The U.S. Senate finance committee has proposed giving independent oil producers some relief from the Alternative Minimum Tax (AMT) provisions in current federal law.
The measure was added to a tax relief package the full Senate is expected to consider this week. The House of Representatives passed a tax relief bill last week, but it did not give independents AMT relief.
The finance committee made three changes to a "special energy deduction" provision intended to help independents in a 1990 tax law. Because that approach was used, the AMT changes would not apply to major oil companies. Also, the committee did not alter independents' depletion allowance preference under the AMT.
The special deduction allows independents to reduce AMT liability by not more than 40% through a 15% intangible drilling cost deduction for development wells and 75% for exploratory wells. The 40% level was not changed, but the finance committee's bill would grant a flat 50% deduction for preference IDCs for all wells. The bill also would eliminate the adjusted current earnings (ACE) adjustment for IDCs under the AMT. And the bill slightly increases the IDC preference. Currently under AMT, independents can deduct IDCs equal to 65% of their oil and gas income. That would be raised to 70%.
ADMINISTRATION VIEW
Treasury Sec. Nicholas Brady, in a letter to some Republican senators, said the Bush administration supports some AMT relief for independents.
He wrote, "The president remains deeply concerned about the continuing low level of domestic drilling activity. This trend could weaken our energy security by reducing our nation's oil and gas reserves and making us more dependent on imported oil.
"It is contrary to the goals of our National Energy Strategy. This concern has been made more acute by the Democrats' failure to enact our proposals for (exploratory drilling in) the Arctic National Wildlife Refuge.
"We recognize that the AMT treatment of intangible drilling costs can result in a 'cliff effect' which deters drillers from undertaking projects that would otherwise be attractive.
"We understand that independent producers may be particularly affected by the AMT, as they have to rely on internally generated capital to finance drilling and expend a high percentage of their capital on drilling costs. Thus the AMT exacerbates disincentives to drilling."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.