IPAA survey: Regulation becoming more burdensome for oil, gas independents

Regulations over the past 5 years have made operations more complex for independent oil and gas producers, according to a recent survey, Profile of Independent Producers 2012-13, released by the Independent Petroleum Association of America.

A vast majority of respondents indicated that regulations have resulted in increased administrative costs, with 48% reporting slight increases and 43% reporting significant increases.

Air pollution standards represented the most pressing concern for independents, as 33% said it has the largest impact on operations while 35% said it had the second-largest impact on operations.

The survey follows a recent analysis of regulation published in April by the Competitive Enterprise Institute indicating that the estimated cost of regulation nation-wide in 2013 totaled $1.863 trillion, 11.1% of estimated gross domestic product (OGJ Online, May 2, 2014).

Meanwhile, independents named the deductibility of intangible drilling costs (IDCs) as their most important tax consideration for business operations. Fifty-seven percent of respondents said that IDCs were the most important tax issue for their business and 24% said IDCs were their second or third most important tax issue.

Independents’ heavy reliance on IDCs was illustrated by two thirds reporting that their capital budgets would decrease by 20% or more if IDCs were repealed. Median capital annual capital expenditures for independents reached $30 million in 2012, with plans to spend $32 million in 2013 and $25 million in 2014.

Defining ‘independents’

An independent producer, according to Internal Revenue Code section 613A(d), does not exceed $5 million in retail oil and gas sales in a year or does not refine more than an average of 75,000 b/d of crude oil during a year.

A survey conducted by IHS in 2010 shows that independents develop 95% of US oil and gas wells, produce 54% of US oil, and produce 85% of US natural gas.

The average firm for responding independents in 2012 was comprised of 246 full-time employees and 15 part-time employees. However, IPAA notes that these figures were skewed by several very large firms, as the median-size firm consisted of 12 full-time and two part-time employees.

The notion that smaller oil and gas companies are rugged upstarts is somewhat diminished by the fact that just one third of respondents have been in business for 10 years or fewer. The average respondent has been in business for 23 years.

A fourth of respondents were publicly traded firms, and 31.3% of respondents were structured as LLCs, 27.3% as S corporations, and 12.9% as limited partnerships. The amount of independents structured as LLCs has more than tripled since 2009.

Domestic operations

Typical with an overall national trend, independent respondents made heavy use of hydraulic fracturing and horizontal drilling in 2012. Fifty-five percent of wells drilled during the year were fraced and 41% were drilled horizontally.

However, 52.6% of production still came from conventional oil, while just 21.9% came from conventional gas. Just 11.5% of independents’ production came from unconventional oil and 14% from unconventional gas.

That compares with 67.2% of overall gas production and 34.7% of overall oil production from unconventional resources across the entire US, regardless of producer profile.

Independents have mostly shied away from using public resources, citing government regulations as significant obstruction. An average of 9.9% of total US production for respondents occurred on federal lands, with just 5.9% operated in federal waters, and 10.6% operated in state waters.

In comparison, 26.2% of total crude oil and lease condensate production and 17.8% of natural gas production occurred on federal lands in 2012.

A total of just 7.3% of responding firms reported participating in international operations, compared with 10.8% in 2008-09 and 11.6% in 2000, primarily due to capital constraints and a lack of expertise.