CPAs study impact of elmiinating oil and gas tax incentives

As debate gets underway in Congress on whether to strip tax breaks from the top five oil and gas companies, the Texas Society of CPAs is weighing in on the debate.

"We felt this was a coming issue," said Leroy Bolt of Condley and Company LLP, who chaired the Oil & Gas Task Force under the society's Federal Tax Policy Committee. "We tried to be as apolitical as possible and present what would happen if Congress takes away those incentives."

There have been a number of studies that show eliminating the incentives would cost jobs or slow the oil and gas industry's job growth, said Midlander Larry Edgerton, executive partner at Weaver LLP. "Taking that away at this critical time, when there's still significant unemployment and we're working toward more energy independence, this is a bad time."

He added, "with all due respect to the president, this shows he doesn't really have an understanding of the industry."

Congress is targeting the five biggest producers by eliminating tax breaks Democrats said added $2 billion to their profits each year. Legislation would bar the companies - Exxon Mobil, Shell Oil, BP, Chevron and ConocoPhillips - from taking a deduction available to other manufacturers, tax credits on payments to foreign governments, deductions for intangible drilling costs and the depletion allowance. Democrats estimate this would raise $21 billion over the next 10 years, which would be applied to the budget deficit.

The society sent a letter to Speaker of the House John Boehner outlining the study's findings and their concerns over how the proposals would affect small operators and individuals.

Edgerton expressed concern that though the biggest companies are the target, it would be the small independents who dominate activity in the Permian Basin who would feel the impact.

"This isn't for 'Big Oil'," he said. "Intangible drilling costs and depletion allowance really affects independents."

Especially in West Texas, said Bolt, "where individuals or groups of individual investors are responsible for funding operations. This would deter that."

Any slowdown in the industry, Edgerton pointed out, would blossom throughout the economies of both the state and the nation.

The task force reported oil and gas activity impacts the nation's trade deficit and energy security and can influence spending decisions by both business and individuals. Rising oil and natural gas prices can reduce the purchasing power of both businesses and families, affect the travel and tourist industry, impact land values and contribute to inflation.

In addition, the study found, the industry provides more than 1.7 million jobs and nearly 25 percent of the economy in Texas. Nationwide, the industry provided 9.2 million jobs, represented 7.5 percent of the overall economy and invested more than $2 trillion in domestic capital projects over the last 10 years. In 2008 alone, the industry paid nearly $100 billion in federal income taxes. The study pointed out that even more jobs are being created as the industry develops new resources such as the Marcellus Shale, where 57,000 jobs were added in Pennsylvania and West Virginia in 2009 and the Eagle Ford Shale play could generate $21.5 billion in total annual economic impact and 68,000 jobs in South Texas by 2020.

In some cases, Bolt said, the issue on the tax incentives boils down to timing.

"It's not necessarily how much you can deduct but when you can deduct," he explained. With intangible drilling costs, for example, even if a well is successful, it could take several years before the net income covers the advance costs of preparing and drilling the well. Without being able to rapidly recover those costs, investors would be less inclined to fund a drilling project. The study points out that the costs would be fully deductible even without the provision, and permitting it 'up front' has no effect on the long-term revenues to the government, but makes a difference to the investors. They immediately have less at risk. Percentage depletion has been limited to independent producers and royalty owners since 1975 and even then with numerous limitations. But as with the IDC, the 'up front' timing is important to investors.

In 2010, the American Petroleum Institute hired Wood McKenzie to determine what would happen If the IDC deduction and manufacturer's deduction were repealed. Wood McKenzie reported in August 2010 that, in a sample study of 230 wells, the number of wells economically viable to investors would fall from 88 to 55. This would result in production losses of as much as 3 billion cubic feet per day of natural gas, 60,000 barrels of oil per day and reduced investment of $15 billion in 2011 alone. That would translate to 58,000 jobs at risk in 2011, rising to 165,000 jobs at risk by 2010.

"We'll continue to get the word out and hopefully there' be an opportunity to get in front of" legislators, Edgerton said, rather than just presenting a paper. "I think these proposals will backfire."

Concluded Bolt, "Our conclusion is these incentives have been law, for the most part, for many, many years. They're needed, they have economic value to the nation and if they're going to change them, they need to look at what they're doing."