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.

Oil costs cause first import price gain in five months

WASHINGTON, Wed Sep 12, 2012 – Import prices rose in August for the first time in five months as the cost of imported oil jumped, a factor that could weigh on American consumers and temporarily boost inflation.

Import prices climbed 0.7 percent last month, the Labor Department said on Wednesday.

The cost of petroleum imports increased 4.1 percent. Higher prices at the pump threaten to hurt consumers’ pocket books.

Analysts had expected overall import prices would rise 1.4 percent in August.

Many economists expect higher fuel costs will contribute to a short-term rise in inflation. At the same time, the U.S. Federal Reserve is still expected to ease monetary policy this week.

There was little sign of broader inflation pressures in the import data. Non-petroleum import prices declined 0.2 percent, a sign that the cooling global economy is reducing companies’ ability to raise prices.

Prices for imported consumer goods outside automobiles fell 0.3 percent, while prices were flat for cars and auto parts brought into the country.

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

U.S. to allow Shell to begin prep work for drilling in Arctic

ANCHORAGE, Alaska/WASHINGTON, Thu Aug 30, 2012 – Royal Dutch Shell will be allowed to begin some “limited” drilling in Alaska’s Chukchi Sea, the U.S. government said on Thursday, a move the company hailed as a step forward in its long-delayed effort to tap Arctic oil.

The U.S. Interior Department said Shell will be permitted to begin preparatory work in the Chukchi, but cannot drill to areas containing oil until the government certifies its oil spill containment system.

Without that containment system, the department has said it will not allow Shell to drill for oil in the Arctic.

“At this point we don’t know what exactly is going to happen with Shell and whether they are going to be able to complete a well in the Arctic this year,” Interior Secretary Ken Salazar told a conference call with reporters.

Shell’s Arctic drilling plans had appeared on track to begin this year but it has run into delays. The company has spent $4.5 billion so far in its effort to explore for oil and gas off Alaska’s coast.

In addition to seeking modifications to its air-quality permits from the U.S. Environmental Protection Agency, Shell is also still working to get its oil-spill containment barge, the Arctic Challenger, approved by the Coast Guard.

Shell’s vice president for Alaska Pete Slaiby said the government’s decision to allow some drilling was “exciting”.

He said that even if Shell’s activities this year were limited to top-hole drilling, that would be an important accomplishment.

“This is really important to begin to establish confidence that we can do this right,” Slaiby told reporters in Anchorage.

“All this work on top holes is clearly going to help us, as well as put real wind in our sails for 2013.”

Facing delays, Shell has asked the government to extend its oil drilling season in the Chukchi beyond the September 24 deadline currently in place. Without an extension, the chances of completing a well this year are slim, Slaiby said.

Exxon CEO says hopes Mexico extends oil reforms

NEW YORK, Wed Jun 27, 2012 – Exxon Mobil would be interested in investing in Mexico’s oil and gas sector, but only if the Mexican government allows the company to own some energy reserves, its chief executive said on Wednesday.

“We’re not real keen on service contracts, we’re not real keen on fixed margin contracts. Although we have some of those, they’re not particularly great for us,” Exxon Mobil CEO Rex Tillerson told reporters after a speech.

Mexico’s constitution bars outside exploitation of the country’s oil resources, making joint ventures or profit sharing with private companies difficult.

But the country has been seeking to open the door to attract investment from foreign oil and gas producers to help tap the vast reserves there.

Mexico’s state oil monopoly Pemex awarded contracts to some foreign companies earlier this month to help develop offshore fields, but those contracts pay bonuses based on performance and do not allow for ownership of oil and gas.

Tillerson said he was encouraged by the initial moves to open the Mexican energy sector, which could eventually attract financing and technology from the global industry.

“I think it’s going to be a long process. And what we’re advocating is just for Mexico to take the next step,” he said.

In addition to its offshore oil fields, Mexico has the world’s fourth-largest reserves of shale gas, according to the U.S. Energy Information Administration.

But so far, Pemex has drilled relatively few wells in those fields near the Rio Grande because it has little capital to develop those areas.

