Loss of IDCs and Percentage Depletion could cost Texas 120,000 direct upstream jobs, says Alliance

By KURT ABRAHAM, Editor-in-Chief on 10/28/2021

As U.S. House Democrats inch closer to striking a deal on a massive Budget Reconciliation package with their counterparts in the Senate, it is important to note the potential implications for jobs in the upstream sector of the U.S. oil and gas industry.

Back in September, as the House Ways and Means Committee was preparing for its markup of the Reconciliation Bill, several members of Congress from Texas asked the Texas Alliance of Energy Producers (the Alliance) to work up some analysis of what the legislation could cost the state and the oil and gas industry. Accordingly, the Alliance prepared an employment impact estimate that would result from the repeal of Intangible Drilling Costs (IDCs) in its current form, and the elimination of the percentage depletion deduction.

These results, which were originally communicated to only those members of Congress and were just released publicly, are frightening, indeed. If both tax treatments are lost, the direct upstream job loss would be 120,250, including 97,750 lost to a loss of IDCs and 22,500 lost to

discontinuation of Percentage Depletion. But if one factors in direct, indirect, and induced negative employment impact all together, then the loss of IDCs would cost 244,375 jobs, and discontinuation of Percentage Depletion would kill 56,250 jobs, for a total loss of an astounding 300,625 positions, most of them well-paying.

Latest Reconciliation developments. Earlier today (Thursday, Oct. 28), the Alliance notified World Oil that “There has been movement on this since Tuesday, when we first reached out, so the discussion is somewhat more informed now.  Even as of this afternoon, this is a fluid process with information coming quickly.”

Karr Ingham
Karr Ingham

“The Alliance, and the oil and gas producers, service companies, and drilling companies we represent, were greatly concerned about plans to eliminate important industry tax provisions, most notably percentage depletion and intangible drilling costs (IDCs) as a part of the reconciliation (Build Back Better) bill,” explained Executive Vice President and Economist Karr Ingham.  “In September, proposals to repeal these provisions were added to the Senate package, but not the House package. It was very encouraging that the Ways & Means Committee did not include their repeal.  However, the possibility of including them in the Ways & Means bill re-emerged late last week. At this point, however, it does not appear as though the elimination of these tax provisions is in the House bill, even with the release of bill language this afternoon. There will still be opportunities for members to try to include the elimination of these tax provisions.”

Methane tax. Meanwhile, notes the Alliance, the House Energy and Commerce Committee included a methane fee, which is more accurately referred to as a methane tax. This tax, to be levied on oil and gas operators, would not be based on detectable and measured emissions, but simply on formulas based on production volumes. That means a so-called fee on methane emissions is, in actuality, nothing more than a federal production tax.  It also means that there is no mechanism by which operators can escape this tax by correcting leaks and eliminating actual emissions, if indeed they exist.  In other words, the methane fee as proposed is based not on actual emissions, but on production. 

“We learned this afternoon (Thursday) that the House draft of the reconciliation bill indeed does contain a methane tax on oil and gas production facilities,” said Ingham.  “This tax is ill-conceived, poorly constructed, and will be costly and burdensome to oil and gas operators, smaller producers in particular.  Additionally, it will very likely make uneconomic a significant number of wells that are presently economic.  That, alone, will cost jobs, and perhaps companies.  It will also lower the contribution to the production total from those wells.”

The effects just multiply. The Alliance says that it, along with other trade associations and companies, has been working hard to eliminate these onerous and costly measures from the Build Back Better Act.  Imposing these negative measures on Texas and U.S. oil and gas producers would have multiple negative effects, including:

  •          Disadvantaging U.S. producers in favor of foreign producers
  •          Disadvantaging smaller independent U.S. producers, compared to much larger operators
  •          Newly imposed artificial restrictions on U.S. domestic production, and increased reliance on imports
  •          Higher energy costs to U.S. consumers.

These costs, continues the Alliance, are imposed on the U.S. domestic oil and gas industry and the U.S. economy, while at the same time having little impact on global emissions, as the U.S. is responsible for only about 12% to 15% of global greenhouse gas emissions.  Very little of that comes from actual production activities.

On the tax side, the language in the reconciliation bill is a positive sign that the men and women in this industry are making their voices heard, says the Alliance. The bill does not appear to contain the disastrous tax policies that were initially proposed and endorsed by some committees that are designed to make the U.S. heavily dependent on foreign sources of oil and natural gas. “Congressional leaders, like (Rep.) Henry Cuellar (D-Texas), (Rep.) Vicente Gonzalez (D-Texas) and (Rep.) Filemón Vela (D-Texas), pushed their caucus to not demonize domestic oil and natural gas producers—they are fighting for Texas jobs and keeping energy prices low,” analyzes the Alliance. 

Additional tax details. In its original comments to Texas congressional members, the Alliance noted that “eliminating both provisions changes the math to U.S. oil and gas producers by raising the tax burden and lowering the effective price received for domestically produced crude oil and natural gas. With regard to IDCs, labor cost, itself, is an intangible drilling cost and is often the greatest share of total IDCs. Attaching a higher tax burden to labor cost will, without question, reduce the amount of labor demanded. In other words, jobs lost and/or not created going forward are unavoidable consequences of repealing the current treatment for intangible drilling costs.”

The Alliance also point out this stark fact: “These increased costs are less easily absorbed by smaller operators, and a number of those companies may simply go away or be absorbed into larger companies. There are hundreds of small independent operators in Texas, and thousands nationally. They and their employees are at considerably heightened risk with the elimination of these tax provisions.

The Alliance says it will continue working to maintain these important tax provisions for oil and gas operators in Texas, independent producers in particular. The association will also be working diligently with industry partners and members of Congress in the coming days and weeks to eliminate the methane tax from the bill. We at World Oil will continue to work with the Alliance to get the word out on further developments and/or changes.



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