KIOGA has compiled statistics that paint a remarkable

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1 JANUARY/FEBRUARY 2013 Where Would the Kansas Economy be Without the Oil & Natural Gas Industry? KIOGA has compiled statistics that paint a remarkable picture of the oil and natural gas industry s impact on the economic vitality of Kansas and the level of state taxes imposed on the industry. The report shows that the oil and gas industry is a key contributor to the Kansas economy. The Kansas oil and natural gas industry is a critical part of the Kansas economy. The Kansas oil and natural gas industry is over a $4.8 billion industry that puts tens of thousands of people all across Kansas to work each day and pumps hundreds of millions of dollars into the state s economy each year; money that helps support families, fund schools, and build roads. The Kansas Geological Society, in association with the Kansas Corporation Commission and the Kansas Geological Survey, named 158 new oil and natural gas fi elds in Kansas during The Kansas oil and natural gas industry is a dependable and stable element of the Kansas economy today and will be a critical part of the economy going forward. Independent Oil and Gas Industry Leads the Way Chairman Letter Kansas Legislature...7 New Congress...12 Energy Security...17 Message from KIOGA President...22 Federal Regulatory...26 The independent oil and natural gas producers continue to lead the way in the Kansas oil and natural gas industry. Independent producers account for over 90% of the oil and 63% of the natural gas produced in Kansas. Kansas independent producers continue to use ingenuity and resourcefulness to grow the Kansas oil and natural gas industry and the Kansas economy. K a n s a s independent oil and natural gas producers have some signifi cant advantages. The independent oil and natural gas producers in Kansas have developed strong skill sets based on their size and scale. Independents historically use their resources to the fullest and therefore accelerate the process of creating value from their assets. Independents are utilizing new technologies like seismic technologies, petrophysical technologies, and horizontal completions. When these technologies were fi rst developed, they were very expensive and out of reach for many independents. Today, many of these technologies are available for independents. At the same time, independents are typically able to run quicker and leaner than larger companies. They don t have the corporate bureaucracy to deal with. Finally, Kansas independents know Kansas geology and how to develop wells in Kansas. They are able to apply that unique knowledge to address issues as they arise. Kansas independent producers have a subsurface intelligence that you cannot buy and gives them a very unique competitive advantage. Kansas independent producers have a signifi cant advantage by running lean but being smart. All of this gives independents some significant advantages. Kansas Industry Activity The Kansas oil and natural gas industry produced over 43 million barrels of oil and 298 billion cubic feet of natural gas in Over 83% of the value of the Kansas oil and natural gas industry comes from oil production and 17% comes from natural gas production. Oil and gas activity in Kansas in 2012 was very robust. The industry saw drilling rigs running most of the year. More than 6,860 drilling permits were issued in Kansas oil production rose by 4.21% in 2012, 2.12% from conventional activity and 2.09% from unconventional Mississippian Lime horizontal wells. Kansas oil production has risen 6 of the last 7 years. Interestingly, while the average oil well in Kansas produces 2.8 BOPD, the industry supports 67,000 jobs and $3 billion in family income. Impact of Mississippian Lime Horizontal Wells Development of the Mississippian Lime (MSL) through horizontal drilling is adding to Kansas already robust activity. In 2012, the Kansas Corporation...continued on page 10

2 ESSAGE from the CHAIRMAN Dear KIOGA Member, When more of the people s sustenance is exacted through the form of taxation than is necessary to meet the just obligations of government, such exaction becomes ruthless extortion and a violation of the fundamental principles of a free government. - Grover Cleveland, Second Annual Message, December 1886 Dwight D. KEEN Chairman, KIOGA At the dawn of 2013, Americans continue to watch and wait as major showdowns on taxes and spending continue to unfold in the nation s capital. The stakes are high for business, high levels of concern and uncertainty abound regarding the scope of prospective regulation and taxation. This uncertainty impacts our industry by substantially raising the level of business risk, by eroding confi dence in our economic future and by impeding economic growth and job creation. These conditions adversely impact our industry s ability to enhance the economic well- being and energy security of the United States. Indeed, within the current environment, the independent oil and gas industry remains a target of the Obama administration s anti-fossil fuel agenda prominently including repeated administration efforts to repeal the important percentage depletion and intangible drilling cost ( IDC ) tax deductions. The IDC deduction, which has been a part of the U.S. tax code for nearly 100 years, allows for a majority of exploration and development drilling costs that do not have salvage value to be expensed in the year incurred. Frequently, these costs represent approximately 60-80% of the cost of a well. The IDC deduction is neither a tax credit nor a government spending outlay but rather is closely analogous to the research and development deduction available for many technology industries and the accelerated depreciation deductions available to all other businesses most prominently including all other manufacturing and construction businesses. Under current law, independent oil and gas exploration and production companies may claim a deduction equal to 100% of their IDC s in the year in which the costs are incurred. Proposed restrictions on the deductibility of these ordinary and necessary business expenses would discourage the massive investment that will be required if our industry is to deliver adequate supplies of American energy to American consumers and industry and simultaneously promote America s energy security. The emphasis and focus in tax reform should be on improving the nation s economic health and job creation and not on limiting the current deductibility of legitimate and ordinary business expenses such as IDC s. The percentage depletion deduction is a cost recovery method that allows taxpayers to recover a portion of their investment in a mineral resource through a percentage of the gross income from that resource. In essence, depletion, like depreciation, allows for the recovery of capital investment over time. Many natural resource extractive industries in the U.S. are allowed percentage depletion. The current allowable depletion rate for crude oil and natural gas is limited at 15 percent, whereas the depletion rate for sulfur, uranium, lead ore, zinc ore, nickel ore, mica and other minerals is 22 percent. Furthermore, unlike the depletion allowance for other extractive industries, current tax law restricts and limits the use of percentage depletion for the oil and gas industry in several additional ways. First, within the oil and gas industry, percentage depletion is only available for independent oil and gas producers and is not available to integrated companies that produce as well as refi ne and market oil i.e., Big Oil. Second, percentage depletion may only be claimed up to specifi c daily American production levels of 1,000 barrels for oil or 6,000 Mcf for natural gas. Third, the deduction is limited to 65% of net taxable income from all sources; however, depletion in excess of the 65% limit may be carried over to future years until fully utilized. And, fi nally, net oil and gas income must be calculated on a 2...continued on page 4

