Less capital reinvested in new wells led to less American-made Oil & Gas for American Consumers
By State Rep. Drew Darby
AUSTIN, Texas (Texas Insider Report) — One of the reasons President Trump won the election was his promise to unleash American energy and make America "Energy Dominant" again, while lowering prices and strengthening America's energy security. Right now, Congress has an opportunity to accomplish that by fixing former President Biden's disparate tax on American drilling – one that is quietly stifling domestic energy production and undermining job creation across the country.
Independent producers account for over 90% of our nation's oil and gas output. However, they are being unfairly taxed because Biden's "Inflation Reduction Act" limited how American independent producers can deduct their expenses for new wells and drilling activities.
While most capital-intensive industries can deduct major operational costs upfront, independent oil and gas producers are denied such deductions for a category of expenses called intangible drilling costs, or IDCs.
These "intangible" costs include many of the very real expenses of drilling a well – things like labor, wages, site preparation, repairs, and supplies. Altogether, they account for about 80% of the cost of drilling a well.
Before the Biden-era Inflation Reduction Act, producers could recover these costs quickly under the normal tax code and reinvest in new exploration and production.
These "intangible" costs include many of the very real expenses of drilling a well – things like labor, wages, site preparation, repairs, and supplies. Altogether, they account for about 80% of the cost of drilling a well.
Before the Biden-era Inflation Reduction Act, producers could recover these costs quickly under the normal tax code and reinvest in new exploration and production.
But when the Inflation Reduction Act reintroduced a new tax, it came with a "twist": a tax penalty that limited the deduction of IDCs to the life of the asset – which is well past the year in which these expenses are incurred.
That means less capital available to reinvest in new wells, and ultimately, less American-made oil and gas for American consumers.
This flaw in the tax code has real-world consequences – it means fewer rigs in the field, fewer jobs, and more reliance on imported energy.
The current policy overlooks the fact that the life of a new well is limited.
Even in the most viable shale basins, output declines by about 50% after the first year of production – and another 30% after the second year. This means it's crucial for producers to constantly reinvest their capital into exploring and developing new wells.
Doing so without the immediate deduction of drilling costs is much more difficult.
Thankfully, Congress is trying to fix this problem.
Even in the most viable shale basins, output declines by about 50% after the first year of production – and another 30% after the second year. This means it's crucial for producers to constantly reinvest their capital into exploring and developing new wells.
Doing so without the immediate deduction of drilling costs is much more difficult.
Thankfully, Congress is trying to fix this problem.
The "Promoting Domestic Energy Production Act" – introduced as S. 224 by Sen. James Lankford in the Senate and H.R. 662 by Cong. Mike Carey in the House – would update the tax code to allow America's independent producers to deduct IDCs immediately, the same tax treatment as other capital-intensive industries. This targeted technical fix would unlock more investment by America's energy producers, resulting in more production, more jobs, and lower energy costs at home.
It's time to level the playing field for America's independent oil and gas producers. I am especially appreciative that 15 members of the Texas Congressional Delegation – including our own representative, Congressman August Pfluger (R-TX 11) – have co-sponsored the "Promoting Domestic Energy Production Act."
And I hope they encourage House leadership to pass this bill in Reconciliation.
The sooner they do, the sooner we can get this legislation on President Trump's desk – and by reforming this penalty in the tax code, we can better equip our nation's independent oil and natural gas producers to keep delivering reliable, affordable, domestically sourced energy for Americans.
That means unleashing America's energy dominance.
State Representative Drew Darby represents Texas' 72nd House District, which encompasses 10 West Texas Counties and includes the Big Country, Concho Valley, and the Permian Basin. He currently serves as chairman of the House Committee on Energy Resources, and In addition he chairs The Energy Council, a non-partisan organization spanning over 12 States & Provinces that facilitates dialogue among legislators and policymakers.
