This paper discusses the impact of taxes at the state and federal level on typical on-shore oil and gas exploration economics in the USA. Taxes considered are the windfall profits excise tax, state production (or severance) taxes, state income tax, and federal income tax. Also considered will be market prices for oil and gas in the USA. The effect of government take as a percent of revenue, on rate of return, discounted payout, and discounted cumulative cash flow is shown on the attached tables.

The conclusion drawn is that tax laws, while rarely the most important factor to be considered when drilling a well, can have significant impact on the profitability of oil and gas ventures, and should be considered when determining where to drill. Hypothetical exploration wells were analyzed for the impact of tax laws on project profitability. The results of this study show that when factors other than taxes are postulated to be the same (such as producing rate, capital, operating costs, and prices), cash flow can vary by as much as 68% due to the differences in the tax laws. Other significant findings for the cases studied include: (a) that discounted payout varied by as much as 1.8 years, (b) that rate of return differed by up to 67% and (c) the total tax rate as a percentage of revenue had a maximum variance of 33%.

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