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Let's do what we do best

4/10/2014

The American oil and natural gas industry has been a bright spot in our economy, with benefits felt across the nation and in Kansas. Innovations spurred by small businesses and entrepreneurs have generated a domestic-energy revolution. American oil and natural gas production is up because the small businesses that make up the independent oil and natural gas industry are committed to investment and job creation in the U.S., and are using technology and innovation to access more and more oil and natural gas reserves. Our nation’s energy supply now is American and abundant, and that is good for national security. This revolution in turn has sparked new life into domestic manufacturing, is supporting 9.8 million jobs and has raised the average household’s disposable income by $1,200 last year, according to a recent study by IHS Global Insight. 

According to recent census data, there are more than 46,000 small businesses supporting the production of oil and natural gas in the U.S. A 2013 analysis revealed more than 75 different companies could be involved in the exploration and development of one Kansas oil well. The analysis indicated 100 people are employed by varying small businesses in the drilling and completion of one oil well in Ness County. Small businesses are the backbone of the Kansas oil and natural gas industry, supporting more than 67,000 jobs and $3 billion in family income.

Every day small businesses provide a vital aspect to the generation of America’s energy. Each of them makes a difference every day for our nation’s energy security and economic well-being. Without the tasks each one of these small businesses complete each day, people would not have the fuel to drive to the grocery store or the heat to warm their homes in the winter. The small businesses that make up the independent oil and natural gas industry are drivers of the American energy revolution and are an important part of people’s everyday lives.

Of course, finding and producing oil and natural gas always has been and will continue to be a risky, time-consuming and expensive process. Industry operators must spend significant time and money before generating a return on their investments. Therefore, the ability to generate and preserve cash flow is vitally important to the industry.

The federal tax code allows exploration and production companies to recover costs quickly so investment is maintained. The percentage depletion cost recovery tax provision allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well. Ordinary business costs that have no salvage value associated with wages, fuel and maintenance involved in drilling a well, referred to as intangible drilling costs, can be deducted when incurred. The resulting improvement in cash flows from these two cost recovery methods means operators have more capital to invest and can perform more exploration and drilling, produce more energy and create more jobs. All of that helps to grow our economy, which creates a larger tax base that can generate more revenue for the government without actually raising taxes.

During the last several months, we have gained insight into Congress’s framework for business tax reform. U.S. Senate Finance Committee Chairman Max Baucus, D-Mont., and U.S. House Ways & Means Chairman Dave Camp, R-Mich., have released tax reform discussion drafts. Both of these misguided tax reform discussion drafts focus on eliminating tax provisions for specific industries. The American oil and natural gas industry continues to be a target. Rarely is any focus given to the positive benefits of existing tax laws.   

Changes to cost recovery mechanisms such as percentage depletion and IDCs could force the small businesses that make up the independent oil and natural gas industry to shut down older, domestic oil and natural gas wells and cut back on drilling new ones. Accordingly, the result would be reduced domestic oil and natural gas production and fewer U.S. jobs. The economic ripple adversely would affect the job growth and revenues of small businesses in the domestic supply chain and those that depend upon a secure energy supply. In short, changes in the federal tax code to percentage depletion and IDC cost recovery mechanisms could unintentionally hit the brakes on America’s energy and manufacturing revolution and have a devastating effect on jobs, the economy and revenue to the government.

The U.S. is one of the few countries with improving energy security. American oil and natural gas productivity has resulted in the U.S. having the lowest long-term natural resource prices of any industrialized nation. The competitive advantage will have far-reaching and positive implications for various domestic industries.

Percentage depletion and IDC cost recovery tax provisions support an oil and natural gas industry that is a significant piece of our state and national economy. The American oil and natural gas industry supports 9.8 million jobs in the U.S. Manufacturing jobs are coming back to the U.S. thanks to the abundance of affordable energy our industry provides. Current tax reform discussion drafts in the U.S. Senate and the U.S. House threaten long-standing cost recovery tax provisions, the health of the American oil and natural gas industry, and the national economy as a whole. Energy is working in America. We just need the federal government to let us do what we do best.

Edward Cross is president of the Kansas Independent Oil & Gas Association.

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