3 KIOGA thanks the following companies for their support though advertising in our newsletter. Advertiser Page Advanced O&G Data 19 AJAX 30 Basic Energy Service 31 Blue Rock Energy Capital 10 Breckenridge Exploration 32 C&B Equipment, Inc. 24 Central Power Systems 35 CK Power/CK Gas 37 Coffeyville Resources 38 Consolidated Oil Well Services 27 Crescent Services LLC 33 CST Oil & Gas Corp 15 Dart Oil & Gas 16 David Morris, P.A. 11 Drill Baby Drill 29 Duke Drilling Co. 32 EnviroClean 33 Evenson Auctioneers 28 Foley Power Solutions 34 GraybaR Electric 23 Hartman Oil 35 IHS 9 JAS Equipment Rental 13 Jayhawk Oilfi eld Supply 21 Kimray 32 Kansas Strong 5 Lockhart Geophysical 29 Melland Engineering 37 Monster Pump 37 Murfi n Drilling Co., Inc. 11 National Oilwell Varco 36 Paragon Geophysical Services, Inc. 35 Advertiser Page PlainJan s 26 Polymer Services, LLC 39 Promap 24 Rainmaker Sales, Inc. 19 SCO-JO 6 Tidelands Geophysical 24 Tim Miller Oilfi eld Sales 28 The Independent Oil & Gas Directory 24 TRC 29 Trilobite Testing 33 Wildcat Resources, Inc. 21 For more information on advertising in the newsletter, Please contact the KIOGA office: PHONE: FAX kioga@swbell.net Please note KIOGA s new address 229 E. William Suite 211, Wichita, KS Oil Field Gas Field Oil and Gas Field 3

4 Chairman s Letter...continued from page 2 property-by-property basis and in no instance may percentage depletion for any particular property exceed the net income from that property. Despite the limitations, percentage depletion remains an important factor in and has a broad impact on the economics of American oil and gas production. For independent oil and gas producers, percentage depletion is a method of preserving capital, mitigating high capital expenditure risks and fi nancing the development of additional oil and gas resources. It is a critical method by which the independent oil and gas industry raises capital and accounts for the depreciation of mineral properties resulting from the extraction and depletion of non-renewable, limited mineral resources. In addition, for many land and royalty interest owners, percentage depletion represents the only federal income tax deduction they receive for their share of production income. There s nothing more dangerous than the U.S. Congress with an idea. E. Patrick McGuire, the Conference Board In an effort to discredit the IDC and percentage depletion deductions, anti-oil and gas development forces portray and mischaracterize these deductions as loopholes and subsidies. These politically targeted deductions are neither loopholes nor subsidies but rather represent the equivalent of normal business deductions granted to virtually all other U.S. industries albeit occasionally under different titles, names or captions. Contrary to subsidized businesses, no independent oil and gas producer receives government checks or taxpayer money in the mail to fund our operations nor do we receive tax credits to directly offset our tax liability. Rather, to qualify for the percentage depletion and IDC deductions, actual oil and gas exploration, development and production operations must be undertaken and, in the case of percentage depletion, must result in the production of oil or gas. Tax deductions should not be confused with subsidies which represent direct government spending or payments. An underlying premise of the U.S. income tax system is that businesses are taxed only on their net income. Accordingly, practical and fair methods must be provided so that businesses may recover and deduct their legitimate costs and thereby offset corresponding revenues and determine net income. It is important to note that most percentage depletion and IDC deductions are simply tax deferral mechanisms that is, it s all about timing. For independent oil and gas producers, IDC s and percentage depletion represent important, legitimate, ordinary and necessary business cost deductions. Every single nickel of our net income or profit is subject to taxation. The independent oil and gas industry receives no tax credits, no government guarantees and no government hand outs. Independent producers represent a signifi cant component of America s oil and gas industry and are the predominate operators of America s marginal wells. Over 85% of U.S. oil wells are marginal wells i.e. wells producing less than 15 barrels per day. Yet, these wells produce approximately 20% of America s oil production. Approximately 75% of U.S. natural gas wells are marginal wells producing approximately 12% of America s natural gas. Marginal wells are unique to the United States since other countries customarily terminate such operations and, once terminated, marginal operations become too costly to be restarted again. For independent operators, keeping marginal wells operating is expensive since such wells must periodically be reworked, their produced water (approximately 9 out of every 10 barrels produced) must be disposed of properly, and the increasing electricity costs incidental to all production and water disposal operations must be recovered through more limited production revenues. Over 94% of the new wells in the U.S. are drilled by domestic independent producers and 67% of the oil and natural gas produced in the U.S. each year comes from these wells. Since independent producers historically invest more than their cash fl ow back into exploration and development activities, the tax deductions for IDC s and percentage depletion provide more revenues to fi nance and fi nd new oil and natural gas reserves in the United States. Succinctly stated, less capital investment means fewer jobs and less production of American oil and gas resources. Nationally, Kansas remains one of the major oil and gas producing states ranking 9 th among 31 oil producing states (with 43 million barrels of oil annually) and 9 th among the 32 natural gas producing states (with over 298 Bcf of gas annually). It is truly amazing to note that this Kansas production is derived from approximately 60,000 oil and gas wells with an average daily production per well of 2.79 barrels for oil and 46 Mcf for gas. In essence, our producers are small businesses and, as such, we are truly vulnerable to over regulation and over taxation. Over the past decade, the Kansas oil and gas industry has supported an average estimated 67,000 downstream jobs, $3 billion in family income and has paid over $1.4 billion in state and local taxes. Obviously, developing our energy resources has vast positive implications for business expansion and growth, job creation, government revenue, a decrease in our international trade defi cit and enhanced domestic energy security. However, it is not inevitable that these potential benefi ts of expanded oil and gas production and development will be realized. Excessive taxation and over regulation are very real possibilities at the federal level and, if pursued, they will certainly impede or prevent the realization of these benefi ts from expanded development. 4...continued on page 34

5 AMERICAN SECURITY. IMPORTED DIRECTLY FROM KANSAS. At a time when economic and energy demands threaten America s security, one industry is working to strengthen our resolve. Kansas oil and natural gas. Our 60,000 wells are producing enough to make us a top-10 supplier of domestic energy. The ripple effect from this supports nearly 67,000 Kansas jobs. So as America s economic and energy security hangs in the balance, our industry is keeping our nation, and Kansas, Strong. See all the benefits at KansasStrong.com 5

