the economic impact of eliminating the percentage depletion ......ihs economics & country risk...

IHS ECONOMICS & COUNTRY RISK

Presentation

The Economic Impact of Eliminatingthe Percentage Depletion Allowance

Report prepared for:National StripperWell Association

October 2014

©2014 IHS / ALL RIGHTS RESERVEDwww.ihs.com

Contents

© 2014 IHS

Overview

Methodology

Energy Assumptions

Economic Impact Assessment

US Economic Impacts

Major US Sector Impacts

State Level Impacts

Royalty Owner Impacts

Federal Tax Revenue Impacts

Conclusion

2

© 2014 IHS

Overview

3

Percentage Depletion Allowance is a tax deduction that allows oil and gas producers (as well as other mineral owners) to re-coup some of the costs of investing in drilling and producing energy.

Designed as incentive to keep producing from already drilled wells and invest in newer wells.

The President’s 2015 budget proposal included the elimination the percentage depletion allowance for oil and gas producers.

The effort is meant to raise federal revenue by closing “tax loopholes.”

This has economic costs due to the change in incentives for the many small, independent oil and gas producers around the country and their royalty owners.

Economic Impact Assessment / October 2014

© 2014 IHS 4

Methodology First the Energy Team:

Forecast two production scenarios: (1) With Percentage Depletion Allowance (current policy) (2) Without Percentage Depletion Allowance (proposed policy)

Forecast the number of new wells coming online in the next ten years (2015-2025) under both scenarios.

Estimated the Capex for the news well under the two scenarios.

Estimated the average Royalty rates for producing states.

• Then the Economic team used the:

Difference in the Production and Capex Scenarios with and without the percentage depletion allowance used as inputs to the Social Accounting Model.

Trans search model to allocate capital goods and services flows to states.

Average royalty rates within a state to estimate lost revenue to royalty owners based on the difference in the value of production within each producing state.


© 2014 IHS

Decreases in Production and Capital Spending Without Percentage Depletion.

Over the course of the forecast period, more than 37,000 wells will not be drilled and 644 million barrels of oil and 2.8 tcf of gas will not be produced if the depletion allowance is eliminated.

5

Total US Capital Expenditure differences ($ millions, 2014)

2015 2020 2025 Drilling Direct Capital Investment

(576) (5,655) (11,636)

Completion Frac Direct Capital Investment (263) (4,555) (9,944)

Supporting Facilities Direct Capital Investment (813) (1,340) (2,714)

Gathering System Direct Capital Investment (36) (930) (1,785)

Value of production without vs. with percentage depletion ($ millions, 2014) 2015 2020 2025 Without Depletion Allowance 83.8 95.4 104.6 With depletion allowance 83.9 96.0 106.9

Difference (0.1) (0.6) (2.3)

• This amounts to $9.4 million dollars in forgone production revenue over the decade.

• And $144 billion less capital investment is made over the decade.


© 2014 IHS

Decreases in Production and Capital Spending Without Percentage Depletion.

Over the course of the forecast period, more than 37,000 wells will not be drilled and 644 million barrels of oil and 2.8 tcf of gas will not be produced if the depletion allowance is eliminated.

5

Total US Capital Expenditure differences ($ millions, 2014)

2015 2020 2025 Drilling Direct Capital Investment

(576) (5,655) (11,636)

Completion Frac Direct Capital Investment (263) (4,555) (9,944)

Supporting Facilities Direct Capital Investment (813) (1,340) (2,714)

Gathering System Direct Capital Investment (36) (930) (1,785)

Value of production without vs. with percentage depletion ($ millions, 2014) 2015 2020 2025 Without Depletion Allowance 83.8 95.4 104.6 With depletion allowance 83.9 96.0 106.9

Difference (0.1) (0.6) (2.3)

• This amounts to $9.4 million dollars in forgone production revenue over the decade.

• And $144 billion less capital investment is made over the decade.


