Oil drillers dread losing tax breaks

President Obama's proposal to cut tax breaks for oil drilling will have dire consequences for the Kansas oil industry and the state budget, local producers say.

Eliminating the breaks, which have been in existence for nearly a century, are part of Obama's budget proposal that, if approved, would go into effect Oct. 1.

The administration figures the changes will bring in billions more in revenue.

But local producers said that change threatens to shut off the $1 billion spent by the Kansas oil industry most years.

"It will shut down drilling totally," said Todd Allam, owner of Val Energy in Wichita. "There won't be any new wells."

The two deductions attract the wealthy investors who tend to fund the new well drilling in Kansas. Lose the deductions and the investors will look elsewhere.

Val Energy is one of the state's top drilling firms, with plans to drill 75 wells in Kansas this year.

It employs 45 people and has a payroll of $4.5 million. If the tax breaks go into effect, Allam expects to have just 10 employees and a $500,000 payroll.

The tax breaks allow investors to write off on their taxes more than two-thirds of the cost of drilling a producing well in the year the year the well is drilled.

Typically such expenses can only be written off over many years.

Because investors can recover the bulk of their investment within a year, they are encouraged to put their money into another well.

It's something the entire independent oil drilling industry is worried about, said Lori Davis, tax practice leader for Grant Thornton in Wichita.

"It really will change how much they do," she said.

The change doesn't even hit the politically vulnerable big oil companies, said Wichita oil geologist Philip Knighton. Exxon Mobil and ConocoPhillips don't qualify for the tax breaks.

Allam said the net effect will be to kill the search for new pools of oil because only one in 10 succeeds.

Drillers will continue to drill new wells into existing fields, he said, but that will last only until those known pools are drained.

Not only will the rules affect the Kansas oil industry, which employs about 26,000 people in all phases of the industry, but it could permanently damage the state budget.

The state collected $56 million in 2009 on its major tax on oil, the mineral tax. But Knighton said it will touch other parts of the tax base as well, such as sales, property and income taxes.

It would devastate many of the counties in western Kansas that rely on oil production to prop up their county tax collections, he said.

Knighton said he has tried to call attention to the issue to members of Kansas state government, but they generally have been too busy or said this is a federal issue, he said.

The Kansas Department of Revenue said Wednesday that it is aware of the issue, but that it hasn't calculated the impact.