I am new to the area of mineral rights ownership, so please excuse me if these are stupid questions.
I was talking with a landman in TX yesterday who made the comment that landmen are hurting for business right now because of Obama. The comment was made as though this has been going on for some time.
I don't really understand the connection. I clearly know that Obama is not supportive of domestic production, but how does that translate into the reduction of transactions that would lead to a loss of business for landmen. I suspect that the answer has to do with fracking, but I would appreciate the expertise of the group in making the connections explicit.
Also, if one owns non-producing oil rights, how does the electing affect decisions such as whether to sell? Did Obama's election just reduce the value of the rights by a significant amount? Should one start trying to unload oil rights, expecially if their value has a lot to do with the potential of fracking.
I would never consider the sell of mineral rights based on the results of this election. You need to stay abreast of any proposed changes in the area of drilling and contact your US Rep or Senator if you have questions or comments. It is way too early to see what impact this election will have on the oil and gas industry. Keep in mind that Obama will not worry about seeking re-election in 2016 so this could be a good thing or bad thing for us mineral owners. Again, don't feel that you need to take immediate action regarding your mineral holdings and keep up with what is transpiring in Congress.
Agree with Charles, plus the sabre rattling by EPA about getting into fracking, which would impact drilling, has not yet happened. Obama's main impact has been on restricting drilling on public lands. Most of the rest is hyperbole, so far. This does not mean we won't get some tax changes as part of the fical cliff negotitiations that could affect drilling, though.
In the short run, drilling on federal lands will continue to be be suppressed by regulations, politics and egos. In the long run, I have extreme confidence that the natural laws of economics through demand for energy will prevail. International politics will increase the demand for domestic energy but mostly domestic economics (measured by GDP or Gross Domestic Product) will set the rate of overall demand increase. Taxes are a drag on GDP, which is growing very very slowly if at all in real terms, so until the Congress and the President do something to make taxes fairer and lower, GDP will not grow at a rate that will generate more demand for energy. (Any new business has an automatic 40% partner right now. That partner does not share in risk but only in profits. That partner is our Uncle so we can't fire him)
So, whether your minerals are producing or not, they will be more valuable for development as the amount we give our Uncle comes down and we can start more operations, companies, and hire people. Tell that to your Congressman when he or she wants to talk about energy independence.
Hopefully Obama will think more like our President than someone constantly running for office.
The writing is on the wall: the oil and natural gas industry will lose depletion allowance and all intangible drilling cost tax deductions, likely as early as 2013. Current natural gas prices do not support shale gas activity and 80 dollar crude oil prices do not support shale oil activity in the absence of tax incentives to stay on the drilling threadmill. Tax rates on the industry, already the highest of any industry in the country, will go up. Labor costs to conform to health care mandates will go up, so will rig and service rates accordingly. The Environmental Protection Agency will be turned lose now like wild horses; frac'ing costs will go up, if they go at all, pipeline and infrastructure problems over environmental compliance will cause even more distribution bottlenecks. Tighter banking regulations will cause less investment capital to be available for mergers and acquisitions, there will be less money to loan to oil companies. Shareholder equity in public oil companies (already over leveraged) will tank. Fewer wells will be drilled, production rates will begin to decline, crude oil and natural gas prices will go higher; any hope we may have had to get closer to energy independence has left the building for good. All Americans will pay more taxes, well, most that have jobs anyway, and the government will piss that all off on wind subsidies and solar panels, neither of which will help reduce the 5.6 billion barrels of crude oil America uses for transportation purposes each year. Thats a billion with a B.
The Obama administration loathes fossil fuels and wants the American public to believe it has a plan for a cleaner, greener source of transportation fuel. Donkey doo doo.
America's Energy Policy is no policy at all. But don't sell minerals, whatever you do; this storm too shall pass. We are running out of fossil fuels in America and unless the whole gig is nationalized in the best interest of the "community," those minerals you own are going to be worth a lot of money some day. Do dump any stock you might own in anything that looks, feels, or smells oily. Maybe when we see what the bottom of the canyon looks like we are being herded off we can buy back soon.
