American Oil and Gas Reporter - February 2015 - 149

NSWA Defends Depletion Allowance
OKLAHOMA CITY-Eliminating the
percentage depletion tax deduction for
U.S. oil and gas producers would reduce
economic growth, jobs and labor income,
and cut federal tax revenues by almost
$2.5 billion and royalty revenues by $1.1
billion by 2025, the National Stripper
Well Association predicts.
Over the next decade, NSWA warns,
the economic impacts of eliminating the
percentage depletion deduction from the
federal tax code would cost the U.S.
economy $184.5 billion in gross valueadded revenues, an average of 178,000
jobs, and $115.0 billion in earned labor
income. By 2025, a report prepared for
NSWA by IHS forecasts a range of unintended consequences:
* The number of producing wells
would decrease by 4.2 percent and new
wells drilled would fall by 23.5 percent.
* Daily oil production would drop
by nearly 4.0 percent and daily natural
gas production decline by 2.0 percent.
* More than 37,000 wells would not
be drilled, and 644.0 million fewer barrels
of oil and 2.8 trillion fewer cubic feet of
gas would be produced. That amounts to
$9.4 million in foregone production revenue and $144.0 billion less in capital investments over the decade.
"At tax time, we always could count
on getting a little back from percentage
depletion," says NSWA Chairman Mike
Cantrell, a marginal well operator. "That
is what we would use to drill wells and
rework wells to increase production. Some
years, it was the only investment capital
we had."
Cantrell says that the more than
770,000 marginal oil and gas wells producing in the United States represent
nearly 80 percent of total wells, and are
responsible for 19.6 percent of total domestic oil and gas production.
He adds that although independent
marginal well operators are not the only
ones who utilize percentage depletion,
they would be disproportionally affected
by eliminating the deduction. According
to Cantrell, the unintended consequences
of changing U.S. tax policies would be
costly for the nation's economy, and
would become worse over time as investments in new wells, which otherwise
would have been drilled, were not made.
"Stripper well producers are the 'family
farmers' of the oil and natural gas industry,
and collectively are responsible for a significant part of the energy independence
we see today in the United States. Keeping
the (stripper) wells on line doesn't benefit

only us. It benefits all Americans," Cantrell
asserts.
NSWA points out that small operators
are concentrated in mature, largely conventional oil- and gas-producing areas,
and consequently more than 75 percent
of the loss of marginal producing wells
and two-thirds of the loss of new wells
would take place in those areas. Almost
every state would be affected, the IHS
study finds, whether or not fossil fuel
production exists in the state.
Modeling The Impacts
IHS says its study uses a social account
model to account for three types of impacts: direct, indirect and induced. The
first examines the impact on the core
producing industries and main industries
involved in drilling wells. Indirect impacts
cover all supply industries supporting oil
and gas activities, IHS details, while the
induced category measures changes in
household incomes because of employment changes among oil and gas workers.
The assessment uses four indicators
to assess economic impacts, IHS continues:
* Employment;
* Value-added revenues to measure
the difference between production costs
or services and sales prices;
* Labor income; and
* Government revenues.
According to IHS, if percentage depletion is eliminated, the indirect and induced costs to other industries and households are even larger than the direct costs
to oil and gas producers. By 2025, IHS
predicts there would be 320,000 fewer
jobs available and income to workers
would fall by more than $20.0 billion.
The economic costs to major U.S.
sectors will increase over time, the study
says, with manufacturing, information
and professional services, natural resources, and financial services posting
significant losses in employment, gross
domestic product, and labor income contributions if the deduction is eliminated.
Looking at direct jobs lost on an annual
basis, IHS forecasts Texas would lead
the nation, with an average yearly employment loss of 82,979 through 2025.
Sixteen other states would lose between
1,000 and 9,999 jobs annually, with 13
losing more than 100. While 26 oil- and
gas-producing states would see cuts in
gross value-added numbers, nonproducing
states also would take hits, the study
warns.

Eliminating percentage depletion will
have an effect on federal, state and local
governments as well, the study warns,
predicting U.S. federal tax collections
would decrease $246.0 million in 2015,
and state and local revenues would drop
$155.0 million. By 2025, IHS estimates,
federal tax revenues would fall $3.7
billion, and state and local taxes would
decline $2.4 billion. In addition, it says
federal royalty earnings could drop as
much as $1.07 billion over the decade,
and state coffers would give up $237,686.
The study notes that eliminating percentage depletion causes producers' average effective tax rates to be higher, but
its model shows that by 2020, the economic costs catch up to the governmental
revenue gains from those higher effective
tax rates, such that total federal revenue
is lower than it otherwise would be with
the percentage depletion allowance. Lower
production that would result from eliminating the deduction, on net, would cost
the federal government close to $2.5
billion in revenues over the next decade,
IHS concludes.
Royalty Owners
Royalty owners would suffer as well,
IHS continues. The study says eliminating
the deduction affects royalty owners in
two ways:
* It lowers financial incentives, so
businesses see leasing mineral rights or
lending investment capital for new wells
as riskier investments.
* Reducing or eliminating marginal
well production lowers royalty owners'
earnings.
Overall, the report projects private
royalty owners would earn $34.3 billion
less over the decade-long forecast period.
"Eliminating the percentage depletion
tax deduction lowers the productive capacity, not only of the oil and gas industry,
but the entire U.S. economy," Cantrell
says. "Our livelihood as the small business
sector of the energy industry, and that of
nearly 10 million royalty owners nationwide, is based on our ability to save percentage depletion."
Ì

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FEBRUARY 2015 149



American Oil and Gas Reporter - February 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - February 2015

Contents
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American Oil and Gas Reporter - February 2015 - Contents
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