According to a data compiled by Bloomberg, Chesapeake Energy Corporation (NYSE:CHK) has paid only $53 million as taxes over its 23-year history. That is less than half of Chief Executive Officer Aubrey McClendon’s compensation, for example, in 2008 alone.
This had been made possible by a century-old rule that allows U.S. natural-gas producers to postpone their income taxes in recognition of the inherent risk of drilling wells that may turn out to be dry. With the advent of technology the rule seems outdated as Chesapeake Energy Corporation (NYSE:CHK) only, struck oil or gas in 99.6 percent of its wells last year.
Agreeing that the rule calls for changes, Edward Kleinbard, a former chief of staff on the congressional Joint Committee on Taxation who now teaches at the University of Southern California in Los Angeles, said “To the extent the world is a different place than it was when the policy was first devised, that’s a powerful reason to revisit the need for this subsidy.”
According to a 2008 Congressional Research Service report, 80 percent of all the wells drilled were dry holes when the tax policy first came into use
Chesapeake Energy Corporation is the not only company to reap the benefits from this rule. According to the data that calculates long-run cash effective tax rates, Range Resources Corp. (NYSE:RRC) paid income taxes of about 0.4 percent of pretax income over the past decade, Southwestern Energy Co. (NYSE:SWN) paid 2.1 percent and EQT Corp. (NYSE:EQT) paid 5.3 percent. This is in contrast to the U.S. corporate income tax rate of 35 percent.
Other companies who have been under the radar are Google Inc (NASDAQ:GOOG) which has a cash effective rate of 18 percent over the past 10 years and General Electric Co., which paid 12 percent as taxes, 2010, according to data compiled by Bloomberg.
These laws have been the subject of recent debate. President Barack Obama has been trying to repeal the drilling-costs benefits. The President argues that change would add $3.5 billion to federal coffers in 2013 and $13.9 billion over 10 years. The president has also argued for other changes in tax treatment for oil companies, including the elimination of LIFO.
Advocates for the rule, include Stephen Comstock, manager for tax policy at the American Petroleum Institute, a Washington-based trade association for oil and gas companies. Stephen states, “Fewer wells would get drilled, and the economics of certain operations in the U.S. would not be able to compete with operations elsewhere, we would have less energy production here in the U.S. and less jobs associated with it.