Understand your concern, but that is alot of ifs there, and alot of pretty pessimistic assumptions, even if the ultimate advice you give is sound. Drilling has done pretty well since 2008, albeit mostly due to technological advances. I think we will have pretty healthy drilling activity as long as oil stays in the $80-120 range, and gas stays in the $4-6 range. I especially doubt they will gut the drilling incentive because of the jobs it is creating, and that is the primary driver from a tax policy standpoint.
Not a big believer in the government boogeyman arguments, regardless of who is in power. I have been following this a long time. Commodity prices drive activity. Tax policy, labor costs, capital availability, government regulation - have always been secondary considerations. In my view the biggest danger to drilling activity is overproduction, as has already happened in natural gas.
I have been doing this a very long time as well, Mr. Caldwell, and nobody I know in the oil and natural gas business believes in boogymen; in situations like these we complain a little then get smarter and pull the energy wagon harder. The man asked for opinions, I gave him mine. Its just an opinion.
But this administration has been wanting to eliminate tax incentives for the oil industry since it moved into the White House and forgive me, what has jobs had to do with much of anything the past 4 years? Mr. Obama was re-elected in the face of highest unemployment rates a president as ever been elected, or re-elected and overwhelming new levels of people on welfare. Climate and environmental issues will trump energy jobs, betcha.
Tax policies have always been paramount in drilling marginal, expensive, bottom of the barrel reserves in our country...we shall see what elimination of depletion allowances and intangible drilling costs does to unconventional shale drilling where I believe 2/3rds of our current rig count is working. By the way, we have been drilling horizontal laterals and frac'ing wells in this country for 60 years; what has spurred drilling activity since 2008 is product prices, little else. That and tax incentives.
I wish energy was not a political football but it most certainly is.
Mr. Easton’s question is should he think about selling his mineral interests, his last paragraph. My response about estate planning and gifting is based on my royalities and my age. If I die today, the death tax is based on a $5M limit. My heirs will have to pay taxes on everything over that limit. Unless something changes on Jan. 1 2013 that limit is lowered to $1M.
No boogeyman, that is a fact. Gary and Mike are well versed and it is true the GOVERNMENT is a 40% player in your mineral interests. What Mr. Caldwell failed to explain is severance and county taxes applied to your interests if they start producing.
Mr. Easton this is your decision, please seek an attorney experienced in this type of thing. Better to pay an attorney and not have your heirs needlessly harassed by the IRS.
Mr. Caldwell, in your last paragraph you state “tax policy… Is a secondary consideration” are you kidding me? All of those items in that sentence are called “overhead” in the business world. Business does not succeed if overhead rates eat the profit.
Apologize for the long winded response Mr. Easton but listen to Mike and Gary
Mike, you are correct tax policy can have a big impact on marginal wells, but the biggest impact is commodity prices. However, saying the drilling boom since 2008 is due to oil prices coming back ignores the new science which has unleashed the shale drilling boom. Yes fracking has been around forever. Shale drilling techniques have not. Prices have made shale drilling profitable but the science made it possible.
Lugunaroy is correct about the risk of the estate caps coming back down, but your original post did not indicate you had an estate tax concern. Hopefully Congress is not stupid enough to let them go back to the $1 million levels. If you do have this issue, the fix is to put your minerals into a family limited partnership and do gifts of the partnership interests. It allows you to get an additional discount on the value because the interests are inside a non-marketable asset.
Yes, tax policy is secondary to commodity prices. This is all I was saying.
I respect your opinion, Mr. Caldwell. We had the "science" to drill unconventional shale long ago; it was not economical feasable to do so until oil prices got over 80 dollars a barrel. Personally I do not adhere to the notion that unconventional shale wells will be our energy savior. Its a nice bump we need, little else. Let us agree to respectfully disagree on that matter
I post as a proud stripper well operator who has been exploring and producing oil and natual gas for over 38 years; estate planning is not relevant here, not for me anyway, except to say that Congress is indeed stupid enough to to raise death tax exemptions again, of course they are. Count on it. Government is running amuck and needs all the revenue it can raise, from whatever source it can, including as Lagaunaroy states, all the way down to the county level and property taxes.
It was brought to my attention a few days ago the surcharge on my cell phone bill....for Obamaphone give aways. I am still in shock over that, LOL.
