Oil Drillers May See Big U.S. Tax Cut -- If Deductions Survive

(Bloomberg) -- U.S. oil explorers could see a multibillion-dollar benefit from a move to slash the U.S. corporate tax rate but some of the industry's biggest tax breaks could also be under fire. 

The tax overhaul outlined last week by Republican leaders and President Donald Trump still faces challenges and could be stalled by a busy political calendar in Washington, Bloomberg Intelligence analysts James Blatchford and Andrew Silverman wrote in a report released Thursday.

Still, the total tax bill for U.S. oil and gas companies could “shrink dramatically” if Congress enacts a law cutting the corporate rate to 20 percent from 35 percent, they wrote. A proposal to allow immediate deduction of capital investments is likely to help companies like Exxon Mobil Corp. and Chevron Corp., although there's also talk of limiting explorers' ability to deduct interest costs.

The tax blueprint released by six administration officials and Congressional leaders on Sept. 27 promised to cut the corporate rate almost in half but also signaled other breaks could be squeezed to partially offset the hit to tax revenues. The nine-page framework provided few specific on which deductions may be targeted.

U.S. energy producers paid the second-highest effective tax rate of any business sector in 2014, at 37 percent, according to BI research. An earlier Trump proposal to reduce the corporate rate even deeper to 15 percent would have saved $13 billion that year for a group of 56 oil and natural-gas companies tracked by Bloomberg, according to a BI analysis in April.

Tax negotiators are also weighing “serious proposals” to repeal two of the industry's biggest tax benefits, said Stephen D. Marcus, a tax attorney with Baker Botts LLP in Dallas who works with explorers. One provision allows companies to deduct so-called intangible drilling costs; another, known as “percentage depletion,” lets them reduce taxable income to reflect the depreciation of reserves, Marcus said in an email.

Eliminating those two provisions would force energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress's Joint Committee on Taxation estimated last year.

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Joe Carroll, Stephen Cunningham