6 Newsline Update (316) Please feel free to edit and use these stories to fit your format. Let us know if there is someone you would like to hear. Currently playing on the newsline: Line 1 Line 2 Line 3 Line 4 Dan Lara, Kansas Department of Commerce will summarize the Oil & Gas Small Business Development Conference held in Hutchinson, KS on November 27th. Art Hall, University of Kansas Center of Applied Economics will discuss the recently completed University of Kansas study that highlights the positive impacts of the Kansas Oil & Gas Industry. Mickey Thompson, Executive Director of Domestic Energy Producers Alliance will discuss the unique collaboration that makes up the Domestic Energy Producers Alliance and how the group has effectively advocated for the small independent producer on federal issues and concerns. Edward Cross, KIOGA President, will discuss KIOGA s federal and state advocacy efforts and plans going foward. Providing Complete Land Services Lease & ROW Acquisition Mineral & HBP Ownerships Curative Project Management Complete Environmental Compliance S.P.C.C. Plans Tier II Reports Annual Inspections Products & Supplies Field Eng. 6 Ofc (405) Fax (405) Website: sco-jooilandgas.com

7 Challenging Issues Face 2013 Kansas Legislature The Kansas Legislature began the 2013 legislative session on January 14, Governor Brownback has a Senate that is as fi scally and socially conservative as he is and the House is likely to be a little more conservative than last year. The state has some genuine financial challenges and several years of pent-up frustration by conservatives over social issues that were derailed by the Senate over the past eight years. With a FY 2013 budget defi cit estimated to be as much as $243 million, signifi cant challenges await the Legislature. Governor Sam Brownback delivered his fi rst State of the State address on January 15, Brownback proposed more individual income tax cuts, eliminating home mortgage interest deduction, rewriting the defi nition of suitable provision for fi nance of K-12 education, and not allowing a portion of the sales tax increase of 2010 to expire as scheduled on July 1st. Brownback said the power of the purse is the primary power of the Legislature, not the executive branch or the judiciary. Kansas Democratic leaders said Brownback was out of touch with reality in the state. Senate Minority Leader Anthony Hensley (D-Topeka) said Brownback brought the state a self-infl icted budget crisis and irresponsibly wants to cut taxes more. Significant Changes in Kansas Legislature In preparation for the 2013 legislative session, KIOGA completed our annual strategic analyses and contingency plans to complement our legislative agenda. Anticipated and unanticipated negative legislative assaults on the oil and natural gas industry could come from many sources. Our report titled Kansas Oil & Gas Industry Strategic Analysis was prepared to help inform and educate legislators, decision-makers, and other interested parties on the contributions the Kansas oil and natural gas industry makes to our economy, society, and history. The study presents up-to-date analysis of oil and gas industry taxation and emphasizes the importance of oil and natural gas production to the state s economy. The report has been used by policymakers and decision-makers in the past and has been a great benefi t for the Kansas oil and natural gas industry. The strategic report can be found on the KIOGA website at or by calling the KIOGA Wichita office at Last November s elections resulted in signifi cant changes in the Kansas Legislature. The House picked up 55 new members and the Senate picked up 16 new members. In the 2013 legislative session, Democrats hold 33 House seats and Republicans hold 92 House seats. In the Senate, Democrats hold 8 seats and Republicans hold 32 seats. The new members of the House and the empowered-by-the-election conservative veterans will ultimately decide the fate of Brownback s budget proposal. Some think the new legislators and the conservative veterans will concentrate on social issues ranging from abortion to guns to immigration and leave the issues of taxes and spending with the Governor. Others think they may dabble a little in in taxes and spending potentially complicating the governor s budget plan. KIOGA State Advocacy Strategy KIOGA has been busy preparing for the upcoming 2013 legislative session. KIOGA President Edward Cross visited with several KIOGA members across the state last October and November to listen to concerns about state and federal legislation, regulation, and other issues. KIOGA s legislative agenda was discussed and reviewed during the KIOGA Board Meeting on December 5, 2012 and was determined to be one in which we will work to minimize legislative assaults on the independent oil and natural gas industry and optimize legislative targets of opportunity. During the fi rst few weeks of the session, KIOGA President Edward Cross visited a number of key legislators and governmental decision-makers including Governor Brownback, Kansas State Budget Director, Revenue Secretary, Senate and House Leadership, Committee Chairs and members of committees before which most oil and gas issues are heard, and other KIOGA legislative friends. Cross briefed each of the leaders on the state of the Kansas oil and natural gas industry and summarized some of the most challenging issues and concerns facing our industry. Cross also made presentations before the House Utilities Committee on January 23rd and the House Energy & Environment Committee on January 29th where he provided an overview of Kansas oil and natural gas activity and discussed barriers and challenges to expanding oil and natural gas production in Kansas....continued on page 8 7

