Many people are quick to point out the imperfections associated with the government take metric. As is true of using any metric, there is an advantage in understanding both the strengths and weaknesses. Take does not measure everything that matters to a government. Daniel Johnston offers a retrospective look at the concept of government take and why it is sometimes so difficult a subject to grasp.

This issue marks the debut of a new regular feature on global petroleum issues by Daniel Johnston. In this first column, he characterizes the current climate facing companies and governments today and discusses the relationship between contract terms and prospectively.

In this issue, Mr. Johnston examines the international gas industry, explaining some of the differences between the commercial prospects for gas versus that of oil and touching upon gas flaring, LPGs, gas-fired power generation, gas cycling, LNGs, and methanol.

If, given a clean slate, you were asked by a newly created government to design the ideal fiscal regime from the ground up, what would that system be? This thought-provoking column offers an outline of what the key elements of such a system should be and how it would work.

This is the second installment of a two-part article on economic modeling and audits. Part II extends the audit exercise to include an examination of some of the key price, cost, and technical assumptions. Part I appeared in the Fall Winter 2000 issue of the Petroleum Accounting and Financial Management Journal.

Mr. Johnston reports on a June meeting in Phuket, Thailand of both oil companies and governments. The combination of misperceptions and diverse non-standard terminology, frustrations, and suspicions created enough confusion to keep the conference lively from start to finish. The discussions also indicated that the science of fiscal system analysis and design is evolving but still lags behind some of the more highly evolved sciences such as petroleum engineering and even geology.

Economic modeling and risk analysis are part art, part science. Unfortunately, the science typically outpaces the art, and the artistic aspect of the exercise of cash flow analysis begins with the understanding that all economic models are flawed. This is the first installment of a two-part article which will conclude in the Spring 2001 issue of the Petroleum Accounting and Financial Management Journal.

Colombia and Sno Tomé e Principe stand at opposite ends of the spectrum in the global market for exploration acreage and projects—a theme addressed extensively in this column. One country is a net exporter. The other has no production whatsoever. In both cases, things are about to change.

The International Accounting Standards Board (IASB) is seeking to develop an accounting and disclosure model targeted at issues unique to upstream oil and gas production as well as other extractive activities. The goal of this project is to develop an International Financial Reporting Standard (IFRS) on accounting for extractive activities. This article discusses the activities aimed at achieving this goal.

If recent events are any indicator, it is highly likely that U.S. based SEC registrant companies will be required to transition from U.S. GAAP to International Financial Reporting Standards (as published by the International Accounting Standards Board) in the not too distant future. This and future articles will focus on current events in this area and, specifically, issues related to oil and gas producers. This article is devoted to background related to SEC activities in regard to the acceptance of IFRS, while future columns will focus on various issues related to IASB activities regarding accounting for and disclosure of oil and gas producing activities.

The IRS in 1978 established the Petroleum Industry Program (PIP), an arm of its Industry Specialization Program headquartered in Dallas, to enhance communication between IRS staff and industry representatives. Mr. Wilson reports on issues currently under consideration at the PIP.

Mr. Reed, Petroleum Industry Analyst in the Internal Revenue Service, out-lines the examination approach used by the IRS in Auditing the windfall profit tax including "first purchaser'' examinations, "operator'' examinations, and "producer" examinations. Mr. Reed also describes the work performed on WPT audits in the Austin Service Center and in the appeals division. He places special emphasis on audit problems relating to the net income limit.

In spite of their apparent simplicity and very long history, the interpretation and application of statutes of limitations still give rise to controversy. Nowhere does this seem more true than in the oil and gas business where many injuries are far from obvious to even the most alert landowner. This article describes some recent controversies involving the application of statutes of limitations to oil and gas matters and gives special emphasis to how courts have dealt with claims for equitable relief fron1 the statutes.

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents in a standard format. The various organizations and committees involved in setting those standards both within and outside the oil and gas industry are discussed. A listing is provided of current applications within the oil and gas industry including the names of persons who may be contacted about the application.

Since the treatment of the IDC deduction has changed under recent revisions to the tax code, it is important for taxpayers claiming this deduction to be up to date on the latest regulations. This paper reviews the general rules concerning the deductibility of IDC's and the current status of the deduction for prepaid IDC.

In this Update Dr. Mark summarizes the first set of Proposed Regulations dealing with the economic performance criteria in Treasury Regulations S1.461-4T. The Revenue Service reiterated the notion that the all-events test must be satisfied before economic performance may be considered to have occurred. Dr. Mark also examines Proposed Reg. S1.1031(a)-2, relating to multi-asset and personal property-kind exchanges. These Proposed Regs. are likely to have a very significant influences on the oil and gas industry. Dr. Mark also discusses recent Letter Rulings dealing with the S29 credit for coal seam gas.