Exxon Mobil sees dip in oil, gas output this year

NEW YORK – Thu Mar 8: Exxon Mobil Corp. said its 2012 oil and natural gas output would drop 3 percent from last year even as it increases spending to bring several large new projects on line, and its shares fell 1 percent.

Despite the expected drop in 2012, production should increase by an average of 1 to 2 percent annually through 2016, the company told analysts in New York on Thursday.

Oil companies like Exxon, Royal Dutch Shell Plc. and BP Plc. have struggled to increase oil and gas output in recent years, forcing them to raise their spending to record levels to tap into difficult-to-reach fields.

Exxon, the world’s largest nongovernment-controlled producer of oil and gas, saw production rise 1 percent last year to 4.5 million barrels of oil equivalent per day.

That modest growth came as the company spent a total of $36.8 billion, just shy of the $37 billion it expects to spend annually for the next five years.

That spending will go toward nine major project startups this year and in 2013, the company said, followed by 12 projects in 2014, which will help it bring on new production of more than 1 million BOE per day over five years.

“The industry is in a period of high capital investment,” Exxon Chief Executive Rex Tillerson told the meeting.

Spending on new projects is likely to push the company’s return on capital employed this year below the 24 percent of 2011, he said.

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.

U.S., Mexico sign accord for joint oil exploration in gulf

WASHINGTON, D.C. — U.S. Secretary of State Hillary Clinton and Mexican Foreign Minister Patricia Espinosa signed an agreement today for development of oil and gas reservoirs that straddle the two nations’ boundaries in the Gulf of Mexico.

The agreement is the first of its kind signed by the U.S., establishing a legal framework and creating incentives for U.S. energy companies to develop oil and gas resources jointly with Petroleos Mexicanos, the Mexican state oil company known as Pemex. When it comes into force, the agreement will end the current moratorium on oil exploration and production in the Western Gap portion of the Gulf of Mexico.

“With this, we are setting aside the old fear that honestly exists among many Mexicans that Mexico’s oil could be extracted from the other side,” said Mexican President Felipe Calderon. “Any joint reservoir will be jointly exploited,” and we will all gain the benefits.

U.S. Secretary of the Interior Kenneth Salazar called the agreement an historic step that “opens to door to previously off-limits areas in the Gulf of Mexico,” an area larger than the state of Delaware.

June import prices post first decline in a year as oil, food costs fall

WASHINGTON ―Import prices fell in June for the first time in a year as petroleum and food costs tumbled, according to a government report on Wednesday that suggested the commodity-driven spike in inflation was abating.

Overall import prices dropped 0.5 percent, breaking eight straight months of increases, the Labor Department said, after gaining 0.1 percent in May.

Economists polled by Reuters had expected prices to drop 0.6 percent last month. Import prices were up 13.6 percent in the 12 months through June.

Stripping out fuel and food, import prices were flat after rising 0.6 percent in May. The report supported the contention by Federal Reserve officials and independent economists that the commodity-induced jump in inflation would be temporary.

Data on Thursday is expected to show that wholesale prices fell 0.2 percent in June from May, according to a Reuters survey. The producer price index rose 0.2 percent in May.

High inflation undercut economic activity in first quarter, with growth slowing sharply to a 1.9 percent annual rate after a brisk 3.1 percent expansion in the final three months of 2010.

So far, data suggest that still-high commodity prices and disruptions to motor vehicle production because of a shortage of parts from Japan contributed to keeping growth sluggish during the April-June quarter.

Last month, a 1.6 percent drop in imported petroleum prices helped to push import prices down. The drop in petroleum in June was the biggest in a year and followed a 0.9 percent fall in May.

Imported food prices declined 1.9 percent, the largest fall in more than two years, after sliding 0.7 percent in May.

The price of imported motor vehicles and parts rose 0.3 percent last month after increasing 0.5 percent in May. The rise in motor vehicle prices reflects the lingering effects of supply chain disruptions after the March earthquake in Japan.

The Labor Department report also showed export prices edged up 0.1 percent in June after rising 0.2 percent the prior month. Analysts had expected export prices to gain 0.2 percent.