8 Kansas Legislature...continued from page 7 Meetings with Governor Brownback & Administration KIOGA President Edward Cross met with Governor Brownback in September, October, November, and December. Cross also met with the State s Budget Director Steve Anderson in December. The Governor and the Budget Director discussed and inquired about activity in the Kansas oil and gas industry, Mississippian Lime development, and a number of broad tax and regulatory issues. Legislative Issues of Interest Several legislative issues of interest could emerge during the 2013 legislative session. In addition to budget issues, a number of other tax and/or regulatory issues could emerge. Kansas Tax law The 2012 Kansas legislature passed and Governor Brownback signed into law a tax bill that, among other things, repealed the two-year severance tax exemption for new pool oil wells except those new pool oil wells generating fewer than 50 BOPD. KIOGA worked with the Kansas Department of Revenue late last year to better defi ne the manner and time interval for which the 50 BOPD threshold would be determined. The Kansas Department of Revenue agreed to our position that the time interval for establishing the 50 BOPD threshold should be 6 months and that the application for the new pool exemption should not be submitted until after the initial 6-month production period has passed. The Kansas Department of Revenue issued a notice stating those changes in November and will be seeking statutory changes to refl ect those changes during the 2013 legislative session. KIOGA President Edward Cross also reviewed these changes with Governor Brownback during meetings in the last quarter of Severed Mineral Taxation - In December 2011, Kansas Revenue Secretary Nick Jordan asked for a Kansas Attorney General (AG) opinion on whether there is a violation of the equal protection guarantees of the U.S. and Kansas Constitutions when the same mineral interest is valued at different rate for taxation purposes based upon ownership of the interest in the surface land. In January 2012, Kansas Attorney General Derek Schmidt asked for KIOGA s comments concerning this issue. KIOGA Legislative Committee Chair David Nickel and KIOGA Chairman Dwight Keen provided written comments on behalf of KIOGA that basically explained why it was diffi cult to value severed minerals separately. On August 8, 2012, Kansas AG Derek Schmidt issued his AG opinion saying the state can classify severed and non-severed minerals separately for taxation purposes. KIOGA Chairman Dwight Keen and KIOGA member David Bleakley joined KIOGA President Edward Cross in a meeting with AG Derek Schmidt last October to discuss the issue further. We also visited with Revenue Secretary Nick Jordan to discuss the issue. We (KIOGA) sought clarifi cation on whether the AG opinion addressed facial constitutionality or application constitutionality. AG Schmidt told us his AG Opinion on this specifi c request addressed only facial constitutionality. The Kansas Department of Revenue thought the AG Opinion addressed whether the statute was constitutional in application. At KIOGA s suggestion, Revenue Secretary Jordan sent AG Schmidt a letter on October 25th asking whether his opinion issued on this matter addressed whether the statute was constitutional in application. AG Schmidt responded on November 7th by stating that his AG Opinion was on facial constitutionality. The KDOR informed KIOGA they would now be discussing this matter internally and will keep us informed as to where they may go from here. KIOGA will be watching for any legislative action on this issue. Kansas Fresh Water Conservation Investment Credit Shell Oil Company is proposing a tax credit to encourage companies to employ a long-term solution for reclaiming water used in commercial operations. The Fresh water Conservation Investment Credit is a tax credit for the purchase, construction, installation, usage, and maintenance of produced water recycling equipment, infrastructure, and facilities used in a commercial process or operation. The proposed credit would be equal to 25% of the total cost of the qualifying purchase, construction, installation, and maintenance of the produced water recycling equipment and related facilities and may be used to offset corporate income tax liability. The amount of the unused annual credit would be refunded to the taxpayer, perhaps with limitations. Wastewater treatment solutions are eligible for federal research and development tax credits. Electric Power Issues As the unconventional Mississippian Lime play continues to develop in Kansas, some of the companies developing horizontal wells have expressed their desire to build private electric distribution facilities. Several utilities and cooperatives have voiced concerns about this approach. In order to get all the stakeholders together to discuss the issue, the Kansas Department of Commerce held meetings in January and February and continues to foster communication. SandRidge Energy expressed their desire to build private distribution facilities to help them more quickly develop their leases. KIOGA reactivated our electric power committee and held a conference call with Sunfl ower Electric on January 11th to learn more about the impact of such a policy on small independent producers. KIOGA members Mike Vess, Dave Murfin, Adam Beren, John Farmer III, Cecil O Brate, and KIOGA Chairman Dwight Keen serve on the KIOGA electric power committee. KIOGA expressed two major concerns: 1. Will the introduction of extraordinary new demand place strains on the electrical supply available and require the addition of supplemental...continued on page 28

9 > GEOSCIENCE SOFTWARE > CRITICAL INFORMATION > CONNECTED WORKFLOWS CONNECTED AT EVERY TOUCH POINT The IHS suite of geoscience software which includes IHS Petra, Kingdom, LOGarc and GeoSyn is designed to seamlessly connect to the industry s leading source of critical Oil & Gas information, eliminating the need to move data manually from source to source and project to project. With this powerful new combination, users can streamline data transfer, enhance database performance and simplify project sharing. The result? data and more time looking for the next big opportunity. It s just one of the many ways that IHS helps to advance the decisions that advance the Oil & Gas industry. Streamline data transfer and simplify project sharing with IHS geoscience software and critical O&G information. Find out more at IHS.com/geoscience 9

10 Kansas Economy...continued from page 1 Commission (KCC) issued 6,861 oil and gas drilling permits with 292 of those permits issued for MSL horizontal wells. KCC data indicates that by the end of 2012, 69 of those 292 MSL horizontal permits had been drilled and were producing, an additional 54 wells were drilled but were not yet producing, 95 were spudded, 6 were inactive, 4 were plugged, and 3 were disposal wells. Over the last two years (2011 and 2012), 124 MSL horizontal wells have been drilled and are producing in Kansas. According to the Kansas Geological Survey, horizontal MSL production in Kansas in 2012 added 2.09% to the states oil production and accounted for 3.8% of the state s total oil production. Kansas Oil & Gas Industry Strategic Analysis KIOGA put together our annual Kansas Oil & Gas Industry Strategic Analysis study to highlight the importance of the oil and gas industry in Kansas. You can fi nd the complete report on KIOGA s website at www. kioga.org. Some of the key fi ndings include: Severance tax collections on oil and natural gas production have increased by 12% over the last year and up 146% over the last ten years. Ad Valorem taxes collections on oil and natural gas has increased by 138% over the last ten years. More than $393 million in severance and ad valorem taxes was paid by the oil and natural gas industry during the last year, making the oil and gas industry one of the most heavily taxed industries in Kansas, as over 13% of the value of oil and natural gas produced is paid in taxes. And that doesn t include sales taxes, income taxes, or the taxes imposed on fi nal products. The Kansas oil and gas industry pays taxes not just once, but multiple times before the oil and natural gas reached its fi nal destination. Taxes are imposed on oil and natural gas while still in the ground, then again when they are produced, when transported, when refi ned, and again when sold as fi nal products. Plus the Kansas oil and gas industry is subject to all other general business, and income taxes that other businesses pay. These taxes reduce the rates of return on new exploration and production investments by an average of 26.5%. The oil and gas industry creates great jobs in Kansas with over 52,000 Kansans directly employed by the Kansas oil and gas industry. When looking at indirect and induced jobs, that number swells to over 65,000 Kansans. The Kansas Department of Labor reports the average wage for a Kansas oil and gas worker in the last year was $28.58 per hour or $59,436 per year. Over 6,860 drilling permits were issued in Kansas last year. Every well drilled in Kansas is like a new business. The well provides employment, generates local and state taxes, and fuels local economic growth. A vast majority of wells drilled in Kansas are in rural areas. The Kansas oil and gas industry invested just over $1 billion into rural Kansas 5 of the last 6 years. Few industries invest $1 billion annually in rural Kansas. Oil production in Kansas has been increasing by a compound average annual rate of 2.89% over the last 10 years. The marginal increase in oil production last year alone is equivalent to the energy produced by 382 new wind turbines. Natural gas production has been declining by 4.13% annually over the last 10 years. More work. More jobs. More money for everyone. More taxes paid. That s what keeps the wheels turning on the economy in Kansas. Where would Kansas be without the oil and gas industry? Statistics compiled by KIOGA show that state and local governments should never want to answer that question. 10

