Proposed repeal of IDC deduction examined in new study commissioned by API

A study commissioned by the American Petroleum Institute found that repealing the intangible drilling costs (IDC) deduction would have a significant impact on the U.S. economy.

The federal government's ongoing budgetary problems have prompted a lot of talk about "closing loopholes" and eliminating deductions that only benefit "big companies" or "millionaires and billionaires." However, the rhetoric surrounding U.S. tax policies has been dominated by misleading and overly simplified statements that often fail to give an accurate picture of what is at stake in different sectors.

One deduction that has ended up in the line of fire is the intangible drilling costs (IDC) deduction, which allows U.S. energy companies to quickly recover non-salvageable expenses incurred in the course of exploring for new resources and drilling oil and gas wells. This is a critical capability because it ensures that the industry can re-allocate that capital towards other projects, generating new employment opportunities and driving overall economic growth.

To make the facts readily available to legislators and voters, the American Petroleum Institute (API) commissioned research and consulting firm Wood Mackenzie to study the IDC deduction's role in the economy and report on the potential effects of a repeal or alteration.

Repeal would have 'significant and immediate' consequences

Stephen Comstock, director of tax and accounting policy at API, recently hosted a conference call with reporters to discuss the results of Wood Mackenzie's research. The Oil and Gas Journal's Nick Snow covered the teleconference and noted that Comstock offered a stark assessment of the repercussions that a repeal of the IDC deduction would have for the U.S. economy.

"The effects of repealing the IDC deduction would be significant and immediate," Comstock said. "The industry would be forced to make fewer investments, drill fewer wells, employ fewer Americans and produce less of the energy that fuels our economy."

According to Wood Mackenzie, job losses linked to a repeal of the IDC deduction could reach 190,000 during the first year, as the industry would be forced to reduce its investments in new drilling activity to maintain financial stability. Over the course of 10 years, the total shortfall in investment would be expected to reach $407 billion.

Despite reports showing relatively strong job creation and overall growth in recent months, cutting an average of $40 billion per year out of the U.S. economy would be extremely damaging to the current recovery. Comstock noted that beyond the impact on workers and investors, the slowdown in drilling activity "would actually lead to long-term declines in federal revenues, state taxes, and royalty payments to private landowners."

This would threaten to make the government's already shaky financial situation even worse, which is why Comstock called raising taxes on the oil and gas industry the "wrong approach" to increasing revenues. He explained that a better strategy would be for the government to maintain policies that support new development, as this would generate new salaries and corporate incomes, which could then be taxed.

Technology remains the key enabler of energy development

Even with pro-growth policies in place, the industry's continued success cannot be guaranteed without an ongoing commitment on the part of stakeholders to the development and implementation of advanced technological solutions to improve productive capacity.

The hydraulic jet pump is one piece of equipment that has emerged as a particularly valuable addition to any oilfield. This powerful solution can be used to improve recovery rates at existing sites or complete drill stem testing and initiate production at new ones.

These pumps are also valued for their versatility. They can be deployed in straight, horizontal or deviated wells and the unit's streamlined design allows each one to be easily retrieved for maintenance or optimization through manipulation of surface valves and reverse circulation of fluids. Furthermore, because it has no downhole moving parts, the hydraulic jet pump has minimal repair needs.