The oil and gas industry in the United States has been somewhat depressed of late, with a decline in the number of active rigs from the record highs of previous years, and numerous calls for increases in taxes and regulations, which have led to instability in the market. Since last year, for instance, over 100 U.S. oil and gas companies have declared bankruptcy. That said, nationwide production has remained steady, despite the presence of relatively low gas prices. Locally, Pennsylvania’s natural gas production continues to rise since the discovery of the Marcellus Shale district, primarily in the southwestern portion of the state. With 6,888 unconventional wells currently producing 4.5 trillion cubic feet per year of natural gas in Pennsylvania alone – or about 20% of total U. S. production – the effort has so far been a boon for regional consumers, who’ve seen steady decreases in household electric costs.
It was against this backdrop that Schneider Downs recently held its annual Oil and Gas Update, a daylong event that covered a wide range of topics including the general state of industry, issues surrounding depreciation, depletion and amortization (DD&A) and property, plant and equipment (PPE) as well as impairment, and capped by a talk from featured speaker David J. Spigelmyer, President of the Marcellus Shale Coalition.
Participants discussed, in detail, industry matters as changes in prices, drilling costs exceeding expectations, significant increases in DD&A rates, production difficulties and lease expiration in the near future, as well as derivative and hedge accounting, taxes and revenue recognition. Conversations regarding PPE, DD&A and impairment proved particularly beneficial in understanding reporting issues relevant to those areas, including understanding how to determine which depreciation method oil and gas clients should be using and determining which triggering events may cause impairment of clients’ assets.
Guest speaker Spigelmyer wrapped up the day, touching on many aspects of the oil and gas industry as a whole and Pennsylvania operations, in particular. After explaining the key difference between conventional and unconventional drilling – conventional involves drilling straight down into a reserve while unconventional drills horizontally through the shale – Spigelmyer described how Pennsylvania is helping to streamline delivery of the retrieved natural gases through the construction of several pipelines that will run from the gas-rich markets to other markets throughout the state and country. With trucking expensive, these pipelines can go a long way in significantly reducing costs.
Spigelmyer concluded his message by addressing a common misconception, namely that oil and gas companies “don’t pay taxes,” by explaining how those companies are hit with massive fees instead. As an example, the licensing fee to start a well – once only $100 – is today over $3,000. In addition, oil and gas companies pay an “impact fee” for unconventional wells.
Despite the oil and gas industry’s ongoing challenges, Spigelmyer expressed optimism about its future as a whole, not only for Pennsylvania, but for the world. For more information on the current state of the oil and gas industry, contact us.