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Posted: June 05, 2012

A closer look at “subsidies”

Oil and gas tax breaks don’t fit the definition

David Lewis

Type "Obama" and "oil subsidies" into Google, and you get 6,120,000 results. These include first-Google-page headlines such as "Fossil Fuel Subsidies: Helping the Richest Get Richer," "Senate Republicans reject Obama call to end ‘big oil’ tax breaks," and "Obama’s day: going after oil subsidies."

Take "Obama" out of the equation and your 17,200,000 results include Google-first-page headlines such as "History of U.S. Oil Subsidies Go Back Nearly a Century."

It’s easy to conclude that, if indeed there is a national debate over oil industry tax breaks, the argument is over and the pro-oil side of the debate lost.

But, just for laughs, let’s say there is a debate and let’s set the terms of that discussion.

So let us define our terms: What is a subsidy? What is it the oil industry is getting from the federal government?

Among other things ("a sum of money formerly granted by the British Parliament to the crown…"), Merriam-Webster defines "subsidy" as "a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public."

And a "grant" is defined as "a gift (as of land or money) for a particular purpose."

So, is the oil industry receiving subsidies? Not according to the dictionary.

"What the president is talking about is tax breaks," says Encana Corp. spokesman Doug Hock. "We don’t get subsidies like some of the renewables where they actually get cash money, and their product is subsidized in the market. We get tax breaks, and a lot of these are tax breaks that have been on the books for almost 100 years, things that are common to manufacturing industries."

A subsidy, or gift, is more akin to the $40 billion the Obama stimulus offered to clean energy companies such as Solyndra ("Clean and Economical Solar Power from Your Large Rooftop"), which received $535 million in loan guarantees and then suspended operations and filed for Chapter 11 bankruptcy. Next, the government paid the company’s creditors the $535 million.

What the oil and gas exploration and production industry receives thus is not a subsidy at all, but various
tax treatments.

(For a remarkable discussion of these points, see the Wikipedia entry, "Energy subsidies," which cites studies from the World Bank, the World Resource Institute, the Environmental Law Institute, the European Environmental Agency, the Union of Concerned Scientists and others to produce a one-sided view of the subject.)

With so much obfuscation, propaganda and politicking ruling the debate, it can be difficult to know just what is under discussion here.

So what are the petroleum industry’s so-called subsidies or, if you prefer, tax breaks? Here are the four major ones:

• Intangible drilling costs have been around since 1913, when the U.S. tax code was originally written. (Mark that 100th anniversary on your calendar, folks!). Typically 65 percent to 80 percent of the cost of drilling, IDCs are deductible in the first year. Intangible drilling costs are not especially intangible, as they include all the preparatory costs of drilling.

"We spend all of our revenue on exploration and development drilling, so we put it all back in the ground," says Denver-based Ted Brown, senior vice president-northern region for Noble Energy Inc. "So if you told me this year that we’re going to take away tax deductions and it will impact you ‘X,’ then we have to re-budget that much less activity. That all trickles down into fewer jobs, fewer tax revenues for the state and the counties. It all comes back."

• Percentage depletion was designed to increase overall oil and gas production and small petroleum producers. Only independent producers and royalty owners, not major oil companies, can claim it. It is available only to domestic production up to 1,000 barrels of oil or 6,000 mcf (thousand cubic feet) of natural gas, and it is limited to 65 percent of net taxable income. "By allowing for the recovery of capital investment over time, it is essential for meeting the costs of operating marginal wells," according to an American Petroleum Institute report.

• Geological and Geophysical expense deduction is effectively the equivalent of research and development expensing for manufacturers. While many manufacturers also receive tax credits for R&D, the oil industry does not. "Extending the amortization period would remove over $1 billion from efforts to find and develop new American production," according to the Western Energy Alliance.

• Section 199 deduction was initiated by the JOBS Act of 2004 to make additional capital available to American production and manufacturing jobs. This deduction is available to all other industries.

David Lewis is a freelance writer based in Denver.

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