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Journal Record Op-Ed by NSWA Chairman Mike Cantrell

Unintended Consequences

Removing the percentage depletion provision from the tax code would have unintended consequences for the nation’s economy by harming small businesses and royalty owners.

Percentage depletion is a tax provision that allows oil and gas producers to recoup some of the costs of investing in energy production. It was designed as an incentive to keep existing wells producing and to invest in newer wells. However, President Barack Obama’s 2015 budget proposal includes the elimination of this provision.

Over the next decade, eliminating percentage depletion would cost the U.S. economy $184.5 billion in gross value added, an average of 178,000 jobs per year and $115 billion in earned labor income, according to a new report produced by IHS Global for the National Stripper Well Association.

Small, independent producers who operate marginally economic wells would be disproportionately affected by elimination of percentage depletion. At tax time, these so-called stripper well producers count on getting a little bit back from percentage depletion so they can then turn around and invest in drilling more wells and increasing production. For some years, it is the only investment capital stripper well producers have.

Marginal wells represent nearly 80 percent of total wells in the U.S. and are responsible for 20 percent of all oil and gas produced domestically. Stripper well producers are the family farmers of the oil and natural gas industry and are collectively responsible for a significant part of the energy independence we see today in the U.S.

Keeping percentage depletion doesn’t just benefit producers, it benefits all Americans. The report found that removing percentage depletion would result in more than 37,000 wells not drilled, and 644 million barrels of oil and 2.8 trillion cubic feet of natural gas not produced.

Eliminating this provision would also affect royalty owners by lowering the incentive to lease mineral rights and drill new wells. As a result, royalty owners would lose $36 million over the next decade.

Removing percentage depletion lowers the productive capacity, not only of the oil and gas industry, but also the entire American economy. Our livelihood as the small business sector of the energy industry, and that of nearly 10 million royalty owners nationwide, is based upon our ability to save percentage depletion.

This op-ed was originally published February 6, 2015, in Oklahoma City's Journal Record.