© 2014 IHS

Percent of Decrease in Capital Spending attributed to each producing state

Percent of Total Capital Expenditure Decreases in each Producing State 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Alabama 0.3% 0.3% 0.3% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4% 0.4% Arizona 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Arkansas 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.5% 0.5% 0.5% 0.5% 0.6% California 1.4% 1.3% 1.1% 1.0% 1.1% 1.1% 1.1% 1.1% 1.2% 1.3% 1.3% Colorado 1.4% 1.4% 1.4% 1.6% 1.9% 2.3% 2.6% 2.9% 3.2% 3.4% 3.7% Florida 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Illinois 1.1% 1.0% 0.9% 0.8% 0.9% 0.9% 0.9% 0.9% 1.0% 1.0% 1.0% Indiana 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Kansas 6.5% 5.9% 5.3% 5.0% 5.3% 5.5% 5.6% 5.8% 6.0% 6.2% 6.4% Kentucky 0.4% 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.5% Louisiana 8.6% 7.5% 6.8% 6.3% 6.5% 6.7% 6.8% 7.0% 7.2% 7.4% 7.5% Michigan 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% Mississippi 0.9% 0.8% 0.8% 0.7% 0.8% 0.8% 0.9% 0.9% 1.0% 1.0% 1.1% Montana 1.8% 1.7% 1.6% 1.6% 1.5% 1.4% 1.2% 1.1% 1.0% 0.9% 0.8% Nebraska 0.3% 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Nevada 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% New Mexico 1.6% 1.5% 1.4% 1.4% 1.5% 1.6% 1.7% 1.8% 1.9% 2.0% 2.1% New York 0.3% 0.4% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.1% 0.1% 0.1% North Dakota 0.7% 0.7% 0.7% 0.7% 0.8% 0.9% 1.0% 1.2% 1.3% 1.5% 1.7% Ohio 0.0% 6.1% 13.9% 16.6% 11.6% 8.0% 7.6% 6.5% 5.5% 4.9% 4.5% Oklahoma 8.9% 8.5% 8.0% 7.9% 8.5% 8.8% 8.6% 8.6% 8.7% 8.7% Oregon 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Pennsylvania 0.3% 0.3% 0.3% 0.3% 0.3% 0.4% 0.4% 0.5% 0.6% 0.7% 0.8% South Dakota 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Texas 59.1% 55.2% 51.4% 50.1% 53.3% 55.4% 55.3% 55.3% 55.0% 54.3% 53.6% Utah 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.5% 0.6% 0.7% 0.8% 0.9% Virginia 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% West Virginia 3.0% 3.8% 2.7% 2.4% 2.2% 2.1% 2.0% 2.0% 2.0% 1.9% 1.9% Wyoming 1.9% 1.7% 1.5% 1.5% 1.6% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%

6


Texas bears over 50% of the decrease in Capex they also bear 45% of the production losses.

© 2014 IHS

Economic Impact Assessment The Social Account Model accounts for three types of impact: • Direct Impact: Impact on the core producing industries (in this gas the oil and natural

gas industries as well as the main industries involved in drilling new wells).

• Indirect Impact: Impact on all supplier industries that support the oil and gas sector

• Induced Impact: Expenditure induced impact from changes in household income due to employment changes in the sectors.

7


© 2014 IHS

Economic Impact Assessment

• Four main indicators are used to assess the economic impact. • Employment: In many capital and infrastructure-intensive commercial undertakings, the employment

supported typically occurs in two ways. The first is during Construction, in this case of new wells. Many construction and manufacturing jobs are created and trigger growth in indirect and induced jobs; however these tend to be more temporary. Production (operating and maintaining the wells) support long-term jobs. These are more direct core industry jobs and related supplier industries as well as those induced by the employees now with more income of the direct and indirectly supported jobs.

