Tax Extenders
November 1, 2007
I am concerned that as of yet, the U.S. Senate has not considered an annual tax extenders package containing extensions of a number of very beneficial tax provisions. I would like to highlight two tax provisions that Congress has annually extended that particularly benefit oil and gas production from marginal wells and depreciation. Specifically, these two tax provisions are the suspension of the net income limitation on percentage depletion allowance for marginal oil and gas production and the accelerated depreciation for assets in Indian Country.
The United States has approximately 457,000 marginal wells, which collectively produce approximately 1.2 million barrels per day of annual production. These wells account for nearly 20 percent of total oil production in the United States, about the same amount imported from Saudi Arabia. A marginal well is one which produces 15 barrels or less of oil a day, or 90 thousand cubic feet or less of natural gas per day.
In my own State of Oklahoma, it is the small independents, basically mom-and-pop operators, producing the majority of oil and natural gas, with 85 percent of Oklahoma's oil coming from marginal wells. Because marginal wells supply such a significant amount of our oil and gas, it is vital we keep them in operation. However, according to the Department of Energy, between 1994 and 2003, the United States lost 110 million barrels of crude oil due to the plugging of marginal wells.
Thus, when we lose marginal well production, we become more dependent upon foreign sources of energy – more dependent at a time when virtually all agree that U.S. policies should encourage reliance upon domestic sources. Furthermore, we lose domestic jobs to foreign nations.
If the current suspension of the net income limitation on percentage depletion allowance expires, U.S. production from our marginal wells would be severely hampered.
Percentage depletion is a form of cost recovery for mineral and leasehold acquisition costs. The percentage depletion rate for oil and gas is 15 percent of a taxpayer's gross income from a producing property. Only independent producers and royalty owners are able to utilize percentage depletion.
Under the net income limitation, percentage depletion is limited to 100 percent of the net income from an individual producing property. In the case of marginal wells, where total deductions and expenses often exceed gross income, this limitation discourages producers from investing in the continued production from marginal wells with high operating costs and low production yields.
Without the full utilization of the percentage depletion allowance, the net income limitation actually encourages producers to plug and abandon production from marginal wells.
Congress has suspended on a temporary basis the net income limitation since 1997. The current suspension expires at the end of this year. The extension of the suspension of the net income limitation will allow independents the necessary capital to continue to produce from these existing marginal wells – which is critical to the Nation's overall energy security.
Additionally, Congress made a special economic incentive available to benefit Indian Country under the Omnibus Budget Reconciliation Act of 1993. It provides for special accelerated depreciation for new and used assets acquired after December 1993 on Indian reservations and former Indian reservations in Oklahoma. This depreciation incentive provides an approximately 40 percent shorter recovery period for most commercial property.
This accelerated depreciation schedule has been very successful in encouraging capital intensive businesses to locate or expand in Indian Country in Oklahoma and throughout the country.
Both of these important provisions expire at the end of this year, and it is crucial that the Congress act this year to extend each.
Background:
Senator Inhofe introduced and today moved to pass several pieces of tax extenders legislation: A bill (S.2216) to extend the Indian employment credit and depreciation rules for property within Indian reservations, and a bill (S.2217) to extend the taxable income limit on percentage depletion allowance for oil and natural gas produced from marginal properties. Unfortunately, Senate Democrats have yet to put together an annual tax extender package and today objected to Senator Inhofe’s Unanimous Consent request to pass the legislation.
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