Categories: Energy Policy, Tax Compliance
Tags: budget, depletion, gas, IDC, Intangible Drilling Costs, Obama, Obama budget, oil, Oil and Gas, passive activity, percentage depletion, working interest
For the second year in a row, President Obama has his tax sights set on the oil and gas industry. In the proposed fiscal 2011 budget submitted by the Obama Administration this past week, the President has included $36,500,000,000 (zeros included for emphasis) of oil and gas taxes. For an analysis of the breakdown of these taxes, see Nick Snow’s article in Oil & Gas Journal.
The President continues to believe that a good way to grow our economy and spur job growth will be to cause businesses to send more money to the federal government than to spend it in the free enterprise system. The tax increases for the oil and gas industry are the same as the ones I wrote about last March and include:
- Repeal of percentage depletion,
- Eliminate expensing of intangible drilling costs,
- Extend the amortization period for geoligical and geophysical costs,
- Repeal the domestic manufacturer’s deduction (only for oil and gas companies),
- Remove the exception to passive loss limitations for working interest owners in producing properties, and
- Repeal the enhanced oil recovery credit and the credit for production from marginal wells.
It seems to me these proposals will have the opposite of the President’s stated desired impact. These types of policies will most likely result in fewer jobs, reduced government revenue, a shift away from domestic production to foreign production, and more reliance of foreign sources of energy.
Categories: Markets and Economy
Tags: barnett shale, drilling, unconventional natural gas
Drillers throughout the U.S. are searching for unconventional natural gas deposits in areas like the Barnett Shale of North Texas. It is expected that similar searches will become pervasive worldwide in the near future.
Vello Kuuskraa, president of Advanced Resources International and known for his work in energy economics and petroleum recovery technologies, commented at a recent energy conference in Fort Worth that he believes “unconventional gas is the future, both in the U.S. and overseas.” Unconventional gas includes shale gas, tight gas and coal-bed methane. Such deposits require measures such as horizontal drilling and hydraulic fracturing to enhance their recovery and make then economically feasible.
Kuuskraa expects his end-of-the-year calculations to show that the Barnett Shale has become the biggest gas-producing area in the U.S., outpacing the San Juan Basin in New Mexico and Colorado. Further, Kuuskraa said that future unconventional gas recovery worldwide could significantly expand supplies helping make gas increasingly attractive as a fuel for transportation and electric power generation.
Categories: Accounting Practices, Controller's Corner, Financial Reporting, Governance
Tags: annual audit, Audit, preparing for an audit
Preparing for a financial statement audit can be an overwhelming task. But there are several simple things you can do to get through your audit this year with minimal frustration:
10. Begin working on your schedules well in advance of the audit. And remember, if you have questions, your auditor is just a phone call or email away.
9. Keep track of issues you struggled with during the year and communicate those to your auditor. It will help the auditor key in on important areas at the beginning of the audit and prevent surprises down the road.
8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance we have of getting them back. Every confirmation that’s not returned creates more work for everyone.
Read the rest of this entry »
Categories: Markets and Economy
Tags: American Petroleum Institute, API, Energy IQ, Oil and Gas, US Department of Energy
A survey was recently conducted for the American Petroleum Institute (“API”) that that highlighted many of the common misconceptions about the oil and gas industry.
The survey found that most Americans continue to underestimate the amount of oil and gas that will be needed to meet future demand as predicted by governmental experts. It was also noted that most respondents overestimate the role that renewable energy sources will play in the future demand, the amount of oil that is imported from the Middle East and the amount of oil and natural gas industry earnings.
It is estimated by the Energy Information Administration that the US energy demand will increase 9% during the next 20 years. The majority of respondents in the survey thought that demand would increase somewhere between 16% and 21%.
Fossil fuels such as oil, gas, and coal are expected to make up approximately 85% of global energy demand – only 10% of respondents answered this question correctly.
The US Department of Energy estimates that 12% of oil consumed last year in the US was obtained from the Persian Gulf countries. The majority of respondents in the survey thought that our dependence on fossil fuels from the Persian Gulf countries was over 30%. Further, according to the DOE, Canada is the largest supplier of imported crude oil and more than 73% of oil and gas consumed in the US is actually produced in North America.
