What role does the U.S. tax code play in oil and natural gas industry investment in America?
Risk is an integral part of exploring for oil and natural gas. There's no guarantee that drillers will find commercially viable amounts of energy. Before companies begin drilling, they must invest large sums of money to lease areas for development (onshore and offshore) get the needed permits, procure the rig, hire workers and assemble the necessary equipment. Sometimes they find energy, sometimes they drill a dry hole.
For an industry managing such huge risks, it’s critical that government provide an energy policy and tax framework that encourages investment instead of discouraging it.
The way costs associated with these risks are treated for tax purposes directly impacts the economics of a project. Though a substantial portion of the costs are recovered over a long period of time, exploration and production companies do get a tax deduction for the labor associated with drilling to defray some of the upfront risk and economic cost.
Additionally, companies are eligible for a deduction under Section 199 of the tax code for their ongoing production activities. It’s a provision aimed at encouraging job creation and retention by U.S. industry and available for all U.S. manufacturers and producers. These deductions have been available to the oil and natural gas industry since their enactment in 2005.
Policy proposals threatening to withdraw these tax deductions—not subsidies—vastly increases the economic risk companies take on in U.S. operations, making America less competitive and putting jobs at risk. In fact, a study by the energy research firm Wood Mackenzie suggests repealing Section 199 and other provisions will hurt jobs, thousands of them, in oil and natural gas.
For more on lawmakers’ choice on taxes, watch the video below:
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