Recent cases and revenue rulings are reviewed on several topics: the special allocation of IDC's; depletion of bases including the remaining adjusted basis in depreciable assets under the alternative minimum tax (AMT); trust distributions as completed gifts; costs depletion on inherited oil inherent in a community property state; gross income for percentage depiction; retailer/refiner status; royalty payments as Passive or portfolio income; aggregation under Section 465; line pack; corporate distribution of bonus and delay rentals; abandonment losses; and non-conventional fuels tax credit issues.

Topics reviewed include: IDC recapture; sales versus lease arrangements; working interest income as self-employment income; final regulations on partners' and S shareholders' percentage depletion; taxable income limitation; pre-August 16, 1986 bonus and advance royalties; non conventional fuels credit; tar sands production by new technology; alternative minimum tax (AMT) adjusted current earnings(ACE) reduction in IDC amortization amount as a result of the alternate tax energy deduction; the treatment of an aggregated non-operating interest as a separate tax property; ordinary loss on a stock sale; and worthlessness loss.

The Tax Court has overturned the legislative regulations in Treas. Reg. 1.863-1(b) requiring that all income from oil or gas produced in the U.S. be considered U.S. income. The Tax Court ruled that secured promissory notes issued by limited partners are not included in the partner's basis until paid. The Tax Court disallowed an investment partnership's IDC prepayments noting that no working interest was owned before the IDC's were paid. The 8th Circuit Court of Appeals has held that partnership profits for services, if capable of being valued, would be subject to current taxation. The Tax Court disallowed deductions for amounts paid to a broker for finding investors.

Service ruling involving Section 29 credits include definition of "well drilled," definition of "property" for Section 29 purposes, and sales triggering Section 29 credit. Other Service news involves the issuance of temporary and proposed regulations under Section 43 dealing with enhanced oil recovery (EOR). The Tax Court rulings concern at-risk rules, alternative minimum tax, IDC recapture, trusts taxed as associations, S corporations as passive income sources, AMT passive losses, and gross income for percentage depletion.

The Internal Revenue Service has released the 1991 inflation figures for the §29 credit. Recent rulings concern net profits interest for depletable quantity calculations, survivor's cost depletion on inherited oil interests, production payments, and pipeline advance payments. Legislation is pending concerning the AMT and §29 credit. In Texas Instruments Inc. v. Comm., the Tax Court has ruled that seismic data collected and sold to third parties qualifies as tangible property for investment tax credit purposes.

Current proposals for the §29 credit include extending its life and encouraging the development of synthetic fuels from coal, as well as the recovery of methane and other gases from landfills. New infill wells drilled into a formation originally drilled prior to 1980 will qualify for §29 credit. A registered, licensed, or certified petroleum engineer must certify wells seeking qualification for energy preference deductions. The Service has simplified regulations defining passive "activity."

The focus of this issue's taxation update is the energy tax proposals of the Clinton economic plan. The authors discuss the administration's objectives, the BTU tax proposal, the BTU tax impact on exported goods, alternative energy proposals, and the economic and environmental impact of the plan.

The Clinton BTU tax proposal and the Revenue Reconciliation Act of 1993 are the focus of this issue's taxation update. The authors detail the taxation's impact on the various categories of petroleum products and outline the proposed points of collection and the liability and remittance of the tax Further discussion concerns exemptions and administration of the legislation.

The "Technical Corrections" Act of 1988 made a number of significant changes that affect the oil and gas industry. These changes together with a synopsis of other developments in the tax area are discussed in this issue's Current Updates section.

Several significant issues have been addressed in the area of federal taxation. The IRS clarified its position with respect to the treatment of certain expenditures on offshore oil and gas platforms and the Tax Court further defined the distinction between sales and subleases. Several letter rulings and other IRS announcements addressed additional issues. This report also summarizes the IPAA's proposals for an Energy Security and Energy Incentive tax acts in Congress.

Although it is unlikely that major income tax legislation directly affecting the oil and gas industry will pass Congress during 1989, there is a possibility that the Marginal Energy Producers Incentive Act of 1989, introduced by Senator Dole will be enacted. Professor Mark summarizes the major provisions of this bill and of the Revenue Reconciliation Act of 1989. In addition he reviews several court decisions and several IRA Rulings directly related to the industry.

The Omnibus Reconciliation Act of 1989 contained several provisions affecting the oil and gas industry. Changes in the calculations of depletion and IDC for AMT purposes were important revisions. Legislative proposals affecting the industry are summarized.

The activities of the Revenue Service and the AICPA in considering the timing of income recognition in gas balancing arrangements are reviewed. Mr. Mark also gives an update of IPAA legislative proposals and discusses the effects of the Revenue Reconciliation Act of 1989 and recently issued Treasury Regulations on calculation of the AMT. Certain Letter Rulings and court decisions are also reviewed

In late 1983, the pipeline curtailed taking the minimum quantity of gas from the producer and also refused to pay for any gas not taken. What accounting treatment should be given to Company P to these facts?

This paper revisits the historical cost versus present value measures/ value-relevance controversy: a consideration of whether historical cost and present value disclosures provide comparable decision-useful information..