Finally, the oil and gas industry has paid over $242 billion in taxes in the past three years and earns just below $0.06 on every $1 of sales. Most respondents believed that the industry contributed less than $100 billion or were not sure how much was contributed in taxes over the past three years and thought that the industry earned more than $0.20 per every $1 of sales.
Categories: Controller's Corner, Management
Tags: JOA Audit, joint interest agreement, joint interest audit, Oil and Gas Audit
In a previous post, I discussed several issues surrounding joint interest auditing and the joint interest accounting in question. Here are some initial steps once you have considered the necessity of a joint interest audit:
- Review your joint interest agreement and the accounting procedure. While many of the agreements are standard, ensure you are aware of the audit provisions and other pertinent facts such as the allowed overhead allocation method. The more complexities in the agreement, the more likely there could be errors.
- Consider the size of the interest and amounts at stake. A joint interest audit will likely produce some results for all wells, but only certain wells would be worth the cost.
- Contact other nonoperating joint owners to share the costs. Unfortunately for the initiator of the joint audit, you don’t receive all the reward for being diligent on your investment. When an error is found in a joint interest audit, the error is corrected and all affected parties receive remedy even if they didn’t help foot the bill for the audit. This should not necessarily prevent you from pursuing the audit assuming you followed the previous two steps.
- Utilize a professional. The individuals who perform a joint interest audit need to have appropriate training and experience resolving the issues typically uncovered in an audit. Many of the large oil and gas companies have a joint interest audit department and conduct most, if not all, of the procedures themselves. If you do not have those resources or lack the expereince to perform a joint interest audit, engaging an independent auditor may be appropriate.
- Consider the timing of the audit. Attempting a joint interest audit during the first three months of the year may lead to higher fees, less cooperative staff at the operator, and less timely completion of the audit. When beginning the audit process under any timing, you should prepare for an extended timeline due to the various communications between the auditor and the operator from initial testing all the way down the road to multiple discussions over the reported findings before resolution.
- Open up communications with other nonoperators and the professional performing the audit. You should consult with the other nonoperators, whether they are participating in the audit or not, about specific concerns related to their joint interest billings. You should communicate their concerns and your own to the professional when engaging them to perform the audit.
We enjoy partnering with our oil and gas clients in all facets of their business needs. We would be happy to discuss joint interest audits or other accounting services with you.
Categories: Energy Policy, Tax Compliance
Tags: Delay Rentals, depletion, Lease Termination, leasehold, leasehold cost
Due to the instability of the current economy, companies may find it increasingly difficult to begin production on oil and gas properties currently under lease. The deferral of production might result in the lessee’s requirement to make delay rental payments to lessors in accordance with their lease agreements. It is important to realize the tax implications to both the lessee and lessor of such payments.
Delay rental payments are amounts paid by the lessee for the right to defer development of properties under a lease. Generally, these payments will be treated like other carrying costs and capitalized as leasehold costs. Delay rentals cannot be expensed unless the lessee can establish that the leasehold was acquired for reasons other than development. A lessee’s failure to make the required delay rental payments usually results in the termination of the lease. As a result, a loss due to worthlessness may be deducted in the year of the lease termination.
Upon receipt of delay rental payments, the lessor must recognize the payments as rental income. The payments are not subject to depletion since the amounts received are not based on the production of the property. This treatment is different than the receipt of a lease bonus payment which often qualifies as depletable income to the lessor.
Many leases were signed prior to the current economic downturn when prices were much higher. As a result, many leases may not be drilled within the original lease term due to concerns about the economic viability of the lease at today’s prices, forcing a decision on the payment of delay rentals.
Categories: Accounting Practices, Controller's Corner, Financial Reporting, Governance, Management
Tags: Enron, Fraud, Fraud Triangle, Madoff, minimize fraud
Anyone…at least that is how one should think when analyzing fraud risks.
Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company - they might change your mind. Because of instances like these, people often think of fraud in large terms, and the mention of the word carries a lot of weight. But fraud can occur in all sizes and forms.
Who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.
