figuring ahead. We don’t know which of these [technologies] will work. You have to be careful. [You don’t want to] just rip all of this out and think that it’s all going to be done out there [in the private sector]. There was no immediate return for a lot of these technologies; the return only happened after several decades.”
But committee Chair Sen. Max Baucus (D-MT) said that wasn’t the committee’s charge.
“Nobody is talking about eliminating things like percentage depletion or the deductibility of exploration and development,” Baucus said. “We’re talking about bringing tax provisions into line with fundamental economics. We’re not talking about getting rid of incentives; we’re talking about making them [industry] neutral. That is the purpose of comprehensive reform.”
Harvard economics professor Dale Jorgenson said a national energy utilization tax — which he called a “kissing cousin” to a carbon tax — would be the “greatest environmental opportunity of our time” and raise revenue equal to 1.5% of GDP.
“It would be primarily on coal, modest on oil and very modest on natural gas,” Jorgenson said. “That would lead to the substitution that is under way right now away from coal — which is the most polluting energy source — toward natural gas in the generation of electricity. It just turns out that it produces a lot of revenue. We’ve got to have taxes that limit this pollution.”
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