11 Oil & Gas Day at the State Capital The Kansas Independent Oil & Gas Association (KIOGA) along with the Eastern Kansas Oil & Gas Association (EKOGA) and the Kansas Petroleum Council (KPC) sponsored an Oil & Gas Day legislative reception at the Dillon House in Topeka on January 23, A Kansas Country Breakfast was offered to all Kansas legislators, government offi cials, and other decision-makers. Several KIOGA members were present to visit legislators and government decision-makers including Dwight Keen (KIOGA Chairman), Steve Dillard, Dave Murfi n, Darrel Walters, Steve Stanfield, Bob McGrath, Kenny Gates, Gary Mason, Ken White, Bill Copeland, Lester Town, Rex Buchanan, Jeremy Viscomi, Allen Rempe, Blake Nelson, Brent Sonnier, David Jervis, Mike Traylor, Kelly Rains, and Edward Cross (KIOGA President). KIOGA hosted a booth display and distributed information about the Kansas oil and natural gas industry. Legislators and government decision-makers were able to fi nd information about the Kansas oil and natural gas industry. Several legislators and government offi cials joined the reception including 46 Representatives, 19 Senators, and the Kansas State Treasurer. In addition, a number of agency decision-makers stopped by to visit. Turnout for the reception was very good. Over 200 people were served breakfast. The reception was catered by a catering service used by a number of organizations and the State of Kansas for a variety of events. A representative from the caterer reported after our reception that legislators and government offi cials seem to really enjoy the KIOGA reception and hang around and visit signifi cantly longer than at other events they cater. Many legislators, government offi cials and other decision-makers expressed their gratitude to KIOGA, EKOGA, and KPC for sponsoring the breakfast and providing educational material. The 2013 reception marks the 7 th consecutive year we have organized the event. The event was very effective for building good will and provided an opportunity for our industry to communicate with legislators on issues important to our industry. Kansas Mineral Drilling And Division Order Title Opinions Real Estate Transactions DAVID A. MORRIS, P.A. ATTORNEY AT LAW 3500 N. Rock Road, Bldg 1100 Wichita, Kansas Telephone: Fax address: dmorris@damlaw.net CONTRACTORS AND PRODUCERS 250 N. Water, Suite 300, Wichita, KS Serving the Oil and Gas Industry Since

12 New Congress Returns to Washington Threats to Small Oil & Natural Gas Producers at Forefront 12 KIOGA continues to fight against attempts by the federal government to impose additional tax increases and regulatory hurdles on the oil and natural gas industry. KIOGA worked hard to meet these challenges throughout 2012 and is prepared to continue our aggressive campaigns in KIOGA has worked with our allies to make tremendous strides over the last several years, said Edward Cross, KIOGA President. We made a number of new friends in Congress for the oil and natural gas industry. But we must stay vigilant in voicing our concerns and educating policymakers, media, and the public on the issues. As we enter 2013, we truly have something to build upon and can be proud of the bipartisan support we have mustered for the oil and natural gas industry. Fiscal Cliff Deal The fi scal cliff deal agreed to by Congress at the end of 2012 was of questionable good for the country. President Obama s rhetoric emphasized increasing marginal rates on upper-income earners as a way to generate revenue. What was missing of course was the fact that increasing marginal rates on upper-income earners included many small business owners across America who provide employment and economic development across the nation. President Obama got the tax hikes he wanted, but he clearly has some challenges ahead. Our nation will still have an $8 trillion debt over the next 10 years. This means the President may have to come to the middle class next with a tax hike. The fact that the fi scal cliff deal that included a tax hike on high-income people and small businesses did not solve Obama s problem could be very diffi cult for many Democrats to explain in the 2014 and 2016 elections. KIOGA President Edward Cross joined other industry representatives through the Domestic Energy Producers Alliance (DEPA) to visit key policymakers during the 112th Congressional lame-duck session. Our message was clear oil and gas tax provisions should not be a part of any short-term deal in the lame-duck session. Cross and others on the DEPA quick-response team visited Senate Finance Committee Chairman Max Baucus (D-MT), Senator Mark Pryor (D-AR), Senator Ron Wyden (D-OR), Senate Republican Leader Mitch McConnell (R-KY), Senator Mark Udall (D-CO), Senate Finance Committee Ranking Member Orrin Hatch (R-UT), Senator Pat Roberts (R-KS), Senator Mary Landrieu (D- LA), House Majority Leader Eric Cantor (R-VA), House Ways & Means Committee Chairman Dave Camp (R- MI), House Ways & Means Committee Democratic Staff, Congresswoman Lynn Jenkins (R-KS), Congressman Mike Pompeo (R-KS), and Congressman Tim Huelskamp (R-KS). Cross told each of the policymakers: Congressional action to address the tax and spending issues creating the fi scal cliff should not be used to fundamentally alter federal oil and natural gas policy. Federal tax policies have been an integral element in the economics of American oil and natural gas development since the inception of the federal tax code. Any changes of these key provisions should be considered with a careful assessment of the impact on America s future energy production and only undertaken in the context of comprehensive tax reform. Also, near the end of 2012 KIOGA joined a series of letters to each member of the Senate Finance Committee, House Ways & Means Committee, and Senate and House Leadership. KIOGA is pursuing a layered approach by teaming similar messages with different groups to ensure our concerns are heard. The fi rst letter urged Congress not to target the oil and natural gas industry in the lame duck session, the second letter discussed the importance of retaining the expensing of IDCs, and the third letter discussed the importance of retaining the percentage depletion allowance. The good news from the fi scal cliff deal was that the tax provisions critical for small independent producers (percentage depletion allowance and expensing intangible drilling costs) were not sacrifi ced. KIOGA continues to make our case at every opportunity to both our Democrat and Republican feidns that keeping percentage depletion and IDCs is essential to energy independence, job creation, and American economic revival. Extension of the suspension of net income limitation on percentage depletion on marginal wells In the past, Congress has suspended the net income limitation on percentage depletion for marginal properties because the net income limitation severely restricts the ability of independent producers to use percentage depletion, particularly with respect to marginal wells. Percentage depletion is already subject to many limitations. First, the percentage depletion allowance may only be taken by independent producers and royalty owners and not by integrated oil companies. Second, depletion may only be claimed up to specifi c daily production levels of 1,000 barrels of oil or 6,000 mcf of natural gas. Third, the deduction is limited to 65% of net taxable income. The net income limitation requires percentage depletion to calculated on a property-by-property basis. It prohibits percentage depletion to the extent it exceeds the net income from a particular property. The typical independent producer could have numerous oil and gas properties, many of which could be marginal properties with high operating costs and low production yields. In some economic conditions, the producer may not have net income from a particular property, especially from marginal properties. The net income limitation discourages producers from investing income to maintain marginal wells. The suspension of the net income limitation on percentage depletion for marginal properties expired December 31, The 112th Congress did not suspend the net income limitation again for Senator Pat Roberts (R-KS) tried to include the extension of the suspension of net income...continued on page 13