Read the rest of this entry »
Categories: Markets and Economy, Tax Compliance
Tags: severance, severance taxes, state, tax
In these tough economic times where many are struggling for cash, states are not an exception. In order to aid them in meeting budgetary goals, some states are proposing the idea of imposing new oil and gas levies.
Pennsylvania and California are proposing increased severance taxes on oil and natural gas production in their states (5% and 9.9% proposed severance tax, respectively). Arkansas passed, and now has in effect, a tax increase on oil and gas production. Companies in these states warn that the new tax levies could lead to lost jobs and higher energy prices as they decide to relocate their business elsewhere.
Some states, such as Colorado and Montana, have already attempted to pass legislation to increase these taxes, but the bills have died in their state legislature due to “vote no” campaigns funded by the industry. Although there is obviously significant opposition to the higher taxes, some industry insiders point out that the higher taxes may not greatly impact a company’s drilling locations. For instance, Alaska (which has the highest severance tax rate at 25%) has not seen a reduction in drilling activity.
As companies make decisions on where to drill, they should keep an eye on the relevant state legislature as rising severance taxes may impact the economic viability of their projects.
Categories: Markets and Economy
Tags: Gas Reserves, Natural gas
The United States natural gas reserves are about 39 percent more than originally estimated two years ago. The current report estimated that the United States has a total resource base of 1,836 trillion cubic feet of natural gas. T. Boone Pickens said that the future supply cited in the study is the equivalent of almost 350 billion barrels of oil, “about the same as Saudi Arabia’s oil reserves.”
The Gulf coast remains at the top of the nations list, but the largest increases from the assessment came from shale gas which is located in the Appalachian, Arkoma and Fort Worth basins, among others. The report states that shale gas is growing in importance since it accounts for 33 percent of the reserves.
Many experts agree that the report is good news for the industry and for potential users of natural gas, but that demand must increase for the potential reserves to become actual supply. Natural gas between $5 and $6 tends to be regarded as a break-even range for natural gas producers. Shale becomes uneconomical at a price of less than $5, while prices at more than $7 are preferred for growth. Natural gas was traded at $3.80 per million British thermal units at the time this report was published.
Categories: Governance, Human Resources, Management, Markets and Economy
Tags: Human Resources, Leadership, Poor Economy
There have definitely been tougher economic times in our country’s history, but the recession we are in now calls for effective leadership. A very important characteristic of managing in hard times is true leadership. A leader’s role changes drastically when business is not booming and there is more down time than usual. Leaders have to make tough, maybe even controversial, decisions. A leader has to be assertive and lead more directly than in good times where delegating responsibilities might be more effective. Mark Cook wrote in the Fort Worth Business Press that leaders have to assert different skills in tough times.
Honesty and Authenticity- communications with employees should show your understanding of the current events and seek input from talented people. Being honest about your concerns and opening communications will help employees see the reality and help them take ownership of the solutions.
Day-to-day Operational Presence- this is not to be confused with micromanagement. This process is more about understanding the impact of the current times at a lower level in order to dissect problems and continue high-level strategy. Top employees will respond to this involvement if it is seen as high-level investigation to make their processes easier and more efficient. These hard times require leadership focus in all facets of the organization.
Optimistic Realism- being either too optimistic or too pessimistic create doubt in employees. Focus on the solutions to the problems and do not dwell in the problems as they appear. Be realistic about performance measures and reward smart solutions and outcomes. Do not give employees a false sense of security or a false sense of insecurity due to business slow downs. You can lose talented employees if they feel uncertainty.
Smart People Decisions- leaders have to make tough personnel decisions in hard times. Be certain changes are made based upon performance and contribution to the company. Develop or better implement performance guidelines to grade your employee group. Hard times are not forgiving to decisions made based on loyalty or politics. Your company cannot afford to keep or hire a liability in this market. You may be able to replace low performers with talented individuals who are currently in an uncertain job or have been laid off due to the current economic climate.
Future Watch- build with the future in mind knowing that the economy will turn around at some point. Can you make key acquisitions now and exploit these when the economy recovers? Use this time to innovate processes, learn new techniques for operations, and look for gaps in your current processes. You can come out on the other side of this economic chasm in much stronger position operationally.
Being a strong leader includes being willing to change current practices. The skills Mark Cook focuses on could help you improve your company for the long term.