Alpha Seven Energy

Permian Basin OverviewMidland Basin

3811 Turtle Creek Blvd, Suite 1850 Dallas, TX 75219(469) 917-1777

2019

In 2016, the US Geological Survey (USGS) assessed the petroleum resources in the Pennsylvanian-Permian Wolfcamp Shale in the Midland Basin of the Permian Basin Province of west Texas for the first time. Since the 1980s, this area had been traditionally developed using vertical wells. More recently, the Midland Basin Wolfcamp section has been subject to over 3,000 horizontal wells that have been drilled and completed.

The petroleum industry has divided the Wolfcamp Shale into four distinct stratigraphic units, known as Wolfcamp A, B, C, & D respectively. In total, the USGS’ assessment of undiscovered, technically recoverable continuous oil and gas resources for the Midland Basin Wolfcamp shale found an assessed mean of 19,948 million barrels of oil (MMBO), or roughly 20 billion barrels of oil, with an F95 of 11,439 MMBO, meaning that there is a 95% chance that there is at least 11.4 billion barrels of oil.

Alpha Seven's primary focus is the Midland Basin Wolfcamp A, in which the USGS estimates a mean total of 5,815 million barrels of oil (MMBO) and 465 million barrels of natural gas liquids (MMBNGL). They also assess an F95 of 3,754 million barrels of oil and 223 million barrels of natural gas.

Right. Map showing the Midland Basin, Permian Basin Province, Texas, and the extent of the six assessment units (AU). The Midland Basin Wolfcamp A Continuious Oil AU and Midland Basin Wolfcamp B upper Continuous Oil AU have the same extent.

“ The U.S. Geological Survey assessed technically recoverable mean resources of 20 billion barrels of oil and 16 trillion cubic feet of gas in the Wolfcamp shale in the Midland Basin.

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–99°–100°–101°–102°–103°

33°

–104°34°

32°

31°

30°

TEXASNEW

MEXICO

Abilene

Lubbock

San Angelo

Hobbs

Midland

Cr

ent al Basin Platform

EasternShelf

Source: U.S. Department of the Interior National Park Service

Val Verde Basin

EXPLANATIONHorseshoe atoll Midland Basin Wolfcamp A Continuous Oil AUMidland Basin Wolfcamp B Upper Continuous Oil AUMidland Basin Wolfcamp B Lower Continuous Oil AUMidland Basin Wolfcamp C Continuous Oil AUMidland Basin Wolfcamp D Continuous Oil AUMidland Basin Northern Wolfcamp Continuous Oil AUPermian Basin Province (part)County boundary

0 50 MILES25

0 50 KILOMETERS25

NEWMEXICO

OKLAHOMA

TEXAS

MEXICO GULF OFMEXICO

Areaof study

Permian Basin Overview

The Permian Basin

ASE

Source(s):

USGS Estimates 20 Billion Barrels of Oil in Texas’ Wolfcamp Shale Formation. (2016, November 15). Retrieved from: https://www.usgs.gov/news/usgs-estimates-20-billion-barrels-oil-texas-wolfcamp-shale-formation

Congressional Incentives Encourage Domestic Petroleum Development

Oil and gas from domestic reserves make the United States more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "loop holes" - Congress placed them in the Tax Code to encourage participation in oil and gas ventures by making them one of the best tax advantaged investments around.

Intangible Drilling Cost Deduction

Drilling's intangible expenses (labor, chemicals, mud, grease, etc.) are usually 65 to 80% of a well's costs. These expenditures are considered “Intangible Drilling Cost (IDC)”, which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $80,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the following years. (See Section 263(c) of the Tax Code.)

Tangible Drilling Cost Tax Deduction

The total amount of the investment allocated to equipment (Tangible Drilling Costs, "TDC") is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted against depreciation over a seven year period. (See Section 263 of the Tax Code.)

Active vs. Passive Income

The Tax Reform Act of 1986 introduced into the Tax Code the concepts of “Passive” income and “Active” income. The Act prohibits the offsetting of losses from Passive activities against income from active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” activity. Therefore, deductions can be offset against income from active stock trades, business income, salaries, and more. (See Section 469(c)(3) of the Tax Code)

Depletion Allowance

The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the “Percentage Depletion Allowance”, is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day . It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The “Small Producers Exemption” allows 15% of the gross income from an oil and gas producing property to be tax-free.

Lease Costs

Lease costs, lease operating expenses (purchase of leases, minerals, sales expenses, legal expenses, administrative accounting, and Lease Operating Costs) are also 100% tax deductible through cost depletion.

Consult Your Tax Advisor

The above examples are for general information only and are not intended as individual tax advice. Consult your personal tax advisor concerning the applicability and effect of oil and gas investments on your personal tax situation. This information was current as of the date this document was first printed. However, tax laws change from time to time and there can be no guarantee of the interpretation of the tax laws.

Tax Advantages

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Dallas, TX 75219