Hemi Energy Group Inc. (fka HMGP)

[bdahl385]

C'mon Keith, let Craig drill that Silvey before Obama changes the rules....



Proposed Tax Changes Could Hurt Kansas Oil Industry
by Rick Plumlee
|
The Wichita Eagle, Kan.
|
Thursday, May 21, 2009


Proposed changes in federal tax laws would cost the Kansas oil and gas industry more than $150 million annually and put a chill on exploration investing.

That was the conclusion drawn by the Kansas Independent Oil and Gas Association after reviewing the Obama administration's proposed 2010 budget.

"This would be devastating to the oil and gas industry, not only in Kansas but nationwide," KIOGA president Ed Cross said.

Cross said the $150 million reflects only direct cost to the state's industry.

"The trickle-down impact would be much greater than that," he said.

Cross said the state collected $422 million in tax revenue in 2008 from the oil and gas industry.

The proposed tax changes would pump $36 billion into the nation's coffers over the next 10 years by erasing some credits for exploration and drilling, according to the U.S. Treasury Department.

Treasury Secretary Timothy Geithner has said oil and natural gas producing companies shouldn't receive significant tax breaks because the industry contributes to climate change.

But independent producers say the tax changes would create a burden for their industry.

"It would kill us," said Ralph Hamilton, president of Wichita's Duke Drilling. "This is a high-risk business.

"If they start messing with incentives, we'd lose a whole lot of business."

One of the two key areas of the proposed changes -- the percentage depletion deduction -- would affect only independents. Major oil companies are not eligible for the credit.

Changes being discussed involve tax credits that have been in place since the early 1900s to encourage exploration, Cross said.

He said independents drill 90 percent of the nation's wells, produce more than 82 percent of the natural gas and more than 68 percent of the oil. The figures are similar in Kansas, he said.

He said the average Kansas oil well produces only 2.27 barrels per day.

"So the margin of profit is not great," Cross said. "Removing incentives would shut down a lot of that exploration."

The Independent Petroleum Association of America, a trade organization, said eight areas of the proposed tax changes would cost the oil and gas industry $30 billion over the next 10 years.

Two of those eight areas would eliminate tax deductions for percentage depletion and intangible costs for drilling and development and would have the greatest impact on independents, Cross said.

The percentage depletion deduction allows a producer to recover capital investment over time.

For example, a well is worth less -- and would be taxed less -- as more oil or gas is extracted.

The percentage depletion deduction is available for all mining commodities, but the oil and gas industry is the only one that would lose it under the proposed changes.

"Oil and gas is being singled out for punitive treatment," said Dave Dayvault, KIOGA chairman and a Wichita accountant.

Wiping out the deduction for intangible costs would mean producers couldn't deduct for expenses incurred such as drilling and hydraulic fracturing.

"It would take away deduction for any services that produces things that are invisible to the naked eye," Dayvault said. "It would be a tremendous disadvantage for attracting capital."

Dayvault said the oil and gas industry has invested more than $1 billion in Kansas over the past several years.

"That level of investment creates jobs," he said. "This tax proposal puts it all at risk. It's detrimental to growth."

KIOGA has pleaded its case in letters to President Obama and to the state's congressional delegation. The federal budget will be finalized in the fall.

Until then, Cross said, "It'll be a full-court press. We're trying to educate policymakers about the economic impact."

Copyright (c) 2009, The Wichita Eagle, Kan. Distributed by McClatchy-Tribune Information Services.

Original source story: http://rigzone.com/news/article.asp?a_id=76386