Appalachian Basin Forecast to Become United States Most Profitable Petrochemical Region

US Department of Energy (DOE)  Secretary Rick Perry recently testified before the US House of Representatives Committee on Appropriations that DOE is actively working on plans to transition Appalachia into a petrochemical refining center with investment in the region a priority for national security.  Perry further explained the Appalachian region “makes sense because you’re sitting on top of the Marcellus and Utica which are prolific gas fields, and helping transition the workers who are either out of work or not working in jobs that are satisfactory from their perspective into higher-paying refining and petrochemical type jobs. That is a something we’re working on actively today at DOE.”

In recent months there has been a growing body of research on the advantages the Appalachian Basin petrochemical industry has over the Gulf Coast region.  These advantages include abundant natural gas, access to water, proximity to markets, skilled labor and cost advantages all exceeding that of the gulf coast region.

Natural Gas

The Appalachia Basin sits atop the Marcellus and Utica Shale formations, two of the most prolific shale plays in the world.  Natural gas from the Marcellus and Utica shale plays accounted for approximately 30% of total U.S. natural gas production in 2017, and is expected to account for more than 40% of the nation’s production by 2030

Water

The Appalachia Basin provides ample room for large manufacturing complexes, but still provides convenient access to large waterways, such as the Ohio River and its many tributaries.

Proximity to Markets

Businesses in the Appalachia Basin have a significant geographic advantage over Gulf Coast due to the following:

  • Within one day’s drive to 50% of high-demand North American markets
  • Within one day’s drive to 70% of polyethylene demand
  • The lowest natural gas prices within the developed world

Skilled Labor

With one of the lowest employee turnover rates in the country, the Appalachia Basin has world-class workforce, combining a storied history of manufacturing and a world-renowned, forward-thinking plastics manufacturing industry

Cost Advantages

Appalachian Basin has dramatic cost advantages over the Gulf Coast region with availability ethane, ethylene and  polyethylene at cost of on average 23% less than that in the Gulf Coast region. These and other cost savings simulated over a period of 20 years, from 2020 to 2040, result in a net present value cash flow advantage of $713 million, or a pre-tax cash flow advantage of $3.6 billion or 4 times the savings of that in the Gulf Coast region.

These advantages over the Gulf Coast region will move the Appalachia Basin and region into a unprecedented growth in all areas of the region as the Untied States remains the worlds leader in natural gas and oil production.

 

Primary Tax Benefits of Investing in Oil

There are several major tax benefits available to oil and gas investors which makes this investment unique above all others. U.S. tax codes favor investment in energy resources and oil and gas leads the way with a catalogue of incentives for investors as well as oil producers. Below are just a few of the key incentives.

Primary Tax Benefits of Investing In Oil

  1. Intangible drilling cost:
    These include everything except the actual drilling equipment. Labor, chemicals, mud, grease, paraffin, and other miscellaneous items necessary for drilling.  These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% tax deductible in the year incurred. So, a million dollar investment could deduct approximately $800,000 right away, which would generate a net tax savings of approximately $280,000 in year one (assuming a 35% tax bracket), reducing the net investment by 28%. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, 100% of the deduction will be allowed, otherwise prorated on starts after March 31 of the following year.
  2. Tangible drilling costs: Tangible cost are those directly related to the cost of the drilling equipment. These expenses are also 100% deductible, but must be depreciated over seven years. Therefore, in the example above, the remaining $200,000 could be written off according to a seven-year schedule.
  3. Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.
  4. Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.
  5. Lease Costs: These include the purchase of lease and mineral rights, lease operating cost and all administrative, legal and accounting expenses. These expenses must be capitalized and deducted over the life of the lease via the depletion allowance.

 

DISCLAIMER: Viper Capital Partners LLC, is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice. The information on this page is for educational purposes only. Individuals should consult their own tax professional for advice. Viper Capital Partners LLC offers no professional tax advice.

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Oil Prices Moved Higher Last Week as Seasonal High Demand Takes Hold

West Texas Intermediate (WTI) closed higher last week at $69.36 as seasonal high demand witnessed inventories draw down last week of -5.9 million barrels with demand outpacing supply by 10 million barrels in the last 14 days. Prices remain bid and will soon reach our next target of $76.47 as June prices opened at $67.07 and if close higher for June will confirm prices are once again moving to new 2018 highs with a daily open and higher close above $72.87 confirming the move to $76.47 is underway.

