Every Drop Counts |
The Growing Gap
Between Supply & Demand
Will Continue to Impact Commodities
Pricing
One look at the gas pump shows that the
trend toward higher and higher oil and natural gas pricing will continue to be a
concern. It’s a matter of simple economics. Growing global and domestic demand
is predicted to outpace current production capacities. Every drop of oil and
every MCF of natural gas are needed, now and in the
future.
- World oil production is predicted to fall by 58.8% by
the end of 2040 (an average decline of 2.45 % per year)
- World energy consumption is projected to increase by 57%
from 2004 to 2030
- China’s need for energy alone is project to increase by
150% by 2020
- Fossil fuels (coal, oil and natural gas) currently
provide more than 85% of all the energy consumed in the US
- Petroleum demand in the U.S. requires nearly 60% of oil
to be imported from foreign nations
- US demand for oil is expected to increase 30% and
natural gas by 50% over the next 20 years
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Immediate and Ongoing Tax
Benefits |
Potential for Tax Deductions May Enhance
Overall Economics of an Investment
Direct participation in oil and gas investments may generate attractive tax benefits ranging from substantial up-front deductions to ongoing depletion allowances. These are not "loop holes" in the tax codes. These allowances are given to encourage and support domestic energy exploration and production efforts.
Tangible Drilling Costs
The equipment costs involved in the initial drilling of a well are considered 100% tax deductible, regardless of whether oil and/or gas are discovered or not.
Intangible Drilling Costs (IDC)
When an oil or gas well is drilled, several expenses may be deducted immediately. These expenses include labor, drilling rig time, drilling fluids, etc. and are deductible because they have no salvage value (they cannot be sold at the end of a project to recoup any portion of expenses). IDCs usually represent 60 to 80% of the cost of drilling a well and are generally available as a deduction in the tax year in which the costs were incurred.
Intangible Completion Costs
As with IDCs, intangible completion costs are generally related to non-salvageable costs such as labor, completion materials, completion rig time, fluids etc. These costs are also generally deductible in the year they occur, and usually amount to about 15% of a well’s total cost.
Depreciation Allowances
Equipment used in the completion and production of a well can generally be salvaged thus are subject to a depreciation allowance. This equipment may be depreciated over a seven-year period. Depreciable equipment types include casing, tanks, wellhead and tree, and pump jacks, etc. Equipment and tangible completion expenses generally account for 25 to 40% of a well’s total cost.
Depletion Allowances
All production revenues gained from oil exploration and development projects are subject to a depletion allowance from the US government. Working interest owners are allowed to shelter some of the gross income earned from production (usually 15% of the well’s annual production).
Lease Operating Expense (LOE)
Lease operating expenses cover the day-to-day costs involved with the operation of a well as well as costs related to re-entry or re-work of an existing producing well. Lease operating expenses are generally deductible in the year incurred.
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This content is provided for informational
purposes only. Information should not be construed as tax, legal, or accounting
advice. Investing in oil and gas is highly speculative and could result in
substantial losses. Individual investors should consult their attorney,
accountant, and financial advisors before investing in oil and gas.
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