TPT March 2018

G LOBA L MARKE T P L AC E

G LOBA L MARKE T P L AC E

finance major pipeline and plant investments – could suffer from the law’s limitation on interest deductions. But, on balance, Mr Blackmon appears to be on firm ground in his assertion that the Tax Cuts and Jobs Act of 2017 “is a clear net positive for the US oil and gas industry.” › An oil and gas-related provision in the tax bill that received major media attention is the opening up of the northernmost sliver of the Arctic National Wildlife Reserve (ANWR) to exploration and development. While not dismissive of its importance, Mr Blackmon expressed some scepticism that companies including BP and ExxonMobil will follow up their expressed interest in exploring ANWR with actual investment. He wrote, “Whether those companies or others will ultimately choose to bid on leases and dedicate the billions of dollars to the years of up-front investments necessary to ultimately produce oil in that remote and inhospitable region remains to be seen.” › The reasoning is that only a relatively few companies have the capitalisation necessary to hope to get at whatever reserves are ultimately proved to exist beneath ANWR. With so many other areas for development available for investment around the world, it may be that the attractions of the Arctic may fade now that it is no longer off-limits. Deemed ‘unnecessary burdens’, US safety rules put in place after the Deepwater Horizon oil spill are to be lifted Just before the New Year it was announced that a division of the US Department of the Interior would, on 29 December, publish a proposal to roll back offshore drilling safety regulations put in place after the Deepwater Horizon disaster in the Gulf of Mexico in 2010. Eleven workers were killed in the oil rig explosion and fire, and the ensuing oil spill stands as the worst in American history. The new, relaxed, rules were to take effect after a 30-day period for comment by the public. The rules written in 2016, during the Barack Obama administration, targeted blowout preventers – massive valve- like safety devices designed to prevent spills from wells on the ocean floor – and stipulated that rig operators must have third-party certification of the reliability of the devices under extreme conditions. In the Deepwater Horizon event, a supposedly fail-safe blowout preventer failed after the buckling of a section of drill pipe. The call for reversal of the Obama-era regulations comes from the Interior Department’s Bureau of Safety and Environmental Enforcement, which was created after the Deepwater Horizon

Oi l and gas A mixed bag of lowered tax rates and limited deductions, a new US law confers benefits galore on the oil and gas industry The impact of the Tax Cuts and Jobs Act of 2017, signed into law by President Donald Trump in late December, will be debated for some time. But David Blackmon, a contributor to Forbes, identified one early winner. (“The Final Trump Tax Bill: a Clear Net Positive for US Oil And Gas,” 21 December) Here, much abridged, are the key benefits Mr Blackmon sees for the industry: • The corporate rate will drop from 35 per cent to 21 per cent. • The option to expense intangible drilling costs is retained. The industry’s lobby and trade associations persuaded members of Congress that this tax provision is critical to the ability of this very capital-intensive industry to raise the capital necessary to keep drilling. • Businesses will be allowed to expense the full cost of certain new plant and equipment for five years – a benefit to many in the upstream, midstream and downstream sectors of the oil and gas industry. • The percentage depletion deduction, a tax treatment important to small independents and royalty owners, is retained. • The corporate alternative minimum tax (AMT) is repealed, a positive development for rapidly expanding midstream companies as well as many upstream producers. • The personal AMT is retained but scaled back. The so-called carried interest provision for managers of private equity funds is retained, helping to preserve access to a key source of capital for projects and start-ups. • International companies that have held profits overseas due to high US tax rates will be able to repatriate those funds for use in the US at a one-time rate of 15.5 per cent. Because estimated profits held overseas by US companies exceed $2.5tn, the expectation/hope here is for a flood of new capital into the country in all major industries. N EGATIVE IMPACTS ARE FEW These are only the most significant advantages for the oil and gas industry in the tax bill. Mr Blackmon believes that any negative impacts will be more than offset by the lower tax rates and the new ability to deduct capital costs that in the past were recoverable only over several years via depreciation. Among the provisions unfavourable to the industry, its midstream sector – which relies heavily on borrowing to

114

www.read-tpt.com

MARCH 2018