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Proposed tax legislation receives support from small energy producers and royalty owners

S. 948, introduced by Senator James Inhofe (R-OK), proposes making permanent the suspension of the net income limitation on percentage depletion for oil and natural gas produced from marginal properties.

On October 8, 2015, thirteen state and national oil and natural gas associations, representing those who operate the more than 600,000 marginal well and millions of royalty owners nationwide, sent a letter to Senator James Inhofe (R-OK) in support of Senate Bill 948, which proposed making permanent the suspension of the taxable net income limitation on percentage depletion for oil and natural gas produced by marginal properties.

“This important relief is critical to preserving production from the nation’s smallest, most economically-vulnerable oil and gas producers. We appreciate Sen. Inhofe’s sponsorship of this legislation and the overall goal of strengthening our country’s energy security and continued economic vigor through support of percentage depletion,” said Mike Cantrell, Chairman of the National Stripper Well Association, who spearheaded support for the legislation.

Cantrell said percentage depletion is a critical tax tool that extends the economic lifespan of low-volume wells by encouraging producers to continue operating marginal wells instead of cementing them in. Percentage depletion is used by oil and natural gas producers to recoup some of the costs involved in exploring for and developing fossil fuel sources, he said.

“I introduced S. 948 to help owners of small, marginally-producing oil and natural gas wells operate more economically and maximize production potential. As marginal wells account for nearly 28 percent of domestic production, this bill would put the United States another step closer toward energy independence,” said Senator Inhofe. “I look forward to working with the National Stripper Well Association and all stakeholders to continue to build support for legislation that revives an IRS provision that has been supported by Congress for 16 years.”

The organizations who signed the letter in support of S. 948 were: National Stripper Well Association; Independent Petroleum Association of America; Kansas Independent Oil & Gas Association; U.S. Oil & Gas Association; National Association of Royalty Owners; Texas Alliance of Energy Producers; Independent Oil Producers’ Agency; California Independent Petroleum Association; Eastern Kansas Oil and Gas Association; Petroleum Association of Wyoming; Texas Independent Producers & Royalty Owners Association; Domestic Energy Producers Association; and, Northern Montana Oil & Gas Association.

“As the small businesses of America’s oil and gas industry, we rely on percentage depletion for capital formation to drill new wells and rework old wells,” Cantrell said.

Jerry Simmons, executive director of the National Association of Royalty Owners, said keeping marginal wells open and producing has huge impact on the income of 8-12 million American citizens who receive royalty income from oil and gas production. Percentage depletion is the only tax provision available for royalty owners with respect to production.

Barry Russell, president and Chief Executive Officer of the Independent Petroleum Association of America, said American independent oil and natural gas producers historically reinvest 150-percent of their capital budgets into new energy projects, generating billions of dollars in federal revenue and taxes, while producing affordable oil and clean-burning natural gas across the nation.

Ed Cross, President of the Kansas Independent Oil and Gas Association, agreed. “In the economic environment we find ourselves in today, passage of S. 948 is critical for many of the small businesses that make up the oil and natural gas industry in Kansas, and across the nation,” he said. “It would allow capital formation where it can do the most good.”

“This vital tax relief has been a lifeline for small producers and royalty owners who play an important role in our nation’s energy independence,” said Rock Zierman, Chief Executive Officer of the California Independent Petroleum Association. “We applaud Sen. Inhofe’s efforts and encourage fellow senators to approve this bill to lock in a critical economic tool for small businesses.”

On behalf of Texas independent producers and royalty owners, the Texas Independent Producers and Royalty Owners Association (TIPRO) strongly urges Congress to pass this legislation and permanently adopt tax provisions that will support American oil and natural gas development, said Ed Longanecker, TIPRO president. 

Longanecker said, with the right tax policies in place, including S. 948, operators will be able to continue producing from America’s smallest marginal oil and gas wells.

“These domestic wells offer an important source of energy supplies for our nation, and it is critical we keep them in operation. Without the passage of this federal legislation, there is a real threat to the nation’s smallest, most marginal producers, who would struggle to sustain operations,” he said.

Russell spoke for all supporters of S. 948 when he said, “Similar to many other U.S. industries, it is critical for producers to deduct certain costs of doing business while ensuring their ability to invest in new energy production – specifically smaller oil and natural gas prospects – here at home.”