As unconventional U.S. oil, gas boom, so do jobs: report

WASHINGTON, Tue Oct 23, 2012 – The U.S. oil and gas rush is cutting into jobless numbers, supporting a total of 1.7 million jobs this year, a number that will swell to almost 3 million by 2020, a leading consultant said in a study released on Tuesday.

The report by forecaster IHS Global Insight is part of a series attempting to quantify the impact that booming production of so-called “unconventional” oil and gas has had on the American economy.

Using new technology to blast fossil fuels trapped in shale rock has transformed the U.S. energy sector.

After five years of rapid growth, unconventional oil accounts for about 2 million barrels per day of U.S. production in 2012, IHS said. Total U.S. crude oil production is expected to average 6.3 million barrels per day, according to the Energy Information Administration.

Unconventional oil will outpace conventionally drilled oil by 2015 and reach close to 4.5 million bpd by 2020, representing close to two-thirds of total U.S. crude and condensate production, IHS said.

“At which point do you stop calling this unconventional?” said John Larson, a vice-president at the firm and lead author of the study, in an interview.

“This is going to become the convention.”

Oil, gas and chemical lobby groups helped pay for the study but did not influence its independent, data-driven results, Larson said.

State and local tax impacts and opportunities for the oil and gas industry

Anthony Ott, Senior Manager, State and Local Tax Services, GBQ Partners LLC

The recent accessibility of oil and gas in the Utica Shale rock formation, located throughout much of Eastern Ohio, will have a major impact on businesses and individuals alike. New businesses will be coming to the state due to the drilling, and companies currently here will likely see increased business.

As a result, companies should be considering the state and local tax ramifications of these operations in Ohio.

“Many businesses coming into the state may not have done work in Ohio before,” says Anthony Ott, CPA, senior manager, state and local tax services with GBQ Partners LLC. “For the first time, they will be subject to Ohio’s state and local tax structure, which does have some nuances that differ from other states.”

Smart Business spoke with Ott about how to prepare for the increased business and the resulting tax ramifications.

What are a few key state and local tax focus areas for businesses impacted by the shale boom?

Ohio is one of the few states that allows municipalities to enforce their own income taxes, which creates a very burdensome compliance process.

Owners of land leased for drilling will likely receive upfront lease bonuses, as well as royalty payments once the well is active and producing. This could produce a much larger municipal income tax liability for these individuals, depending on where they live. They may also be required to make estimated payments for municipal income tax, creating a new level of complexity.

It’s also very problematic for businesses to properly comply, especially those coming from out of state that are not familiar with the municipal taxing structure. Ohio utilizes a 12-day entrant rule — if you operate in a given taxing municipality for 12 days during any given year, you’re responsible for withholding and paying municipal income tax in those locations. Businesses with mobile work forces have to track the location of employees and property to apportion their income in Ohio to the correct municipality. This becomes difficult when you have crews working all over the state.

Ohio also imposes sales tax on certain services such as temporary employment.  So, if businesses are utilizing temporary help and other taxable services, they will have an impact on the profitability of their jobs.

How do severance and real property taxes apply?

The severance tax is the hot topic right now. With the mid-biennium budget review, Gov. John Kasich proposed certain changes that would increase the tax above its current level and use the additional funds collected to provide an income tax credit to Ohio individuals.

The legislation would establish two categories of wells — hydraulically fractured horizontal wells and conventional wells — and tax each differently. If this legislation passes, it will raise the complexity for companies, particularly those with hydraulically fractured horizontal wells, given the opportunity to use a reduced rate for the first two years while they recoup costs associated with construction of the well.

The real property, or ad valorem tax, allows county auditors to value the oil and gas reserves for producing wells and assign a value for real property tax purposes. The value is determined based on an annual return filed with the county auditor.

What about the Commercial Activity Tax?

Ohio’s CAT is unlike the income/franchise taxes levied in many other states. In essence, it is a tax on a business’s gross receipts. The CAT’s unique requirements around what items are included in gross receipts and how receipts are sourced will have an impact on both businesses and individuals participating in the industry.

What is the overall risk of not understanding and complying with Ohio’s taxing structure?

The risk is that a company operating in the state fails to comply with all the statutory tax requirements. This could lead to an audit by the state or municipality, and the business would likely be subject to the tax assessment and associated penalties and interest.

What are some of the opportunities for companies participating in the boom?

The state and local tax impact can increase dramatically as the associated revenue dollars and investment rise. Depending on the project, there may be opportunities for incentives from the state and local jurisidictions that may help offset some of those increased costs. These may include incentives and tax credits for job creation, capital expenditures, training, etc.

Ohio law also provides a sales tax exemption related to items directly used in the production of oil and gas. I would encourage industry participants, as well as service providers, to fully understand what qualifies for the exemption in order to take full advantage and possibly reduce the overall dollar investment required.

How can companies stay up to date on these issues?

Participants in the industry should keep a keen eye on the severance tax legislation. The Ohio Oil and Gas Association is very active in this area and is a good resource for members of the industry to stay informed.

Regarding current Ohio taxes, businesses and individuals alike should review the structure and consult with a state and local tax professional to better understand how it will apply. Each industry segment, as well as the ancillary service businesses, will be impacted differently.

There are also many opportunities to attend informational seminars specifically related to these issues.

Anthony Ott, CPA, is a senior manager, state and local tax services at GBQ Partners LLC. Reach him at (614) 947-5311 or [email protected]

Insights Accounting & Consulting is brought to you by GBQ Partners LLC

KKR, Chesapeake to partner in oil and gas investments

OKLAHOMA CITY, Okla. – Tue Mar 6: Private equity group KKR & Co. and Chesapeake Energy Corp. will form a partnership to invest in mineral and royalty interests in oil and gas assets in the United States, which the companies said will be seeded with $250 million.

Under the terms of the agreement, Chesapeake, the second-largest U.S. producer of natural gas, will contribute 10 percent of the initial investment and focus on finding, acquiring and managing royalty interests.

The deal highlights growing private equity interest in the energy sector and comes at a time when decade-low natural gas prices have forced producers to seek partnerships to bolster their depleted cash flows.

Last month, a consortium led by private equity firm Apollo Global Management struck a $7.15 billion deal to acquire El Paso Corp’s oil and gas exploration and production business.

Another private equity major Blackstone Group LP said it would invest $2 billion in Cheniere Energy Partners LP to help build Cheniere’s first export plant in Sabine Pass, Louisiana.

Chesapeake has said it would raise $10 billion to $12 billion from assets sales and joint ventures. The Oklahoma City-based company faces a funding gap in billions for next year and it needs to cobble together a series of deals to raise cash.

KKR said it is making the investment through its affiliates and KKR Financial Holdings LLC.