Posts Tagged ‘Utica Shale’

Cash Continues To Flow From Ohio’s Shale Industry

Thursday, April 23rd, 2015
Companies Eye Mercer County For Fossil Fuel

Current news reports suggest that oil and gas companies will continue to invest in Ohio’s shale industry which could provide more opportunities for land owners.

For many of us, the future of Ohio’s shale industry has become a regular topic of conversation. And as a landowner in the state’s Marcellus and Utica shale regions, you’ve probably wondered what (if any) effect current events, such as the state budget and plunging energy prices, will have on your financial well-being. While nobody can predict the future, I’m optimistic we won’t see any major slowdowns over the next few years. Here are a few reasons why:

Severance Tax Sees The Cutting Room Floor

We recently learned that Gov. Kasich’s plan to increase the state’s severance tax on horizontal drilling to pay for the plan to cut income taxes was removed in the newest rendition of the state’s proposed budget bill.

The governor’s original two-year budget plan called for oil and gas produced by horizontal wells to be taxed at a 6.5 percent tax rate for product sold at the wellhead – while 4.5 percent tax would have been applied to product sold downstream. Earlier this year, Ohio Tax Commissioner Joe Testa told the media that the governor’s proposed tax hike was because Ohio’s horizontal drilling industry has become more developed and that drilling has proved to be less expensive than anticipated. In response, American Petroleum Institute’s Executive Director, Chris Zeigler, argued that the original budget proposal placed the “future development of Ohio Shale at serious risk.”

Now that the proposed tax increase in question has been removed, one could assume that drilling companies are breathing a sigh of relief. However, while there appears to be no new initiatives in play to raise the existing severance tax rate at the moment, the new budget proposal still has a long legislative journey to make before the June 30 deadline.

Shale Investment Appears To Be Untouched By Low Energy Prices

Lower prices at the pump might be a bit unnerving if you are, for example, in the process of finalizing a mineral lease agreement. But have no fear, even though new drilling initiatives in Ohio’s shale regions are slowing, according to Business Journal Daily, “oil and gas exploration continues to have positive ramifications across the region.”

As Ohio’s oil and gas industry matures, it continues to become more efficient, which has helped it persevere at a time when oil producers in the Middle East and elsewhere appear to be maintaining higher production quotas in an effort to price horizontal drillers out of the market. For example, the practice of “super fracking,” by which producers pump higher quantities of sand into the wells they fracture, has increased productivity from 400 barrels a day to 600. The result is a lower break-even cost for producers and, in general, more staying power than experts had initially thought.

To date, Energy In Depth, an oil and gas trade organization, estimates that Ohio’s shale industry has grown to $22.3 billion, and expects it to grow by another $8.1 billion by 2016, with the construction or extension of additional pipeline infrastructure, power plants and processing plants. In other words – don’t expect the Ohio’s oil and gas industry to slow down any time soon. In fact, it could be expanding as landowners from other parts of the state appear to have been approached by companies looking to increase their reserves.

Companies Eye Mercer County For Fossil Fuel

About 10,000 acres of farmland located in the Mercer County area, about 60 miles southwest of Lima, has been leased for 3D seismic oil and gas exploration according to The Daily Standard, a local news publication. The leased property, which is primarily farmland, will be subjected to noninvasive 3D seismic tests that will identify whether “significant amounts of oil and/or gas” are present. The results are expected to be available by June.

The newspaper reports that “[more] than 90 land leases involving thousands of acres have been filed in Mercer County since 2013 between various companies and property owners … the legal documents give companies access to test, drill or perform other action on the land as stipulated in each agreement.” Mercer County Commissioners agreed to test some government-owned property as well.

This news is not only important to the residents of Mercer County, but to residents throughout Ohio. The fact that companies are actively seeking to further their investment within the state is promising for all landowners. And at the very least, this recent move signifies that these companies have no plans packing up and shipping out anytime in the near future.

Email Rea & Associates if you have questions about how current events could affect your leasing options or if you are considering entering into a lease agreement for drilling or exploratory purposes.

By David Shallenberger, CPA (Wooster office)

 

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Signing On The Dotted Line

Tuesday, January 20th, 2015

Know What Your Pipeline Easement Agreement Entails Before Signing

For years, state and national economists have pointed to the Marcellus and Utica shale regions as a source of relief for Ohio’s economic well-being. As momentum continues to grow, more and more pipeline infrastructure will be built, providing landowners with an opportunity to enter into a pipeline easement agreement. While you may be handed a contract that looks favorable to you, make sure you completely understand your rights and responsibilities before signing.