Respectfully, tax policies to my industry are not secondary to commodity prices; you might go back in time and see what windfall profits taxes did to rig rates in the United States. Again, Laguanaroy is correct; rig rates, casing costs, property taxes, polka dot gloves, all taxes take away from the bottom line and effect profit margins. We have had the benefit of intangible tax deductions in this country for I believe 65 years and it got us thru 3 dollar oil prices and 10 cent gas prices for many years to the energy security and unprecedented industrial growth of our country. If you believe that these crummy shale wells will continue to be drilled on 7% per year annual rates of return, without depletion allowances and being able to write down 75% of the total well costs, you are I beleive not correct.
I have enjoyed the respectful debate, thank you. I must go dig a straight ditch this morning.
Good topic George and interesting/informative replies all..
I haven't had mineral rights very long and haven't had a hole drilled yet. I've got a curiosity that is much more simple minded than getting into the weeds of taxation effects - although that surely is important. As it has been up till now states have the authority over drilling activity on state and private lands withing their state. The decrease in drilling permits issued on federal lands seems to me to have not effected oil production efforts because of the newly available reserves on state and private lands. In effect, the less federal lands available the better opportunity for the private owners. As Mike points out I think a nefareous EPA is the biggest threat to that though. It seems to me that if the states can somehow repel EPA's expected expanded authority attempts in efforts to control what the states now have control of, private mineral rights owners should benefit from federal lands not being available. I suppose taxation can be used as a tool as easily as EPA can, but that can't be done by executive order and agency policy - or overnight.
It indeed holds water like a 55 gallon drum. I personally believe that matters of climate change and global warming (which Sandy is supposedly to have been born of) and environemental issues, an effort at a cleaner, greener America is No. 3 on this administrations agenda for the coming years and more, stricter regulations will be directed at the oil and gas industry. The EPA will be given more authority to implement those regulations, even on the state level. Here in Texas we have been able to hold off the EPA to large extent but I believe, have been told, that the rift between the Railroad Commission and the EPA is growing. I think in other states the EPA is pretty much dictating all oil and gas regulations, indirectly or directly, but I do not know that for a fact. I cannot answer the question of how fast and to what extent the EPA will grow, sir; I use to believe in the system of checks and balances in Washington but often now find myself astounded how easily new laws can be sneaked thru the system by, as you say, executive order.
I think, Larry, we would be shocked how many Americans would favor nationalizing all oil and natural gas in our country, simply letting the government own and operate the whole kittenkabootle. They don't understand finding and extracting costs, they think oil grows in the ground and is everywhere you poke a hole, they don't like quarterly profits in the billions of dollars by major oil companies (never mind that they represent <8% returns on capital investment) and the hate messes like BP made.
If I sound pessamistic, forgive me; we'll find a way. Maybe its the 480 point drop in the DOW since Wedensday. I guess I am not the only guy in the country feeling scaret. Yes sir, bigger government means a bigger, stronger EPA. All of us want cleaner air and water and less blight on the landscape (you should see the mess in the Eagle Ford in S. Texas...pads and roads and broken highways everywhere), we must simply accept that it comes with a hefty price tag. Like gasoline in California.
Thank you, Reagan. For the record I do not agree that commodity prices are the single most important factor in maintaining production levels in this country; taxes and increased regulatory constraints on the industry are at currrent commodity price levels. Short of 150 dollar oil prices and 10 dollar natural gas, if we lose IDC deductions drilling activity in our country is set to eat the big enchilada. As you correctly point out, mineral related income, the value of minerals, realized or hoped, jobs, tax income to federal, state and local coffers is now, in my opinion, set to go down, down, down.
A clear and precise energy policy that embraces oil and natural gas, promotes it, is vital to the energy security of this country. We have not seen anything that resembles common sense about energy the last 4 years, what makes people think it is going to get better now is beyond me.
I understand Oklahoma has held EPA at bay resonably well too. Not too many weeks ago they were rated the #1 on the best place to invest in drilling oil. They have Senator Inhofe as well, he and EPA don't mix well :~}. I've been monitoring activity up there for a while and have wondered the past few weeks if I've been seeing some 'Wait and see how the election turns out.' decrease. I sometimes visit a friend, I call him 'Jed' now, who had a whole bunch of Eagle Ford activity around him the past 24 months. There has been some deteriation of the paved roads, but his ?county? learned from others and contracted the repairs to be at oil company expense. They seem to get on top of issues pretty fast that way. The dirt roads improved from what they were.
