TIPRO News Releases and Statements

TIPRO Opposes Bill to Eliminate Percentage Depletion and Intangible Drilling Costs Tax Deductions

Austin, Texas – Today the U.S. Senate Committee on Finance will consider the Clean Energy for America Act, comprehensive climate legislation that would adversely impact independent producers, mineral owners and our nation’s energy security. The bill aims to promote clean energy, while terminating longstanding tax policies for the U.S. oil and natural gas industry. The following statement can be attributed to Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association (TIPRO).

 “This week, TIPRO communicated our strong opposition to provisions in the Clean Energy for America Act relating to the elimination of percentage depletion and intangible drilling costs (IDCs) in the U.S. tax code ahead of the today’s mark up in the U.S. Senate Committee on Finance.

The percentage depletion deduction has been a part of the U.S. tax code since 1926. All mineral natural resources are eligible for a percentage depletion income tax deduction to reflect the decreasing value of the resource as it is produced. Percentage depletion allows independent producers to reinvest cash into the expenses of existing wells and redeploy capital to drill new wells. This deduction is highly limited and only applies to smaller independent producers and to royalty owners, not “Big Oil.” Thousands of small domestic producers and more than 12.6 million royalty owners in the U.S. could be adversely impacted by the removal of the percentage depletion deduction, including retirees who heavily rely on royalty payments as part of their income needed to live. These taxpayers should not be penalized through politically driven tax reforms that will result in the loss of these important American natural resource assets.

Since 1913, the intangible drilling and development costs deduction has been allowed as a mechanism to attract capital for the high-risk business of exploring for, and developing, American oil and natural gas. While drilling costs are unique to drillers, the deduction of costs is similar to cost-recovery provisions provided to every business sector. IDCs are also not a tax break, as drillers pay the full amount of taxes that are owed. Removing this tax provision would not only strip away roughly 25 percent of the capital available for independent producers, but also diminish the many economic benefits created by domestic exploration and production activities. 

The direct Gross Domestic Product (GDP) for the U.S. oil and natural gas industry last year was $741 billion, or 4 percent of the nation’s economy. When incorporating direct, indirect, and induced multipliers for employment at the national level, the industry supported more than 17 million jobs last year. Direct payroll in the U.S. oil and natural gas industry totaled $102 billion in 2020, and the total number of related establishments exceeded 43,000, the majority of which are small businesses. Finally, the industry purchased U.S. goods and services in the amount of $527 billion in 2020 from virtually every business sector in our country, further illustrating the importance of oil and natural gas from an economic perspective.

The U.S. Shale Revolution has delivered significant savings to both industry and American households. According to the American Chemistry Council, U.S. chemical and plastics industry investment linked to plentiful and affordable domestic supplies of natural gas and natural gas liquids (NGLs) from shale formations has surpassed $200 billion. Since 2010, 333 chemical industry projects cumulatively valued at $202.4 billion have been announced. Residential natural gas prices have been on the decline since their 2008 peak and stand at approximately $10 per million British thermal unit (BTU) as of August 2020. This is $27 cheaper on average across the United States for the electrical equivalent per million BTU. And while this difference varies by region, gas is consistently two to three times more affordable than electricity. The White House Council for Economic Advisers (CEA) estimated that “shale driven improvements in energy productivity reduced the domestic price of natural gas by 63 percent,” and the shale revolution in the states has saved U.S. families an average of $2,500 annually.

At a time when oil and natural gas supply and demand has come back into balance, eliminating these tax provisions would lead to a decreased production and likely higher oil prices. A rise in energy price would disproportionately impact low-income households. These households, defined as earning 80 percent or less than the median income of their state or region, spend, on average, three times more than non-low-income households when paying for energy. A 10 percent increase in household energy costs would lead to approximately 840,000 people across the U.S. being pushed into poverty. Additionally, U.S. manufacturing world competitiveness would suffer with higher natural gas prices, which would drive many more jobs overseas to countries that do not share the same environmental standards as the U.S.

The U.S. is a global leader in clean air, water, and the world’s largest producer of oil and natural gas. Our industry has made its commitment to reducing emissions and minimizing its environmental footprint well known and has achieved quantifiable success through voluntary actions, investment, collaboration and innovation. As an example, over the last 20 years, the U.S. oil and natural gas industry has collectively invested over $300 billion in greenhouse gas (GHG) mitigating technologies through the oil and gas value chain. As a result of this ongoing commitment, methane emissions from oil and natural gas systems are down 23 percent since 1990, according to 2020 data from the EPA's Inventory of U.S. Greenhouse Gas Emissions and Sinks. Also, since 2005, total U.S. GHG emissions have dropped by 12 percent and total GHG emissions from fossil fuel combustion have decreased nearly 15 percent. Increasing use of natural gas to fuel power generation is also a key factor in the reduction of U.S. emissions of carbon dioxide (CO2) to the lowest levels in a generation. Eliminating these tax provisions would put further financial pressure on domestic producers and could actually stifle environmental oriented investment and innovation.

Independent producers drill 90 percent of U.S. wells, produce over 80 percent of its natural gas and about 65 percent of its oil. Many of these businesses were severely hurt this last year by record low prices and experienced at least a short period of negative prices. Eliminating percentage depletion and IDCs would again reduce domestic supply, and thereby increase the nation’s reliance on foreign oil and natural gas sources, kill thousands of American jobs, and raise costs for the American consumer. 

We have respectively asked members of the Senate Committee on Finance and other congressional leaders to reject the elimination of these important tax provisions to protect American jobs, small businesses, and national security.”

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