Obama considers repealing tax incentives

Enterprise

Throughout the US presidential campaign, the now-President Barack Obama promoted an energy policy focused on boosting the growth of renewable power across the nation by decreasing dependency on imported energy.

To achieve this, the Obama administration has proposed the repeal (the removal or rehearsal of a law) of various tax incentives on the oil and gas industry. According to some estimates, these could cumulatively cause an additional cost of $31bn by 2019 to US oil and gas companies.

“The repeal of various tax incentives could cumulatively cause an additional cost of $31bn by 2019 to US oil and gas companies.”

Among the key measures under the new budget proposal by the Obama administration that will have strong implications for the oil and gas industry is the elimination of tax breaks such as the intangible drilling and development costs, percentage depletion and manufacturing deduction.

It also includes an excise tax focused specifically on production in the Gulf of Mexico and the extension of the period of geological and geophysical amortisation [the process of increasing or accounting for an amount over a period of time]. Here we take a more extensive look at each measure of the proposal to fully comprehend its overall potential impact on the US oil and gas sector.

Similarly, the budget proposes to eliminate the tax incentive on intangible drilling and development costs (IDC), which it estimates will raise about $3.4bn. This move would eliminate the ability of companies to write off certain business expenses as intangible drilling costs. IDC includes the costs incurred on recovering oil from the toughest areas of a reservoir.

With this in mind, some industry experts believe the elimination of IDC would affect the independent producers and reduce their ability to invest in new production.

A percentage depletion income tax deduction also features in the proposal, which could raise an estimated $8.2bn. All natural resources would be eligible for such a percentage depletion tax deduction and it would allow for the recovery of capital investment over a period of time – subject to various conditions.

One such condition is that the percentage depletion allowance may only be taken by independent producers and royalty owners and not by integrated oil companies.

“By extending the period of geological and geophysical amortisation to seven years, the Obama administration hopes to raise about $1.1bn.”

Depletion also may only be claimed on specific daily domestic production levels of up to 1,000 barrels of oil or 6,000mcf of natural gas.

Another catch is that the deduction is limited to 65% of net taxable income while the net income limitation requires percentage depletion to be calculated on a property-by-property basis. In addition, it prohibits percentage depletion to the extent that it exceeds the net income from a particular property.

So while the percentage depletion tax deduction could provide capital for smaller independent companies, the repeal of the percentage depletion tax deduction will at the same time mainly affect the smaller independent companies – thus proving the measure counterproductive.

With the tax increases likely to strip the oil and gas companies of the much-needed capital required to weather the downturn in the economy, some have even gone as far as to question whether the Obama administration’s energy policy will mark the end of the US domestic oil and gas industry.

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