13 New Congress...continued from page 12 limitation on percentage depletion on marginal wells in the fi scal cliff deal, but no amendments were allowed in the Senate. Congresswoman Lynn Jenkins (R-KS) was also prepared to offer the suspension of net income limitation extension in the House but the fi scal cliff bill that came from the Senate was a straight up and down vote. Since the 112th Congress did not suspend the net income limitation again in 2012, the net income limitation applies to marginal properties for Tax Reform President Obama campaigned on his belief that increasing marginal rates on upper-income earners was the best way to generate revenue. We can expect the Obama Administration to pursue this same brand of tax policy as a key element of his tax reform plan. Congressional Republicans, on the other hand, oppose tax increases, and instead hope to couple spending cuts with tax simplifi cation to facilitate economic growth. The difference between the sectors of the U.S. oil and natural gas industry could become important as the tax reform debate unfolds in On one side are the fi ve major oil companies that benefi t signifi cantly from tax provisions not available to smaller domestic independent producers such as the foreign investment tax credit and the manufacturing tax deduction. On the other side are domestic independent producers who drill 95% of the new wells in the U.S. each year. Domestic producers rely heavily on percentage depletion and IDCs to attract the capital necessary to drill these wells. These difference are important because the time may come during the tax reform debate in 2013 when tax provisions available to the big fi ve major oil companies are pitted against the provisions available to domestic independents. The big fi ve majors will fi ght hard to preserve the provisions important to them such as the foreign investment tax credit and the manufacturing tax deduction. At some point, they may try to sacrifi ce percentage depletion and IDCs in order to save the provisions most important to them. The domestic independent oil and gas industry cannot let that happen. We are not there yet, but at some point domestic independent producers may have to clearly distinguish ourselves from the big fi ve major oil companies if the Administration and Congress decide that some changes need to be made in oil and gas taxation as a part of tax reform. When the time comes, you can rest assured KIOGA will be joining our DEPA colleagues and others to make it clear that domestic independent producers are the most important to U.S. energy independence and security....continued on page 14 13

14 14 New Congress...continued from page 13 Energy Freedom & Economic Prosperity Act Kansas Congressman Mike Pompeo (R-KS) reintroduced his legislation from last Congress in January. H.R would reduce government interference in the energy sector by repealing all energy tax credits while maintaining general business deduction available to multiple industries. Senators Jim DeMint (R-SC) and Mike Lee (R-UT) have introduced companion legislation in the Senate. The proposed legislation would repeal subsidies for plug-in electric and fuel cell vehicles, alternative fuel and alternative fuel mixtures, cellulosic biofuel producer credit, alternative fuel infrastructure, production tax credit for electricity produced from renewable sources, including wind biomass, and hydropower, investment tax credit for equipment powered by solar, fuel cells, geothermal or other specifi ed renewable sources, enhanced oil recovery credit and credit for producing oil and gas from marginal wells, advanced nuclear power generation credit, and clean coal investment credits. Policymakers and others talk frequently about energy effi ciency. The energy-versus-energy dueling in Washington is energy ineffi ciency. Congress needs some political conservation. The Energy Freedom & Economic Prosperity Act provides for a government more restrained allowing voluntary consumer decisions picking winners and losers in the energy sector. U.S. Rep. Mike Pompeo (R-KS) Energy Policy A second-term Obama administration will see energy policy remain an issue of prominence. Congress is increasingly looking to the intensifying tax and budget debates as the best way to make changes in energy law, as major stand-alone energy legislation remains elusive in a politically divided Congress. President Obama recently said, We have subsidized oil companies for a century. That s long enough. By no stretch of the imagination does the oil and natural gas industry receive tax subsidies. There is not a single targeted tax credit in the Internal Revenue Code available to the oil and natural gas industry. President Obama is having a diffi cult time coming to grips with the destruction of the energy scarcity narrative and appears to be taking every opportunity to attack, weaken, or destroy domestic oil and natural gas production in order to promote his ideologically preferred renewable energy and climate change agendas. The president s backward energy policy will not help lower energy prices. As of late 2012, Obama s green-energy failures continue to climb with 23 bankruptcies and 27 troubled. At least $15 billion of taxpayer money is either gone or still at risk. Time Magazine recently named President Obama Person of the Year. During the interview, President Obama spoke about one of the most unexpected events of his Administration, that being the boom in domestic oil and natural gas production, which he has been all too ready to take some credit for. President Obama cannot take credit nor should he receive credit for one drop of oil and natural gas production in the U.S. during his tenure. Another recent report found that oil and natural gas production in the U.S. will add $167 billion - $245 billion to the U.S. GDP by 2017, and that will deliver 835, million new jobs. Climate action activists responded by saying that President Obama should... lead the adaptation of federal fi scal policy to the realities of the contemporary world. That means phasing out virtually all of the policies and practices that encourage the use of coal, oil, and natural gas. Federal Strategy for 2013 One of the most important take-aways from the November election results is that KIOGA s bipartisan approach to addressing key federal tax and regulatory issues over the past 4 years has gotten more important and will be critical going forward. Working with our colleagues at DEPA, IPAA, and Liaison Committee of Cooperating Oil & Gas Associations, we have developed signifi cant positive relationships with key Democrat and Republican policymakers that make us the most effective voice in Washington for small onshore independent oil and gas producers. Going forward, we are going to work harder and be even more vigilant. The issue of tax reform will be hammered out in the Senate Finance Committee and the House Ways & Means Committee. Kansas Senator Pat Roberts (R-KS) is a member of the Senate Finance Committee and Kansas Representative Lynn Jenkins (R- KS) is a member of the House Ways & Means Committee. KIOGA President Edward Cross visits and communicates regularly with both policymakers. Cross also recently joined our colleagues at DEPA to visit with Senate Finance Committee Chairman Max Baucus (D-MT), House Ways & Means Committee Chairman Dave Camp (R-MI), Senator Mark Warner (D-VA), Senator Dan Coats (R-IN), Senator Mark Pryor (D-AR), Senator Ron Wyden (D-OR), Senate Republican Leader Mitch McConnell (R-KY), Senate Finance Committee Ranking Member Orrin Hatch (R-UT), Senator Mary Landrieu (D-LA), House Majority Leader Eric Cantor (R-VA), and House Ways & Means Committee Democratic Staff. U.S. Sen. Baucus (D-MT) U.S. Sen. Hatch (R-UT) U.S. Sen.Landrieu (D-LA) U.S. Sen. Warner (D-VA)...continued on page 15