• Value-added: Value-added is the difference between the production cost of products or services and the sales price (i.e., total value added is revenue less outside purchases of material and services). The frequently cited Gross Domestic Product (or GDP) is simply the sum of value added across all products and services produced within an economy. GDP is generally considered the broadest measure of economic activity.

• Labor income: A subcomponent of value-added is labor income, which captures the compensation (wages and benefits) paid to workers. A common measure of the relative contribution of an industry to the overall economy is labor income per worker. The higher the ratio, the greater is each worker's quality and contribution to growth.

• Government revenues: Increased economic activity will expand government revenues by expanding taxable income and vice versa, decreased economic activity lowers taxable income and will lower government revenues (ceteris paribus).

8


© 2014 IHS

The economic costs to the US economy are large and grow over time; the indirect and induced costs to other industries and households are larger than the direct costs to oil and gas producers.

10


© 2014 IHS

The economic costs to the US economy are large and grow over time; the indirect and induced costs to other industries and households are larger than the direct costs to oil and gas producers.

10


© 2014 IHS

By 2025 there are over 320,000 jobs less than there would be under the current policy …

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... And income to labor is over $20 billion less

or $151 less per household --- which is like a month without cable, internet and phone…


© 2014 IHS

The economic costs to the major US sectors grow over time; Manufacturing and Information & Professional services have the largest losses to output ---- even greater than those to the Natural Resource Sector.

12

-160000 -140000 -120000 -100000 -80000 -60000 -40000 -20000 0

Manufacturing

Information & Professional Services

Natural Resources

Financial Services

Constuction

Transportation & Utilities

Wholesale & Retail Trade

Leisure & Other Services

Government

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Impact of Eliminating Percentage Depletion for Oil and Gas Producers on Major US Industry Output($ millions, 2014)


© 2014 IHS

Impact on Jobs by Industry Sector

13

2015 2020 2025 Average

Information & Professional Services 5,857 40,006 83,469 42,027

Manufacturing 4,827 27,636 57,119 29,002

Leisure & Other Services 2,567 18,253 38,098 19,167

Natural Resources 1,541 17,892 37,983 18,816

Wholesale & Retail Trade 2,149 15,180 29,856 15,774

Financial Services 1,900 14,278 29,787 14,982

Construction 1,845 12,053 25,046 12,659

Transportation & Utilities 919 8,072 17,076 8,495

Government 117 863 1,804 906

Total 21,722 154,233 320,238 161,829

Percentage Depletion Elimination Impact on Employment (number of workers)


© 2014 IHS

Forgone GDP Contribution by Industry Sector

14

2015 2020 2025 Average

Manufacturing 598 3,703 7,685 3,887

Information & Professional Services 492 3,362 7,015 3,532

Financial Services 374 2,794 5,829 2,932

Natural Resources 181 2,113 4,498 2,224

Wholesale & Retail Trade 185 1,291 2,538 1,341

Transportation & Utilities 119 1,064 2,252 1,120

Construction 125 816 1,695 857

Leisure & Other Services 106 756 1,577 793

Government 9 69 145 73

Total 2,189 15,967 33,235 16,758

Percentage Depletion Elimination Impact on Value Added (millions of Real 2014$)


© 2014 IHS

Forgone Labor Income Contribution by Industry Sector

15

2015 2020 2025 Average

Manufacturing 384 2,608 5,442 2,740

Information & Professional Services 380 2,233 4,622 2,343

Financial Services 123 1,444 3,062 1,518

Natural Resources 121 922 1,924 967

Wholesale & Retail Trade 111 774 1,566 808

Transportation & Utilities 114 746 1,550 783

Construction 66 584 1,235 614

Leisure & Other Services 81 576 1,202 605

Government 9 66 138 69

Total 1,389 9,953 20,742 10,449

Percentage Depletion Elimination Impact on Labor Income (millions of Real 2014$)


© 2014 IHS

The 26 Oil & Gas Producing States bear, on average, 94% of the total costs to the US economy (in terms of lost gross value added).

