A change made in the recent tax bill that has not received much attention by the press, but which has significant benefits for E&P companies (and for anyone drilling oil & gas wells for that matter), is that from now until the end of '11, all equipment purchases can be written off 100% in the year of inception of use. About a 5th of the cost of drilling a typical well normally represents an equipment purchase.
This rule will not change the GAAP effective tax rates of the E&P companies, but it will change their cash tax rates, and for those companies that are really ramping up cap ex, might even put them into a net operating loss for tax purposes, which might allow for the last couple of years' taxes to get recovered.
Quite an amazing turn of events on the tax treatment of well-drilling costs over the last 10 months or so. Last February the Obama administration, in its list of desired tax changes, included the thought of repealing the deduction for intangible drilling costs, which would have resulted in none of the costs of drilling a well being immediately deductible. Now, with the retention of the IDC deduction along with the new rules allowing immediate writeoff of equipment purchases, 100% of the costs of drilling a well are deductible! |
