ALTERNATIVE MINIMUM TAX
This tax has been liberalized for oil and gas investments a few years ago. Campbell advises you to consult your tax advisor about the impact of the alternative minimum tax.
A deduction that accounts for the diminishing asset nature of a gas well that is available as long as the well produces. This deduction is as much as 15%, and is in addition to the Intangible Drilling Costs and depreciation.
Once a well is considered commercially viable, the well is completed. The tangible portion of the investment is capitalized and deducted as depreciation over the next several years. The tangibles make up 25-30% of the investment.
FARM OUT ROYALTIES
If another concern owns a lease on a site and Campbell wishes to drill that lease, typically a fee is paid up front and 1/32 of the gross revenues are paid as a royalty, in addition to the royalties paid to the mineral rights owner.
INTANGIBLE DRILLING COSTS
This considerable deduction is the primary incentive given by the Federal Government to stimulate investor participation. This deduction is taken completely the year of investment. The value of the deduction is equal to the costs necessary to determine if there are commercially producible resources, and can be between 70-75% of the cost to bring a well on line.
These are revenues received by the investor after royalty payments, management fees and direct well operating costs. Revenues are highly volatile due to commodity pricing fluctuations and seasonal needs.
PINCHING BACK (A WELL)
Production of natural gas at lower levels due to careful well management or a response volatile market conditions.
These fees are paid to entities involved in the drilling process. Campbell limits these royalties to three types:
- Paid to the mineral rights holder, this is one eighth of the gross revenues by law in Pennsylvania. Although it is typically one eighth in other states, this rate can be negotiated.
- Additional 1/16th royalty is paid to Campbell on all wells developed on its leases.
- Farm Out Royalties may also be part of development costs and limited to a 1/32nd override.
To suspend the production of natural gas during a time where the producer considers the price to be inadequate, in light of prevailing market conditions.
When drilling commences, by the drill bit making contact with the ground.
The fixed price to develop a commercially producable well. Investment in excess of the turnkey price is borne by the developer.