15 New Congress.continued from page 14 Going Forward U.S. Sen. McConnell (R-KY) U.S. Sen. Roberts (R-KS) U.S. Sen. Pryor (D-AR) U.S. Sen. Cantor (R-VA) U.S. Sen. Coats (R-IN) U.S. Sen. Camp (R-MI) U.S. Sen. Wyden (D-OR) U.S. Sen. Jenkins (R-KS) Over the pa st 4 years, KIOGA has met faceto-face with over 130 policymakers and have built credible relationships with a number of key Democrat and Republican members of Congress. Good advocacy requires quality analytical work and KIOGA continually updates our fact sheets and reference material. We are becoming increasingly more productive as many Congressional members are looking more and more to our group for guidance on issues impacting the small businesses that make up the independent oil and gas industry. We still have a long way to go in defending tax provisions essential to our industry. But, real progress has been made in telling our story to key policymakers. Going forward, the battle will be grueling, but we will continue to be vigilant. Liaison Committee of Cooperating Oil & Gas Associations KIOGA participated in the Liaison Committee of Cooperating Oil & Gas Associations meeting on January 11th. Liaison Committee consists of 29 state oil and gas associations. KIOGA member Dick Schremmer is the Liaison Committee Vice-Chairman and KIOGA President Edward Cross is the Liaison Committee Secretary/Treasurer. The Liaison Committee began building a structure for addressing critical federal tax and regulatory issues. KIOGA is working with the Liaison Committee, DEPA, and IPAA to identify assets and leverage our individual strengths to optimize our collective impact. Council for a Secure America KIOGA has been working with our partners in DEPA to develop coalitions with groups outside the oil and gas industry to disseminate our messages to folks who outside the oil and gas industry. We have recently formed a coalition with the American Jewish community. In a series of meetings last year, we met with the Conference of Presidents of Major American Jewish Organizations. We expressed our belief that a secure America and a secure Israel means the same thing and that a thriving U.S. domestic oil and gas industry is essential to both. We have been able to agree that there is common interest between our two groups regarding efforts to increase domestic oil and gas production and to decrease U.S. reliance on imported oil from the Middle East. Last September, we fi nalized the formation of a 501 C(3) organizations known as the Council for a Secure America (CSA). CSA is a coalition between the American independent oil and gas industry and the American Jewish community. CSA recently went live with a website at www. councilforasecureamerica.org. We believe this could be one of the most signifi cant coalitions in our industry. 15

16 NAPE Expo February 5-8, 2013 Houston, TX Horizontal Drilling Shale & Tight Oil Plays 2013 February 20-21, 2013 Houston, TX AESC Annual Winter Meeting February 20-22, 2013 Tucson, AZ Rocky Mountain Oil & Gas Awards March 12, 2013 Denver, CO TORP Improved Oil Recovery Conf. April 1-2, 2013 Wichita, KS KIOGA Midyear Meeting April 17-19, 2013 McPherson, KS KIOGA 76th Annual Convention August 18-20, 2013 Wichita, KS Entry Level Courses Kansas Department of Revenue Property Valuation Division (PVD) Appraisal Courses February 4-6, 2013 February 25-27, 2013 Dodge City, Kansas Chanute, Kansas Advanced Level Courses February 6-8, 2013 February 27-March 1, 2013 Dodge City, Kansas Chanute, Kansas Oil & Gas Appraisal Guide Seminar March 12-13, 2013 Topeka, Kansas For more information and registration call or register online at Looking to Purchase Oil and Gas Production Contact: Roger M. McKinley, Vice-President Land Telephone: (517)

17 As the oil and natural gas industry faces enormous challenges of providing adequate and reliable energy supplies in the years ahead, an informed public has never been more necessary. KIOGA has taken on a number of communication and advocacy initiatives to educate elected offi cials, consumers, media, and school children about the importance of American, and more specifi cally Kansas, oil and natural gas production and why it is so critical to the future of our economy and energy security. KIOGA s aggressive public information initiative has resulted in thousands of Kansans who have heard KIOGA s key messages. Major Kansas news outlets - from the Kansas City Star, Wichita Eagle, and Topeka Capital-Journal, to the Garden City Telegram, Gyp Hill Premier, and Manhattan Mercury - are turning to KIOGA as the leading oil and natural gas industry news source in Kansas. Our Challenge Across the nation, the oil and gas industry continues to draw media attention. President Obama s continual call for oil and gas tax hikes, controversy over hydraulic fracturing, and more all cast a negative light on our industry. Misconceptions about important economic and environmental issues encourage policymakers to make misinformed decisions. Anti- oil and gas groups exacerbate public opinion by conducting information campaigns that confuse the public and policymakers about the oil and gas industry. This problem has a potentially negative impact, both on the industry s ability to explore and drill for oil and natural gas, and on America s future access to oil and natural gas supplies it needs. Policymakers will respond to public concerns. Negative public attitudes encourage legislation and/or regulation that refl ect those public concerns. As the oil and gas industry faces enormous challenges of providing adequate and reliable energy supplies in the years ahead, an informed public has never been more necessary. KIOGA s messages are getting out and continue to penetrate markets statewide. KIOGA s public information and energy education advocacy efforts work hand-inhand with our government relations activities to optimize KIOGA s effectiveness as an advocate for the Kansas independent oil and gas industry. KIOGA s Response KIOGA Advances Energy Security Message Making a Positive Difference! has worked to develop salient messages and thorough, well-prepared materials to counter threats and attacks to the independent oil and natural gas industry. We are leveraging our early preparedness to create opportunities with congressional lawmakers, opinion leaders, media, and third-party groups. Our goal is to not only educate policymakers, but to also educate the public on policy issues. Our most current efforts differentiate small, independent, onshore, oil and gas producers from large companies and offshore production. The effort to prepare, launch, and build momentum has included: editorial board meetings with the Topeka Capital-Journal, Wichita Business Journal, and Kansas City Star, drafting and placement of opinion editorials and press releases, radio advertising, civic group presentations, and more. KIOGA targets policymakers and the public with messages and energy education initiatives to set the record straight on many issues. Current focus is on bringing a wealth of new information on energy to the forefront, deploying an aggressive communication strategy designed to separate fact from fi ction, reality from myth, and proven practices from hyperbole. KIOGA is advocating sensible state and federal policies that will help encourage more American oil and natural gas production. As signs of success, we re seeing more and more third party organizations, lawmakers, and congressional and state legislator staffers using KIOGA talking points, fact sheets, and analyses in their communications. Media Relations - Energy Security Message Developing good media relations are an important tool for achieving the goals of KIOGA. Recently, KIOGA has embarked on a vigorous campaign to educate the media and public about energy security issues and the integral role of responsibility in the oil and gas industry s activities. KIOGA continually develops and update fact sheets, white papers, and reference materials on important energy policy, economic, and environmental issues. Some of the most recent provide fact-based information on federal oil and gas taxes, energy security, and Mississippian Lime development in Kansas. You can fi nd all of KIOGA s reference material on KIOGA s website at org. In light of a number of mischaracterized environmental and economic issues, promoting the independent oil and gas industry goals and protecting our interests has become more challenging both in Washington and Topeka. KIOGA s latest public information initiative is a proactive forward-looking campaign. KIOGA s aggressive communication campaign anticipates the scope of threats to the Kansas independent oil and natural gas industry before they materialize allowing us to craft comprehensive information and education efforts to pre-empt them. KIOGA...continued on page 20 17

