Research group Wood Mackenzie has published new evidence pointing to the harmful effects that proposed tax increases would have on domestic oil and natural gas producers.  Wood Mackenzie’s study, “Evaluation of Proposed Tax Changes on the US Oil & Gas Industry,” analyzes the estimated impact of two widely-used deductions, intangible drilling costs (IDC) and Section 199 manufacturing tax deductions.

The study finds “the proposed repeal of the IDC and the Domestic Production Activities deductions increases breakeven prices by approximately 10%. For natural gas, the average breakeven price shifts from $5.40/mcf to $6.00/mcf when losing the deductions. The average oil breakeven shifts from $47.00/bbl to $52.00/bbl. Almost 80% of gas developments need $5.00/mcfor greater to breakeven, while less than 20% of the oil developments need more than $65/bbl to breakeven.”

Producers operating in the Rockies and Mid-Continent and Gulf Coast onshore areas are disproportionally affected by the proposed tax increases with $12 billion of the total $15 billion of investment risk in 2011 directly related to these regions.

Rocky Mountain region plays “fall below the economic threshold as 20 of the 33 plays fall below a 15% Internal Rate of Return (IRR.) This set of sub-economic plays includes tight gas and CBM plays in the Piceance, Powder River, and Uinta basins, as well as the Bakken Oil Play in the non-core Montana portion of the formation. The most viable areas such as the core Bakken, the Jonah field, and the Pinedale field provide sufficient economics under the proposed changes. Development is expected to continue in areas of many of the marginal plays, but the periphery of the developments is at risk due to higher taxes.”

Western Energy Alliance has been challenging tax increases since they were first proposed in the President’s Budget and will continue to work with affiliated trades and other groups to prevent these counter-productive ideas from becoming law.

Western Energy Alliance Tax Committee has met with members of our western Congressional delegation to educate them on the impacts of IDCs and percentage depletion deductions.  This June, we were encouraged when all but 5 Senators from our 13 western states voted against Senator Bernie Sanders’ tax amendment to eliminate IDC and development costs, repeal percentage depletion and Section 199 manufacturers’ tax deduction for oil and natural gas producers.  No Senators from major producing states in the West supported the measure. Even so, we continue to be vigilant, and expect the increases will again be considered in the lame duck session that will occur after November’s election.

Please take a moment and read this short 14 page study and share it with someone who cares about American jobs and energy security.  Click here to read the study. Additional resources and industry studies are available on Western Energy Alliances’ study archive.