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Exec Says Oil Deduction Loss Would Hurt ND Growth

December 20, 2010
The Associated Press

Bismark, ND - The potential loss of a federal tax deduction for oil drilling threatens to dramatically reduce exploration and could cost North Dakota's economy billions, says an oil executive whose company is one of the leading players in the state's western oil-producing region.

"It could be a tremendous setback for the domestic oil and gas industry and for states like North Dakota and Oklahoma and other states that depend upon this resource development," Harold Hamm, CEO and chairman of Continental Resources Inc., said in an interview with The Associated Press.

Continental, which is based in Enid, Okla., produced an average of about 20,000 barrels of oil daily from North Dakota's Bakken shale rock formation from July through September, company filings say. North Dakota's daily oil production averaged about 331,000 barrels during the same three months, state Department of Mineral Resources data says.

A North Dakota State University study, published last year, estimated the oil industry accounted for $8.2 billion worth of business activity in 2007 alone. Ron Ness, president of the North Dakota Petroleum Council, said Monday that the annual figure is likely to have grown since the NDSU analysis was done.

Hamm estimated the loss of the deduction for drilling costs would reduce the investment available for new drilling by one-third or more.

"It would take a lot of our capital away from us, and basically we'd be paying that to the government every year, instead of being able to re-invest that in new reserves here in America," Hamm said.

A federal deficit reduction commission has recommended dropping the deduction for "intangible drilling costs" as part of a general overhaul of business taxation. In exchange for the loss of deductions, the top federal corporate tax rate would drop from 35 percent to 28 percent, and $80 billion would be reserved for deficit reduction in 2015 alone, the commission's report said.

Sen. Kent Conrad, D-N.D., a member of the commission, said he supported the overhaul as part of a broader effort to reduce the nation's budget deficits and national debt. Every interest group would be asked to sacrifice, and it would be difficult to make exceptions, he said.

"We've got to deal with this," Conrad said. "It's going to take everybody giving up something . It is going to be painful, and it is going to be unpopular.

Oil prices are high enough to make drilling profitable without the deductions, and companies also would benefit from a lower corporate tax rate, Conrad said.

The prospects for Congress embracing the proposed tax overhaul are uncertain. President Barack Obama, in his 2011 budget proposal, proposed dropping the oil industry deduction for intangible drilling costs, which the administration said would result in $8 billion in additional tax collections over 10 years. The idea has not been adopted.

The tax provision allows oil companies to immediately deduct from their taxable income money spent in connection with oil and gas drilling, including the cost of chemicals, cement and fluids used in the drilling process, ground preparation and survey work, the wages of drilling workers, and other expenses that have no salvage value.

For example, the cost of drilling fluids used to cool a drill bit may be deducted because the fluids are not reused. The cost of piping is not generally considered a deductible cost, because it can be used again.

If the drilling expenses cannot be deducted when they are made, they will have to be written off during a longer period, industry officials say. That makes a well a less attractive investment and will result in less capital available for drilling, said Ness, whose group represents oil producers.

Ness said other businesses are allowed to take similar deductions for up-front expenses.

If investors in North Dakota's Bakken shale have their investment "spread over seven years, or the life of the well, it's pretty hard to attract capital that way," Ness said. "Plus, nobody knows what the price (of oil) is going to be in a period of years."