Study: Delaying IDC Recovery to Result in US Production, Job Loss
U.S. industry investment would also decline by $407 billion over the 2014-2023 timeframe, or a yearly average of over $40 billion.
“Given the high level of unemployment and budgetary stress facing the nation, the findings of this study should be of interest to policy makers as they move forward to craft solutions to these problems,” Wood Mackenzie noted.
Federal tax increases would be more than offset by reductions in federal, state and private royalties and other state taxes lost as a result of delaying IDC recovery, Wood Mackenzie noted.
Regions that will be particularly hard hit by IDC delay include the Northeast, Midcontinent and Rockies, with each region possibly losing around 20 percent of their future growth production if IDC deductions are delayed, Wood Mackenzie said.
IDCs include charges for wages, fuels, repairs, hauling and other non-salvageable expenses incident to and required for drilling wells or preparing wells for production. IDCs usually represent 60 to 90 percent of a well’s cost, depending on the well type and costs associated with the specific intangible services.
The tax treatment of IDCs does not reduce the actual tax liability over a project’s life, but allows the liability to spread across the life of a project. While Wood Mackenzie tends to see a higher percent of intangible cots in offshore wells, the percentage of intangibles in onshore wells rise after drilling is completed and hydraulic fracturing begins. Completion costs, including fracturing, can be the largest single intangible cost, greater than the cumulative day rate.
The delay of IDC recovery will mean that many projects will no longer meet the criteria for investment as many U.S. plays and fields will become marginalized if IDC deductions are delayed.
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