Should the company "write down" the book value of the rigs? If so, to what amount?

The prospect of astronomical decommissioning costs influences decisions made throughout the oil production business. Future decommissioning costs have become a major consideration when contemplating new exploration or production.

Prior to the Felmont case, the Federal Energy Regulatory Commission (FERC) imposed a utility-based service obligation on natural gas producers. The changing economic conditions of the 1970's led to a failure of this policy because producers had little incentive to find natural gas if they would be obligated to produce it at less than economic prices. The Felmont decision permitted producers to obtain a limited term abandonment which effectively would relieve both producers and pipelines from some of the consequences of uneconomic contracts. The subsequent release from the burden of the utility-based service obligation is discussed in this paper as well as the effects such release should have on production incentives.

In a taxable acquisition, a buyer of property burdened by environmental contamination must capitalize the subsequent payment of environmental cleanup costs regardless of whether those costs would have been deductible to the seller. This does not necessarily hold true in the case of non-taxable transactions. Accordingly, taxpayers may want to consider the existence of environmental liabilities when negotiating the purchase price of property and may also want to consider the use of nontaxable acquisition techniques in appropriate circumstances.

Addresses the deductibility of post-production costs under the laws of two neighboring states—Texas and Oklahoma. These two states take different views of the issues that center around when the lessee's production activities cease.

As its five-year anniversary approaches, the authors discuss and recap the events surrounding the Deepwater Horizon Disaster including a summary of resultant litigation and tax implications.

This article reports on the results of a survey conducted by the Extractive Industries Accounting Research Institute. The purpose of the survey was to determine the criteria used in certain situations by respondents in classifying wells as exploratory or development. Responses from 25 full-cost companies and 30 successful-efforts companies were used. The results suggest that well classification varies considerably between companies.

How should the company compute depreciation on the idle rigs, if at all?

Ms. Wright discusses the argument that in making "capital market studies "confounding events should be explicitly controlled. Ms. Wright uses as an example her prior research into the effects of oil and gas company news releases on stock prices.

Policy makers have an interest in promoting banking sectors that are both stable and efficient. Stability requires sufficient banking profitability, while economic efficiency requires banking spreads that are not too large. A prerequisite to formulating effective banking polices is to understand the determinants of bank profitability, especially when considering these issues in an economy predominated by petroleum.

When the ceiling test required by the SEC of full cost oil and gas firms went into effect in 1986, many such firms reported lower earnings and lower net worth. Since then many studies have analyzed the impact of the ceiling test on full cost companies. The purpose of this article is to explain the cross-sectional variation of the stock price effects of the ceiling test write-off for full cost companies using contracting and political cost variables.

Professors Pasewark and Crumbley review the general concept of the economic interest in taxation of natural resources, comparing the published IRS interpretations with those found in judicial decisions. They examine and classify variables identified by the IRS to be used in making decisions about the existence of economic interest in coal properties identifying those variables that have been held to be most significant.

Relative finding costs are considered a key determinant of a company's stock market value. The heavy use of finding costs data is causing problems, however, because there is as yet no standard for calculating and reporting finding costs. This article analyzes the strengths and weaknesses of conventional techniques for determining finding costs and argues the case for a finding costs measure that is a reliable indicator of future profitability.

Unitization effectively reallocates property rights in an efficient manner and leads to an optimal rate of extraction of resource. Because unitization is more likely to be undertaken when the price of oil is low rather than when it is high, a sub optimal amount of unitization will occur in times of high oil prices. For this reason regulatory agencies should be more watchful and more ready to intervene to encourage unitization in times of higher prices than in times of low prices.

This is the first installation of a two-part article that explores the role of the United States Department of the Interior's Minerals Management Service's efforts to develop clear, fair, and cost-effective regulations to establish the royalty value of gas production from Indian lands. The exploration, production, and sale of natural gas from the nation's Indian reservations and allotted lands has generated billions of dollars in revenue. Historically, only a small part of that revenue has gone to Indian tribes, and the allotters have long sought a greater—in their view fairer—distribution of royalty revenues, challenging the federal government to honor its trust obligation to manage and protect these valuable mineral resources.

The second half of an article which appeared in the Spring 2003 issue of the Journal, this paper examines the Interior Department's development—during the 1990's—of the Amendments to Gas Valuation Regulations for Indian Leases to address the great royalty divide between federal lessees and Indian lessors. This installment describes the Indian gas valuation negotiated rulemaking process and the substantive workings and content of the new regulations.

This paper explores some of factors associated with the development of a corporate accounting policy by the Royal Dutch/Shell group of companies in relation to environmental clean-up activities and identifies some of the accounting issues addressed in the preparation of that policy.

A continuing column which provides summaries of updates in the area of financial accounting. This issue's column includes a discussion of FASB statements, SFAS No. 96, and COPAS activities and bulletins.

A continuing column which provides summaries of updates in the area of financial accounting. This issue's column includes a discussion of AICPA's new statements and FASB statements.