What are Royalties?

Royalties refer to ownership of a portion of oil produced, without responsibility for the costs of development and production, which are the sole responsibility of the oil project operator. Royalties are Cash Payments for the production of oil.

Typically, royalties are paid to the individual mineral owners and generally range between 7% and 34%.

Significantly, VVEG mobile oil extraction unit owners are paid off the GROSS production, not the NET!

While basic royalties, royalty interests and overriding royalty interests are all similar concepts; there are some subtle differences in terms of executive rights. Owning rights gives you slightly more control in terms of the right to enter into lease agreements with oil companies.

Owning royalties, which is more common, is easier and less complex and gives you a fixed royalty rate, but offers no control over an oil lease. Both are considered real assets from the perspective of the Internal Revenue Service (IRS).

The royalty clause is generally established at the well. VVVEG does not utilize wells! This means that the cost of exploration, production and marketing are all assumed by the company operating the lease. However other expenses that may be incurred after production may be carried either by the company, the royalty owner, or a combination of both. All of this is clearly defined in the royalty clause, and for royalty investors this is the important aspect of any deal. A royalty clause may state that the royalty is fixed in the pipeline, at the point of sale, or at some alternative delivery point – all of which will affect the calculation of royalty payments and additional expenses deducted. These are costs that will be deducted after oil has been extracted at the well. In other words, review your royalty clause closely; you may be subject to the cost of moving oil from the well to the refinery and storage tanks. This is not the VVEG Royalty Program.

Outlook

Oil Sands Relevance

The Energy Resources Conservation Board (ERCB), forecasted oil sands production to increase from 1.9 million barrels per day in 2012 to over 3.8 million barrels per day in 2022.

The Canadian Association of Petroleum Producers, in its crude oil forecast, predicts oil sands production will hit 5.2 million barrels per day by 2030, with Canadian crude oil (traditional) production expected to be 6.7 million barrels per day by the same year (up from 3.2 million bpd in 2012).

Despite a severe economic downturn in a region whose growth once seemed limitless, many energy companies have too much invested in the oil sands to slow down or turn off the taps. In addition to the continued operation of existing plants, construction persists on projects that began before the price fell, largely because billions of dollars have already been spent on them.

Oil sands projects are based on 40-year investment time frames, so their owners are being forced to wait out slumps. For the next four years, growth in the oil sands will persist, but after that comes an inflection point for the Canadians, where there are no big new projects waiting in the queue. The 20 or so paused projects and expansions are entirely dependent on a recovery in the price of oil that could be happen in 2016.

The energy forecaster, in fact, does not expect crude oil to reach $80 a barrel until 2020. After that, demand growth is expected to grind almost to a halt, increasing 5% over the next 20 years, the IEA said. At those prices, the typical Canadian oil sand producer is just able to cover their production and transportation expenses, according to Jackie Forrest, a Vice-President with ARC Financial, who monitors trends in the Canadian oil and gas industry.

Long Term Influence

Population growth and the demand globally as a result will drive production and pricing. The United States will become a major exporter and Oil Sands will increase its role as a source with major supplementation from the US oil sands areas in Utah.

The United States may likely increase it imports from its neighbor from the North (Canada) over time as the US also expands its own export capabilities.

The United States, which imported 60 percent of its oil in 2005, is on pace to become entirely self-sufficient with oil by the 2030s. The use of different energy sources is becoming so diversified that by 2035 no one fuel will be dominant for the first time since the Industrial Revolution. Technology will lead the way again as new advancements in clean extraction methods will emerge in the US.

Demand for oil and other liquid fuels will rise by nearly 30 percent, and most of that increase will be linked to transportation.

A growing share of the supplies used to meet liquid-fuel demand will come from deep-water, oil sands, tight oil, natural gas liquids and biofuels.

Vivakor envisions the usage of next-generation extraction technology for clean, environmentally friendly, low-cost processing and fulfillment of high quality oil from the Utah oil sands.

Vivakor is focused on Asphalt Ridge Deposits mainly due to its high level of richness (48% oil saturation) and very low sulfur content (<0.4% by weight).

The ability to sustain productivity levels and cash flows for extended periods of time unlike traditional oil plays is a game changer for companies that provide this type of capability. The market opportunity with early mover advantage creates a tremendous opportunity for those that get involved. Especially, for those that get engaged early. Our world’s energy drink is not going anywhere any time soon!

Opportunity

Much of the world’s oil (more than 2 trillion barrels) is in the form of oil/tar sands, although it is not all recoverable. While oil sands are found in many places worldwide, the largest deposits in the world are found in Canada (Alberta) and Venezuela, and much of the rest is found in various countries in the Middle East.

