Chesapeake Energy’s 1% tax rate shows drilling subsidy cost

Chesapeake Energy Corp. made $5.5 billion in pretax profits since its founding more than two decades ago. So far, the second-largest U.S. natural-gas producer has paid income taxes on almost none of it.

Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. That’s less than half of Chief Executive Officer Aubrey McClendon’s compensation, for example, in 2008 alone.

The company and other U.S. oil and gas producers can thank a century-old rule that allows them to postpone income taxes in recognition of the inherent risk of drilling wells that may turn out to be dry. The break may be outdated for companies such as Chesapeake, which, thanks to advances in technology, struck oil or gas in 99.6 percent of its wells last year.

“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,” said 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.

While Oklahoma City-based Chesapeake is the biggest U.S. oil and gas producer with such low tax payments, it’s far from alone, according to the data that calculated several companies’ so-called long-run cash effective tax rates. Range Resources Corp. paid income taxes of about 0.4 percent of pretax income over the past decade, the data show. Southwestern Energy Co. paid 2.1 percent and EQT Corp. paid 5.3 percent, the data show.

The U.S. corporate income tax rate is 35 percent.

Google’s Tax

Other companies whose tax strategies have attracted scrutiny in recent years have much higher rates than the oil and gas producers. Google Inc., which has used tax strategies with names like the “Double Irish” and “Dutch Sandwich” to minimize its tax bill, had a cash effective rate of 18 percent over the past 10 years, according to data compiled by Bloomberg.

General Electric Co., whose tax strategy the New York Times termed “aggressive” in a front-page article in 2010, paid 12 percent.

The biggest tax break, for Chesapeake and other independent U.S. oil and gas companies, is a rule that’s been around since at least 1916 that allows some producers to expense “intangible drilling costs.” Companies can count most of the cost of boring a new well against their taxes at the time the money’s spent, rather than recognizing it over several years. That allows them to effectively put off tax payments, even during years when they turn a profit.

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