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Top 10 Producing States - Impact of Percentage Depletion on Gross Value Added ($ millions, real 2014) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Texas

(1,336)

(2,166)

(3,574)

(5,152)

(6,940)

(8,866)

(10,886)

(12,852)

(14,739)

(16,565)

(18,313)

Colorado

(85)

(171)

(282)

(413)

(573)

(765)

(979)

(1,211)

(1,455)

(1,711)

(1,976)

Oklahoma

(102)

(204)

(337)

(493)

(670)

(857)

(1,045)

(1,235)

(1,429)

(1,630)

(1,821)

California

(137)

(162)

(261)

(371)

(500)

(639)

(788)

(942)

(1,100)

(1,263)

(1,431)

Louisiana

(96)

(156)

(251)

(345)

(457)

(580)

(719)

(866)

(1,020)

(1,177)

(1,331)

Ohio

(20)

(182)

(619)

(1,061)

(975)

(875)

(1,026)

(1,067)

(1,065)

(1,117)

(1,164)

Kansas

(59)

(102)

(162)

(226)

(302)

(388)

(486)

(594)

(710)

(831)

(951)

Michigan

(37)

(104)

(204)

(308)

(358)

(416)

(507)

(586)

(661)

(744)

(827)

Illinois

(35)

(85)

(166)

(253)

(300)

(348)

(425)

(495)

(563)

(638)

(708)

Arkansas

(21)

(53)

(86)

(124)

(166)

(212)

(262)

(315)

(370)

(426)

(482) Top Ten Producing States Total

(1,928)

(3,384)

(5,942)

(8,745)

(11,240)

(13,945)

(17,124)

(20,164)

(23,113)

(26,102)

(29,004)

All Producing States Total

(2,092)

(3,673)

(6,428)

(9,466)

(12,120)

(15,010)

(18,434)

(21,723)

(24,941)

(28,230)

(31,450)

US Total

(2,189)

(3,911)

(6,864)

(10,117)

(12,920)

(15,970)

(19,605)

(23,089)

(26,495)

(29,982)

(33,395) Producing States % of US Total 96% 94% 94% 94% 94% 94% 94% 94% 94% 94% 94%

© 2014 IHS

But Non-Producing States bear some of the cost as well.

Top 10 Non-Producing States: Impact of Percentage Depletion on Gross Value Added ($ millions, real 2014) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Missouri

(74.5) (178.2)

(286.6)

(404.4)

(542.6)

(696.2)

(853.0)

(1,009.6)

(1,164.0)

(1,315.2)

(1,461.3)

Minnesota (2.1)

(18.8)

(62.3)

(108.8)

(106.8)

(100.7)

(120.3)

(129.5)

(135.1)

(147.3)

(159.1)

Wisconsin (3.6)

(10.2)

(16.6)

(24.0)

(33.1)

(42.9)

(53.7)

(65.7)

(78.9)

(93.1)

(107.4)

New Jersey (3.7)

(14.3)

(38.3)

(63.9)

(60.0)

(55.5)

(64.7)

(67.9)

(69.3)

(73.6)

(77.6)

Iowa (2.6)

(4.5)

(8.3)

(12.5)

(15.6)

(19.0)

(23.6)

(28.4)

(33.2)

(38.5)

(43.8)

Oregon (1.6)

(2.2)

(3.6)

(5.2)

(6.9)

(8.8)

(10.9)

(13.0)

(15.4)

(18.0)

(20.8)

Massachusetts (1.5)

(3.2)

(8.2)

(14.0)

(12.6)

(11.4)

(13.3)

(13.7)

(13.9)

(14.6)

(15.4)

Tennessee (1.1)

(1.4)

(2.3)

(3.3)

(4.4)

(5.8)

(7.3)

(9.1)

(11.0)

(13.0)

(15.2)

Georgia (0.8)

(1.1)

(1.9)

(2.7)

(3.6)

(4.8)