Currently, oil is not produced from oil sands on a significant commercial level in the United States. Oil sands resources in the US are chiefly concentrated in Eastern Utah, primarily on public lands. The in-place oil resources in Utah are estimated at 32 billion barrels.

VVEG identified an extraordinary oil sands deposit in Eastern Utah back in 2014 and the ability to extract the oil. The shallow oil available in our area of interest in this designated oil sands expanse is well north of one (1) billion barrels of crude. VVEG has available roughly three hundred (300) million cubic yards of oil sands material to process well into the next thirty-(30) years. As described earlier, each cubic yard yields approximately 1 barrel of oil.

VVEG will utilize its low-cost, proprietary mobile processing capability to extract high quality, premium oil from this specific region. VVEG has already acquired 120 acres of state land in this region and is actively looking for additional land in support of this tremendous opportunity. There are pipelines, refineries, storage and brokers in the immediate area and thus disposition of the oil is very straightforward and simple. VVEG will look to maximize its turnover of the product based on market conditions.

VivaVentures utilizes a patent-pending technology as well as a patent-pending process that enables clean, environmentally responsible extraction of all oil from the sand based material.

  • Cost is <1/3 the Canadian Steam process utilized for current Keystone Pipeline oil transmission into the United States (~2M BPD/barrels per day).
  • Utah Oil Sands have little to zero water in the molecules unlike Canada. This is largely why the Canadian method is costly, sloppy and an environmental catastrophe. Yet they continue to serve buyers from across the globe.
  • VVEG process requires zero water and low energy to operate. The Canadian process utilizes water (huge environmental impact) and high energy (costly).

Tax Benefits

Taxes on Royalties

Royalty payments are considered ordinary income in terms of federal and state taxes. This income is reported on Schedule E of Form 1040, while the oil company reports royalty payments to royalty owners on Form 1099 MISC.

Royalties are subject to the 2013 Net Investment Income Tax (NIIT) of 3.8%, which is levied on individuals with unearned income and adjusted gross income of more than $200,000, or $250,000 for joint filers.

The advantage here is that allowable depletion, and other expenses, which could include legal fees, may offset royalty income. While the IRS allows royalty investors to deduct any expenses incurred, the most significant deduction is for depletion.

Oil and gas wells do not produce forever, and production tapers off after its initial peak. Risk here is lowered substantially by the depletion deduction, which allows royalty owners to recover losses by writing off a portion of their income each year.

There are two ways to calculate this depletion. It can be calculated accurately based on well reserves versus production, or the IRS allows you to claim a 15% depletion deduction straight off the gross income. In addition, if your royalty clause contains post-production expenses, such as transportation fees, these costs can also be deducted, along with accounting and legal expenses. We cannot provide tax advice and ask that you seek guidance from a tax professional respective of your situation.

Explaining the Schedule K1 Deduction

As the oil operator begins the exploration and development of the property, these costs are allocated to the investor. In the beginning, these are geological survey costs, oil well equipment (also called tangible costs), and intangible drilling costs (IDC), which for tax purposes are allowed to be deducted rather than capitalized. The partnership passes these IDCs through separately to the investors on the K1. In the early years, these investments create large losses. Normally these passive activity losses would only be deductible to the extent that the investor has passive income. Most investors find themselves with large passive losses that they cannot deduct. But if you own a working interest in any oil or gas property, either directly or through an entity that doesn’t limit the taxpayer’s liability with respect to the interest, it is non-passive activity, regardless of the taxpayer’s participation. This represents a great opportunity for the taxpayer to take advantage of a widely used IRS tax code! (Consult a Tax Professional).

The Big Picture

There is no magical formula for investing in royalties. This is a highly dynamic environment that requires minimal effort from an investor. The best companies in the business recognize this and are always evaluating current and prospective investments and making adjustments as market dynamics change and as commodity prices fluctuate. We offer a safe, stable model through all market conditions. Your royalty payments increase as oil prices go up; this is a win-win. Most royalty programs are fixed returns for investors. We want our program to be generous for our investors.

The safest investment in oil is through royalties with operations that can offer you a stream of quarterly revenue for decades with your downside risk protected.

The big picture here is impressive: With the Eastern Utah oil formation, VVEG is in the middle of an oil boom in Utah that could still be resounding generations from now, thanks in large part to our new technologies that have helped the region reach previously inaccessible reserves. As more oil sands material is processed, we will continue to unveil new techniques and material to process. Anticipate more innovation and improvements to lead to even greater accessibility and profitability of formerly off-limits reserves.