Last weeks IEA report revealed US daily production reached 10.9 million barrels for the week ending June 15 while total global production peaked at 99.3 million barrels per day. However, during the same period global consumption reached 100.2 million barrels leaving a global deficit of 900,000 barrels per day. During last week’s OPEC oil ministers meeting a compromise was reached to raise production by 1 million barrels per day but no date was given as to when this increase will take place. Emerging market growth and global industrial rebound remain as the key factors contributing to this unprecedented and sustained global demand. Recent forecast expect daily demand to exceed 102 million barrels per day buy 2019.

Oil Prices Move Lower for Second Week on Continued Talk of Production Increases

Crude oil inventories data released yesterday, May 31,  witnessed a drawdown of 3.6 million barrels (MMBbl) for the week of May 20-26 according to the Energy Information Administration (EIA). The EIA report is released each week and measures the change in the number of barrels of crude oil held in inventory by commercial firms during the prior week.

Despite the drawdown in inventories, oil prices actually moved lower due to Saudi Arabia, Russia, and other OPEC countries announcement to increase production by 1.0 MMBbl/d to meet global demand. As reported in our May 25 post, Saudi energy minister Khalid Al-Falih said OPEC and Russia would supply more oil to offset the declines from Venezuela and the potential impact from US sanctions on Iranian supply.

No word was mentioned as to how soon the production increase will take place, though some unofficial reports have the current quotas remaining in place until the end of the year, which should provide near term support for prices. Both Saudi Arabia and Russia signaled that the fate of the curbs will be addressed at the upcoming OPEC meeting in Vienna on June 22nd.

Oil prices moved lower last week after reaching a new 2018 high of $72.87/barrel, a few cents above the 71.93 target in mentioned in our Mar 9 forecast. Futures traders began unwinding speculative long positions after the oil ministers announcement of production increases though traders have bids are lined up between 55.00-62.44. CFTC data which tracking speculative long and short positions show that long positions declined 34,798 contracts or 9.1% of open positions. This selling was met with new short selling by the managed money short sector, which increased 18,496 contracts. The chart below brings into perspective the liquidation that has occurred from the speculative sector as it has reduced positions by over 100,000 contracts the last four weeks. However,  oil broad outlook remains very bid as short term price fluctuations will continue as buying on dips will remain the preferred strategy.

US rig count has nearly doubled in the last two years while production is at all time highs. Currently US produces 10.4 million barrels per day with US to soon become the worlds leading producer of oil within the next few months. Currently US, Saudi Arabia and Russia are the three largest producers of oil in the world.

 

stocks chart

Oil Moves Lower This Week as US Dollar Gains

West Texas Intermediate (WTI) currently trades at 70.18 at this writing and is set to close lower this week after reaching a new 2018 high of 72.87, just a few dollars shy of the 76.47 target cited in our January 2018 forecast.  Oil moved lower this week mostly due to strong gains in the US dollar and a surprise surplus in last weeks crude oil inventories.  The US dollar was broadly bid this week and achieved new 2018 highs against a basket of global currencies fueled by European and far east markets net long equities covering positions and moving funds back to US dollars. The US dollar is the largest and most liquid market and remains the worlds reserve currency as the majority of global funds denominate in USD as their base currency. The USD also had additional buying interest this week out of Turkey and Venezuela as both countries central banks raise interest rates in their efforts to slow capital flows out of their country. The US dollar has gained 5 out of the last 6 weeks while oil has moved higher 8 of the last 9 months as historically when USD gains, oil falls.  In recent months, however, oil has remained bid despite USD gains as global demand has and will keep oil bid well into 2030.

Earlier today Russian Energy Minister Novak stated that the global oil glut is over with expectations for long-term rise in demand and prices while also today Saudi Oil Minister Falih said that Saudi will boost supply to meet expected rising demand. Russia, USA, and Saudi Arabia are the 3 largest producers of oil with all three each producing 10.5-11.5 million barrels per day.  WTI dropped from today’s earlier high of 70.72 on news that Saudi will increase production to meet current demand. From a technical basis, WTI has achieved the 71.93 target cited in my Mar 3, 2018 forecast with near-term support at 67.26 and 61.09 as buy orders build at these levels just as the northern hemisphere moves into seasonal high oil demand. Look for WTI to continue to find dips as buying opportunities with 76.47 as the upside target. Look for daily prices to open above 72.87 and close higher followed by a weekly open and higher close to confirm further price rise is once again underway to our next target 76.47.