Pangea Exploration, LLC.
As oil and natural gas supplies are declining, global demand is on the rise. The top ten oil-consuming
countries alone consume over 50 million barrels of oil per day*. Even with the rising popularity of
alternative energy sources as a means to fuel our cars, oil cannot easily be replaced as it is used to
manufacture virtually everything we use on a daily basis, from clothing and pharmaceuticals to detergents and
insulation. There are thousands upon thousands of petroleum-based products that we rely on every day. All of
this translates into opportunity for savvy investors.
Through direct participation programs in oil and gas, investors actually own a portion of the well and receive a
share of the cash flow generated via monthly disbursements. In addition to the income potential, oil and gas
investments offer substantial tax benefits, which the U.S. government has designed to encourage domestic
drilling. Since the Tax Reform Act of 1986, direct participation programs in oil and gas are one of the few
remaining investments that allow investors to shelter income, making it one of the most tax advantaged
investments today. Investors may be able to deduct as much as 65 to 100 percent of their investment within
the first year, whether the well is successful or not, and 15 percent of your income is tax-free.
*Source: U.S. Energy Information Administration
The Independent Producer
America’s determination to increase domestic reserves and be free of OPEC dependency has placed a
tremendous need for capital on oil and gas companies. The burden is particularly heavy for independent
producers whose funds are more limited than those of major oil and gas companies which fund their drilling
activities with the sale of stock. Most Independent Operators, which drill the majority of the Nation’s wells, are
able to provide investors with cash flow and tax advantages through direct participation in oil and gas
programs, thus avoiding the major oil companies’ corporate overhead.
Oil and Gas Investing Tax Treatment
The Tax Reform Act (Act), enacted in 1986, made significant changes to the tax laws as they pertain to oil
and gas investments. The Act attempted, for the most part, to shift more of the tax burden from individuals to
corporations. The Act affected the ability of taxpayers to shelter income.
Intangible Developmental Costs
The Act allows Domestic Intangible Development costs to be expensed or capitalized at the discretion of the
taxpayer. Furthermore, intangible costs may be deducted by the taxpayer in the year the well is drilled.
Tangible Developmental Costs
Currently, the drilling of an oil and/or gas well is considered production of an asset. The tangible well costs are
capitalized and amortized over a seven (7) year period, beginning with the month in which they are paid.
• Independent producers and royalty owners can claim percentage depletion of 15% on domestic production.
Depletion costs may be recovered using whichever of two (2) methods provides a higher deduction, cost depletion
or percentage depletion.
• Percentage depletion for oil and gas properties is limited to independent producers and royalty owners for
daily production up to 1,000 barrels of crude oil or an equivalent amount of natural gas. However, percentage
depletion cannot exceed 65% of overall income.