President’s 2016 budget proposal is ‘worst-case scenario’ for small oil and gas producers

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The President’s 2016 budget proposal, which calls for the elimination of all oil and gas industry tax provisions, is no surprise, but completes the absolute ‘worst-case scenario’ when combined with the crude oil price slump, said National Stripper Well Association Chairman Mike Cantrell.

OKLAHOMA CITY – Just like the movie Groundhog Day, where actor Bill Murray is caught in a never-ending loop of the same day, the national budget proposal released by the White House on Groundhog Day, February 2, 2015, again calls for the repeal of all oil and natural gas industry tax provisions, which came as no surprise to domestic oil and natural gas producers.

 “I have to say we expected this,” said National Stripper Well Association (NSWA) Chairman Mike Cantrell. However, when combined with the crude oil price slump, the President’s budget proposal is the “absolute worst-case scenario” for small independent oil and natural gas producers.

“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. “Once again, President Obama is targeting America’s independent energy producers and workers with the equivalent of a devastating tax increase on mostly small producers and royalty owners.”

Cantrell said that the President’s budget proposal is a “killer of the small businesses of the U.S. energy sector” and that NSWA and IHS Global released an economic impact report in October 2014 which showed that eliminating the percentage depletion tax provision for oil and gas producers would not be a net revenue raiser, and instead would cost the U.S. economy an average of 178,000 jobs per year during the forecast decade.The cost to the federal government will be $2.5 billion in tax revenue by 2025, with another $1.1 billion lost in royalty revenue.

Percentage depletion is a tax provision used by oil and natural gas producers that allows them to recoup some of the costs involved in exploring for and developing fossil fuel sources, and is the only tax provision available for royalty owners with respect to production.

“At the same time that U.S. energy production is under assault from foreign nations trying to depress the price of oil and terminate domestic production, to have the President pile on is really excessive,” Cantrell said. “It’s hard to fight OPEC, Vladimir Putin and Obama all at the same time.”

Although they are not the only ones who can use the percentage depletion tax provision, small independent producers who operate marginally-economic wells would be disproportionately affected by elimination of the percentage depletion deduction. The more than 770,000 marginal oil and natural gas wells currently in production in the United States represent nearly 80 percent of the total wells, and are responsible for 19.6 percent of the total of all oil and natural gas produced domestically.

“The President has had the domestic oil and gas industry in his crosshairs for years; however now we know the economic impact of his policies on America’s energy workers and small businesses. The IHS report highlights how eliminating percentage depletion would be devastating to jobs—not just in the energy sector, our economy and overall government revenue.”

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