(6.1)

(7.6)

(9.4)

(11.4)

(13.6)

Washington (3.9)

(2.1)

(3.3)

(4.7)

(5.9)

(7.0)

(8.0)

(8.9)

(9.8)

(10.7)

(11.7)

Total Top 10 Producing States

(95.3)

(236.0)

(431.5)

(643.4)

(791.6)

(952.1)

(1,160.9)

(1,353.4)

(1,540.0)

(1,735.5)

(1,926.0)

Total Non-Producing States

(97.2)

(238.7)

(436.0)

(650.6)

(799.2)

(960.6)

(1,171.2)

(1,365.2)

(1,553.6)

(1,751.3)

(1,944.1)

18

Missouri even bears a higher cost than some of the producing states.


© 2014 IHS

The economic impact on the owner’s of Royalty shares in producing wells is significant. Over the decade, Royalty owners are estimated to earn 35.9 million less.

19

Royalty earnings are a function of production and the royalty share rate. Royalty owners in states with more private land and states, such as North Dakota that would otherwise be projected to boost production over the next decade, are especially hard hit by 2025.

Top Fifteen States With Royalty Owner Earnings Forgone (Private Sector, $ 2014)

2015 2025

Texas (169,739) Texas (4,776,591)

Oklahoma (30,354) Oklahoma (743,487)

Louisiana (11,063) Louisiana (720,312)

Kansas (6,267) Colorado (263,524)

West Virginia (6,222) Kansas (257,144)

Colorado (5,690) North Dakota (194,173)

Montana (5,166) West Virginia (161,746)

New Mexico (2,311) New Mexico (122,143)

Mississippi (2,145) Mississippi (114,226)

North Dakota (1,832) Pennsylvania (94,693) California (1,488) California (89,406) Ohio (1,467) Alabama (80,245) Illinois (1,207) Pennsylvania (63,129) Arkansas (1,147) Montana (53,525) Alabama (889) Arkansas (50,861)


© 2014 IHS

Federal and State Governments also lose Royalty Revenue on their land…

20

Royalty Earnings Forgone (Without vs. With Percentage Depletion) $ 2014

2015 2020 2025 Total (all years) Federal (5,125) (66,763) (281,812) (1,068,195) State (1,069) (14,369) (65,003) (237,686)

Private (250,541) (2,195,183) (7,957,494) (32,403,715)

Impact on Government Revenues (Elimination of the Percentage Depletion Allowance) ($ millions, 2014) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Federal Tax (246) (433) (760) (1,120) (1,429) (1,766) (2,168) (2,553) (2,929) (3,313) (3,690)

State and Local Tax (155) (283) (497) (732) (935) (1,156) (1,419) (1,671) (1,918) (2,171) (2,418)

…in addition to their losses in tax revenue.


© 2014 IHS

Eliminating the percentage depletion allowance causes the average effective tax rate to be higher. However, the results show that by 2020 the economic costs “catch up” to the revenue gains of the higher effective tax rates and federal revenue is lower than it otherwise would be with the percentage depletion allowance.

21

Considering changes in production shows that, on net, eliminating the percentage depletion allowance costs the federal government close to 2.5 billion in tax revenue over the next decade.

Federal Tax Implications of Eliminating the Percentage Depletion Allowance for Oil & Natural Gas (millions $)

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total JCT Estimate of Federal Revenue Gains (due to increased tax)*

1,025 1,606 1,616 1,650 1,714 1,775 1,820 1,852 1,877 1,900 16,835

IHS Estimate of Federal Revenue Losses (due to decreased production)**

(251) (451) (807) (1,212) (1,578) (1,989) (2,490) (2,991) (3,500) (4,039) (19,309)

Net Federal Revenue gain(loss)

774 1,155 809 438 136 (214) (670) (1,139) (1,623) (2,139) (2,474)


the economic impact of eliminating the percentage depletion ......ihs economics & country risk...

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