Energy Industry Insight

	4th Quarter, 2009

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about the Author

Shuja has over twelve years of professional accounting experience and serves as a Tax Manager in the Houston office of HEIN & ASSOCIATES LLP. He assists public companies of all sizes in the energy industry with tax compliance and consulting work, including entity classification in support of partnership formations. He is also experienced with FAS 109, cost and percentage depletion schedules, and sales and use tax examination. In addition, Shuja specializes in consolidated return issues as well as S corporation transactions.

In addition to his energy experience, Shuja has also developed a focus in the retail industry. Prior to joining HEIN & ASSOCIATES LLP in 2008, he was a Tax Manager with Ernst & Young, LLP. He is a member of the American Institute of Certified Public Accountants (AICPA), the Texas Society of Certified Public Accountants (TSCPA), and the Council of Petroleum Accountants Societies (COPAS). Shuja received his Master of Business Administration in finance from the University of Azad Jammu & Kashmir, and his Master of Laws in taxation from the University of Houston. He also holds a Certificate of Financial Planning from Rice University.

Shuja can be reached at 713.850.9814 or sakram@heincpa.com.

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Additional Federal Developments

By Shuja Akram, CPA, Tax Manager

The following is a look at additional federal items currently impacting the oil and gas industry, including oil and gas royalties, Bureau of Land Management violations, policy proposals, and inflation adjustments.

Federal Oil and Gas Royalties. Many in Congress feel that the government has been deprived of revenue from oil and gas production from federal lands and waters because the government has permitted producers to pay royalties "in-kind" rather than in cash. After receiving a portion of production in the form of oil or gas, the government then sells the production on the open market.

This program has been criticized for lax enforcement of the rules, costing the government millions of dollars. It is estimated that approximately half of the $12 billion in oil and gas royalties due to the government are collected through the in-kind program. The program was also at the center of a 2008 scandal involving employees in a Colorado Interior Department office.

Interior Secretary Ken Salazar recently stated that the royalty in-kind program will be terminated. Rather than ending suddenly however, it will be phased out in an "orderly manner," according to Salazar.

BLM under Attack. A recent Government Accounting Office (GAO) audit concluded that the Bureau of Land Management (BLM) failed to follow both the law and its own guidelines in issuing over 6,500 exclusions that permitted oil and gas drilling in the West without environmental impact studies. According to the audit, these decisions contributed to growing air-quality problems in many western states.

The authority for granting these exclusions came from the 2005 Energy Act, in which Congress granted the BLM some leeway. The GAO report emphasizes several types of violations:

Allowing too many wells under a single approval.

Approving wells that were inconsistent with the BLM criteria.

Allowing drilling when the environmental evaluation was older that a five-year limit.

Environmentalists involved in the matter criticized the BLM for granting exemptions "in the habitat of sensitive species like the pygmy rabbit and the sage grouse."

In a related matter, the House of Representatives has approved a fiscal 2010 interior-environment appropriations bill that increases the fee from $4,000 to $6,500 for applications for permits to drill on federal lands.

Energy Policy Proposals. Though Congress recently has turned most of its attention to the health care debate, there have been several lightly publicized entrants into the federal energy policy debate. First is a proposal by the Senate Western Caucus called the Clean, Affordable and Reliable Energy (CARE) Act. It would provide incentives for oil and gas production, building energy infrastructure, conservation, and efficiency. It also instructs the Interior Department to develop an oil and gas leasing program for various undeveloped parts of the country. A day later, the Fueling America Act, aimed at promoting natural gas and propane vehicles, was introduced. This bill contains tax credits and promotes research for better use of natural gas and propane. A short time later, the Natural Gas Act was also introduced, which would extend and increase tax credits for natural gas vehicles and fueling stations.

Oil Recovery Credit Inflation Adjustment. The Internal Revenue Service (IRS) has issued the inflation adjustment factor and phase-out amount for the oil recovery credit for taxable years beginning in 2009. The recovery credit for calendar year 2009 is phased out completely since the reference price for the 2008 calendar year exceeds $28 multiplied by Code Sec. 43(b)’s inflation adjustment for the 2008 calendar year by at least six dollars.

Section 613A Inflation Adjustment. The IRS also announced the Section 613A (small owner – percentage depletion) adjustment for the 2009 calendar year. The applicable percentage to be used in determining percentage depletion for marginal properties for 2009 continues to be 15%.