Reform targets tax measures vital to producers, refiners

Nov. 22, 2013
The chairman of the US Senate Committee on Finance proposes generally righteous tax reform that would specifically hurt oil and gas producers and refiners.

The chairman of the US Senate Committee on Finance proposes generally righteous tax reform that would specifically hurt oil and gas producers and refiners.

The tax code needs work in important areas like simplicity, fairness, and international competition. But Sen. Max Baucus (D-Mont.) is considering measures that would discourage activity in a lively part of an otherwise languid economy and raise prices of oil products.

Threats to the oil and gas industry appear in comprehensive discussion drafts newly published by the Finance Committee.

One change would require that “qualified extraction expenditures” be treated as assets and amortized—written down in value—over 5 years.

Expenditures in that category include geological and geophysical (G&G) costs, intangible drilling costs (IDCs), and outlays for tertiary injectants.

Producers now can charge all or most IDCs and tertiary injectant costs to expense in the year they’re incurred. Current G&G amortization periods are 2 years for independents and 7 years for majors.

Canceling mechanisms that allow producers to defer—not escape—taxation would slash the amount of cash available for drilling, which would decline.

Another change under discussion would repeal the last-in, first-out (LIFO) method of inventory accounting. LIFO accounting is not a tax dodge. In use since 1939, it appeals to companies that buy and store materials tending to increase in cost over time. Many refiners use it.

Repealing LIFO would amount to a retroactive tax increase. It would have the same effect on LIFO refiners that repealing IDC expensing would have on producers: suddenly diminished cash flow.

All refiners struggle with volatile margins, growing regulatory burdens, and uncertainty about requirements under development for product chemistry and performance and for facility greenhouse-gas emissions. Refineries now on the economic margin and facing new costs for environmental compliance wouldn’t survive LIFO repeal.

LIFO accounting and tax deferrals for costs unique to the extraction of natural resources are proper mechanisms that support important work. Political misrepresentation puts them in jeopardy. Economic judgment should keep them in place.

(This item appeared first in the subscription area of www.ogj.com on Nov. 22, 2013; author’s e-mail: [email protected])