Intangible Drilling Costs Essay

Published: 2017-12-18
Intangible Drilling Costs Essay
Type of paper:  Essay
Categories:  Economics Finance
Pages: 5
Wordcount: 1241 words
11 min read

Findings and Discussion

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Intangible drilling cost deduction effect

Breaking down Impacts of IDCs

The term might differ, but IDCs, like tax deductions that are available to diverse American industries – such as research and development for technology firms and fertilizer for farmers From a general perspective, IDCs have an overall impact of mirroring the deduction of costs for natural gas and oil production. Even so, it is well-founded that the Obama Administration has been unrelentingly trying to repeal the 100-year-old provision for IDCs, among other tax laws over the past several years. The routine tax reduction is typically mischaracterized as loopholes and subsidies. However, an analysis of definitions across the board reveal IDCs as tax deductions for enterprise expenditures that all other business in the US are permitted to make (Rogers & Price Waterhouse, 1985). As in the Tax Reform Act of 1986, All small and medium business, whether tool factories, automobile part suppliers, family farms, deduct these costs – arising from development, development, productions of services and good. For the natural gas and oil industry, the American firm is miles underground but is more high-tech that the majority and as least as modern as other factories.

Tens of thousands of factories are build every year in American each costing an average of $4 million to about $10 million. Seismic work, site preparation, roads, labor cost, environmental mitigation, and the rest fall under intangible drill costs (Deshmukh, 2006). Such costs are categorized under IDCs because they lack residual value for a well once its generation is depleted. Nonetheless, above-ground plants have significant residual value in its brick and mortar, machinery, and other equipment. Expensing indirect drilling costs for tax reasons provides a self- funding chain of credit through which firms regain the initial capital for every well and swiftly return the same capital around and plowing it into the next oil and natural gas exploration and development project (Burke, 2016). IDC expensing presents the flow- through initial investment to thousands of private generators who in turn drive new development and innovation; a prominent example being developments in the stimulation of hydraulic fracture and horizontal drilling.

IDCs as Prerequisite for the Exploration of Potential Oil and Natural Gas Locations

IDC deductions include the research and development program for the natural gas and oil industry. Unlike other research and development initiatives funded by taxpayer handouts and government subsidies, IDCs delineate an expansive research and development program that is funded by the private sector, with outstrips what the federal government could provide (Nadel, Farley, & American Council, 2012). Tight sands and Shale stand among extraordinary plays –from Texas, through Colorado, and North Dakota that was made financially feasible through IDC tax laws that help to regain costs of exploring and developing natural gas and oil. In fact, the potential new resources would not have been explored without IDCs, thereby leading to an unfavorable scenario where an enormous proportion of domestic energy supply remains untapped. Sustained investing also allows new technologies such as laser drilling, 4-D seismic visualization, advanced water recycling, safety innovation and walking rigs that have, by far transformed the oil and gas industry of the US (see Section 1.612-4(a)) (Burke, 2016).

IDCs in Job Creation and Economic Growth

The implementation of IDCs gains the support of numerous stakeholders and policymakers in American bearing in mind the high risk of the oil and natural gas business where there is a little guarantee of success. For example, Deshmukh (2006) affirms that between 60% and 80% of drilling a well accrues regardless of whether the hole turns out to be productive or not. What is more, more wells must be drilled every year to cope with demand as contemporary wells have higher chances of success that traditional ones. Worth noting also is that the members of Western Energy Alliance depends on IDC tax provisions to sponsor the production and exploration of clean and safe domestic energy while generating employment and encouraging economic growth (Burke, 2016). In the light of this realization, one wonders how repealing IDC tax provision will impact the domestic oil and natural gas industry of the US.

Impacts of Repealing IDCs

Repealing ICDs will Reduce the Exploration and Development of Domestic Oil and Natural Gas Locations

The puzzle of whether he IDCs should be repealed has, over time, become a controversial agenda, attracting opposing arguments. Generally speaking, opponents of the reform argues that repealing this federal government regulation will have devastating impacts on independent oil and natural gas generators who constitute 90% of entities running and developing new wells, the majority being small firms. Pearce (2010), for instance, uses the facts and ruling of Louisiana Land and Exploration Co. v. Commissioner to argue that small-scale generators rely almost entirely on IDC tax policies to sponsor their day-to-day activities and that repealing the IDC expensing has a profound potential to discourage the risk-taking spirit that supports investments and the development of new wells (Foster, 1915). Compelling to bring on board is that some policymakers believe that repealing IDCs and substituting them with comparatively lower corporate taxes presents a favorable bargain. Even so, the same would disadvantage the majority of producers who exist in the of small companies – non-corporate structures such as partnerships (Burke, 2016). The decision to substituting the repeal of IDCs with a reduction in corporate taxes appears to be somewhat biased because it would lead small businesses without a way to reduce their operating expense, further disadvantaging them to bigger corporations.

Repealing IDCs will decrease Oil and Natural Gas Production

Repealing IDCs is also expected to have far-reaching effects in reducing the production of natural gas and oil in the US, which promises to have further devastating economic impacts. For example, the American Petroleum Institute recently commissioned a study that proposed that the reform will reduce drilling investments by $408 billion in over the next decade and cost the US about 190, 000 jobs in the first year of its implementation (Burke, 2016). Prospects are that repealing the IDC deduction will have significant and immediate outcomes as the industry will experience fewer investments, which will result in fewer wells that generate fewer job opportunities for Americans and lower the production of energy that fuel America’s economy. A study by Pearce (2010) updated research from 2005 predicted that removing the IDC deduction provision will cause the losses to reach 232,900 by 2018 and 264,000 by 2013.Similarly, the same study forecasted that the US will experience a drop of 2.54 million boe/d in domestic production by 2023.

Repealing IDCs will Reduce Royalty Payment to Private Property Owners

Other impacts of repealing the IDC reduction provision will be a significant decline in state taxes and federal revenue and reduce the royalty payable to private estate owners. The implication in this place is that increasing taxes is an inappropriate approach for policymakers to make more revenue from natural gas and oil production (Burke, 2016). On the contrary, a progressive initiative to extend opportunities for US gas and oil development could generate more than 1 million jobs and produce billions of extra dollars of revenue for the government (Nadel, Farley, & American Council, 2012). Without IDC deductions, private firms will be the sole business with no tax code provision to enable them to offset the expenses of doing business in the US, which contravenes fundamental tax principles (National Renewable Energy Laboratory, United States, & United States, 2012).

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