6 Things To Know Before You Sign

  1. A pipeline easement grants a pipeline company permission to use your real property to transmit natural gas liquids. This means that your entire property is not affected – just the portion outlined in the contract.
  2. Understand the difference between a temporary easement and a permanent easement. A permanent easement refers to a time period of 30 years or longer and the amount is taxed at capital gains rates. This happens when the amount received exceeds the cost basis of the portion of the property where the permanent pipeline covers. A temporary easement pertains to a shorter amount of time and is taxed at your ordinary tax rate. A permanent easement is normally more favorable to the taxpayer because of the capital gains treatment.
  3. You are eligible to be compensated for anticipatory damages to your property. Anticipatory damages are awarded for damages that have not yet taken place. They are generally negotiated with the easement. There are two types of anticipatory damages; Compensatory and Non-Compensatory damages.
  4. Compensatory damages are linked to items such as crop damages, business income interruption, temporary work site rental and temporary road access. Basically if you are using the property to produce ordinary income or the pipeline company wants to rent a portion of the property while they work, the anticipatory damage income you receive is taxed at your ordinary rate.
    Non-compensatory damages are damages that are not tied to the items listed above and are taxed at capital gains rates.
    As a landowner, you can also receive actual damages after the pipeline easement is complete. Actual damages are taxed at capital gains rates and any amount of the actual damage payment that is invested back into the property is non-taxable.
  5. Pipeline easement payments are not ongoing. You will be compensated once, which will likely be when you sign the contract.
  6. Different opportunities are available for different people. For many, a pipeline easement may be an opportunity to save for retirement. For others, additional economic opportunities may be available. Your CPA is qualified to help individuals identify your best options – those that make financial sense and those that do not alter your lifestyle.

There are many different myths about pipeline easements. Your financial advisor can help you understand the facts, ensure that you get a fair price and manage your tax obligations.

Email Rea & Associates to learn more about how to make the most of your pipeline easement.

By David Shallenberger, CPA (Wooster office) and Scott Moyer, CPA (Zanesville office)

 

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Outright Shale Sales Are Another Option For Landowners

Tuesday, August 26th, 2014

The work to unearth valuable minerals from the Utica and Marcellus shale deposits in Eastern Ohio continues to move forward at full speed. While many of the area’s landowners entered into mineral land leases years ago, some chose to put off the leasing process for later – it is now 2014. Several years have passed and the landowners who chose to wait are now facing a different set of choices and options concerning their land and the minerals found within.

What Has Changed?

If you’re looking to cash in on the shale boom, the traditional land/mineral lease alternative is no longer your only option. Today, some landowners are considering the outright sale of their mineral interests to an acquiring entity. While both options have their merits, this discussion is not intended to weigh the economic consequences when comparing land/mineral leasing versus the outright sale of your mineral interest. You should be aware of a few points surrounding the sale of mineral interests that may help govern your decision.

  • Outright sale agreements typically state that the landowner will agree to sell their mineral interests, specific to formation or generic, to an acquiring entity.
  • Per the agreement, the seller typically relinquishes all incidents of mineral ownership – and usually all rights to any future income streams based on the future production from the minerals in question.
  • If you choose to sell your mineral interest outright, your decision to do so may trigger tax planning opportunities, such as the “like-kind exchange” tax treatment for real estate transactions also known as the IRC1031 exchange. In other words, this particular transaction could qualify your gain from the sale of mineral interests to be deferred into the acquired “like-kind” real property. The acquired real estate must be held for trade, business or for other investment purposes.

Proceed With Caution

Before jumping the gun and making a decision based on the possibility of triggering the like-kind exchange, understand that the rules governing IRC1031 are very complex. The sale of mineral interest just adds to the complexity. It’s important that you speak with an advisor concerning a “like-kind exchange” before closing on the mineral interest sale, or the replacement property.

The like-kind exchange opportunity is not for everyone. For those who qualify, however, a mineral sale scenario with the right fact pattern coupled with a properly executed 1031 exchange could result in a significant tax planning opportunity for landowners who are seeking ways to minimize the current tax consequences.

While it’s great to have a range of choices when dealing with matters such as these, the larger selection has a tendency of making it harder to zero in on the information needed to make an informed decision. If you’re considering a land/mineral lease or an outright sale alternative, email Rea & Associates to get more information about these options.

Author: Jim Fracker, CPA (Zanesville office)

 

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New Tax on Shale-Related Rent Monies and Landowner Royalty Payments

Wednesday, May 22nd, 2013

If you receive shale-related advance rent monies or landowner royalty payments from an existing well, you should be aware of a potential increase in tax that may hit in 2013. With the passing of the Patient Protection Act, a new tax provision took effect in 2013 – and it could impact the amount of tax you need to pay when you receive your royalty and rent payments. (more…)

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How Could Ohio’s Election Impact Severance Tax?

Monday, November 5th, 2012

Every four years, national politics takes center stage here in Ohio. You can’t turn on the radio or t.v. without being inundated with presidential, senatorial or congressional election ads. But there are issues a bit closer to home that are equally important to us.

Of the many state and local issues getting lost in the commotion is one that can have a big impact on Ohio’s oil and gas industry – Governor Kasich‘s proposed severance tax change. Initially introduced in March, this is not a new issue. It was tabled in the lead up to the election and is likely to be reconsidered once the Ohio House and Senate return for their next session. (more…)

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How Can Lease Holders Benefit from the Utica Shale Play?

Friday, October 5th, 2012

Much has been written about the Utica shale development phenomena since it first arrived on the scene in eastern Ohio. The topics of discussion are numerous and include tax planning and environmental impact, just to name a few.  But, for the most part, discussion of the Utica shale involves two main parties of interest:

  • Acquisition/exploration/production companies and supporting casts
  • Landowner/mineral interest entities (“lease holders”) (more…)
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