Very interesting discussion going on here. I think I'll evesdrop for a while and see what I can learn.
Thanx y'all. Mike said:
It indeed holds water like a 55 gallon drum. I personally believe that matters of climate change and global warming (which Sandy is supposedly to have been born of) and environemental issues, an effort at a cleaner, greener America is No. 3 on this administrations agenda for the coming years and more, stricter regulations will be directed at the oil and gas industry. The EPA will be given more authority to implement those regulations, even on the state level. Here in Texas we have been able to hold off the EPA to large extent but I believe, have been told, that the rift between the Railroad Commission and the EPA is growing. I think in other states the EPA is pretty much dictating all oil and gas regulations, indirectly or directly, but I do not know that for a fact. I cannot answer the question of how fast and to what extent the EPA will grow, sir; I use to believe in the system of checks and balances in Washington but often now find myself astounded how easily new laws can be sneaked thru the system by, as you say, executive order.
I think, Larry, we would be shocked how many Americans would favor nationalizing all oil and natural gas in our country, simply letting the government own and operate the whole kittenkabootle. They don't understand finding and extracting costs, they think oil grows in the ground and is everywhere you poke a hole, they don't like quarterly profits in the billions of dollars by major oil companies (never mind that they represent <8% returns on capital investment) and the hate messes like BP made.
If I sound pessamistic, forgive me; we'll find a way. Maybe its the 480 point drop in the DOW since Wedensday. I guess I am not the only guy in the country feeling scaret. Yes sir, bigger government means a bigger, stronger EPA. All of us want cleaner air and water and less blight on the landscape (you should see the mess in the Eagle Ford in S. Texas...pads and roads and broken highways everywhere), we must simply accept that it comes with a hefty price tag. Like gasoline in California.
Well, the prez just spoke and it doesn’t look good.
Mr. Dukes your blog is excellent and I think covers all the topics. People can read that and find what applies to them and research their concerns. I am providing it to my kids as a read ahead for a family meeting this weekend. They are not well versed in this stuff but they ask great questions.
Things do not look good right now for anyone in oil and gas no matter their specific involvement. By no means do I think it is time to sell, I will never sell my mineral interests. My thoughts are that everyone should identify their risks and mitigate accordingly.
Right now in the EF there is a mad scramble to get drilling done on the leases so they can hold those leases by production. The drillers have until March to complete those wells and take the write offs for 2012 taxes.
I have been thinking about what the leading indicators will be to assess the impact for next year. Permitting is not a good one because that is just a wicket you have to go through and can be extended at almost no cost. What I am going to watch is rig count, I believe that we will start seeing a reduction in the EF the middle of December. It will start with the old style rigs, the flex rigs save money so that number will probably go down until after Jan 1. If this does happen it will be tough times ahead. Hope I am wrong and unlike Mr. Dukes, my wife says I am always wrong, you are a lucky man Mr. Dukes.
I offer this advice to all, now is not the time to make emotional decisions, plan for the worst, mitigate your risks, and adjust with whatever changes come in the future. Most importantly, talk to family and friends, you needed them before this, you need them now, and you will live the future with them.
Sorry for this long read, I don’t know how to blog. Mike good luck, hope this helps.
N
Thank you all for a great discussion that is very helpful to me (and hopefully to others as well).
I do have one small follow-up question. What the comment that was made to me about business for landmen drying up true? If so, this clearly happened before the election. So what has been the cause? I am assuming that the the amount of business for landmen has to do with new (potential) production and the amount of buying and selling of mineral rights.
Companies have leased millions upon millions acres the past few years as shale plays proved commercial. We're entering a development phase now. Operators have to develop the land or lose the leases. At this point in the business cycle, fewer landmen will be needed. It doesn't surprise me to hear that comment.
In short, the leasing rush takes more landmen than the actual drilling and development of the leases.
George S Easton said:
Thank you all for a great discussion that is very helpful to me (and hopefully to others as well).
I do have one small follow-up question. What the comment that was made to me about business for landmen drying up true? If so, this clearly happened before the election. So what has been the cause? I am assuming that the the amount of business for landmen has to do with new (potential) production and the amount of buying and selling of mineral rights.