18 Kansas Independent Oil & Gas Association KIOGA Midyear Meeting Best Western Holiday Manor McPherson, Kansas April 18-19, 2013 Register today! Call Kelly Rains at the KIOGA Wichita Office at or register online at Tune in to Energy Issues! Since 1937, the Kansas Independent Oil & Gas Association Kansas Independent Oil & Gas Association Wichita Office 229 E. William - Suite 211 Wichita, Kansas Fax kioga@swbell.net Topeka Office 800 S.W. Jackson Street Suite 1400 Topeka, Kansas Fax kiogaed@gmail.com (KIOGA) has successfully led and served the industry as the voice of the Kansas independent petroleum industry. KIOGA s greatest strength continues to be member opinions and experiences that help shape our discussions with federal and state policymakers and the media. KIOGA member meetings such as the Midyear Meeting offer the ideal format for members to share experiences, ideas, and challenges with friends, colleagues, policymakers, and other leaders from across the state and nation. The KIOGA Midyear Meeting Committee is developing an outstanding program offering you an excellent line-up of speakers, a wide variety of exhibitors, and entertainment. Make plans to join us on April 18-19, 2013 in McPherson to visit exhibitor booths, listen to speakers & seminars, visit with other producers and friends, and just enjoy yourself! What to expect at this year s Midyear Meeting 18 Learn what KIOGA is doing to ensure your business is successful well into the future Value-Added Business Development Seminars to help build your business Trade Show Networking opportunities Dinner and Entertainment Friday Golf Tournament and Sporting Clay Tournament

19 KIOGA Promotes Kansas Oil & Gas Careers Participates in 2013 Kansas Workforce Summit KIOGA participated in the 2013 Kansas Workforce Summit in Topeka on January 23-24, The event is an annual forum for community leaders, chamber representatives, legislators, government officials, employers, educators, and local workforce board members to address the new realities facing the workforce and economic development issues in Kansas. Over 300 folks participated in the forum. The forum heard plenary speeches from Kansas Governor Sam Brownback and Kansas Secretary of Commerce Pat George. Several workforce development presentations were made by governmental workforce development entities, private companies, and federal agencies. In addition, Kansas Senate President Susan Wagle (R-Wichita), Kansas State Senators Garrett Love (R-Montezuma), and Laura Kelly (D-Topeka) along with Kansas State Representative Brian Weber (R-Dodge City) gave a Kansas legislative update. A number of organizations participated with onsite marketing exhibits, including KIOGA. Thirty-fi ve exhibitors from 15 states and 67 cities participated in the forum. Kelly Rains of KIOGA staffed the KIOGA booth where she provided information about careers in the Kansas oil and natural gas industry and distributed KIOGA s Kansas Oil & Gas Career Toolkit. The oil and natural gas industry is one of the nation s premier job creating engines today and has the potential to expand that role tomorrow. As Kansas oil and natural gas industry tries to supply ever-increasing energy demand, we are looking for the next generation of energy industry leaders. KIOGA s Kansas Oil & Gas Career Toolkit is part of our Association s Career Center. KIOGA s Career Center is designed to better connect job seekers and employers in the Kansas oil and natural gas industry. The Toolkit helps encourage qualifi ed and talented individuals to the Kansas oil and gas industry. The Kansas Oil & Gas Career Toolkit outlines job descriptions, typical education requirements, typical career paths, routine working conditions, salary information, and more information for over 70 jobs and careers in the Kansas oil and natural gas industry. The Toolkit provides information that helps individuals map out a career strategy and provides reassurance that careers in Kansas oil and natural gas industry are diverse, challenging, rewarding, and attainable. The Toolkit communicates that opportunities exist for men and women, blue collar and white collar, those with college degrees and those without. Log on to to view and download the entire Kansas Oil & Gas Career Toolkit. Drowning in your documents? We can help. Document management solutions designed for the oil and gas industry or 19

20 Energy Security...continued from page 17 Expanding the Message Opinion editorials from KIOGA addressing oil and gas tax provisions, hydraulic fracturing, environmental issues, energy security, and energy policy have been published in newspapers across Kansas and the nation over the past few months. Editorials titled We no longer live in a world where energy is scarce, America is able to take control of its energy future, What is our energy future?, Policy solutions for high gasoline prices, The Whole Fracking Story, Energy Tax Policy A Complex Issue, Public Angst Demands Right Response, New Energy Reality, and more appeared in newspapers across Kansas and other states including the Kansas City Star, Great Bend Tribune, Wichita Eagle, Gyp Hill Premier, Abilene Reflector- Chronicle, Salina Journal, Manhattan Mercury, Garden City Telegram, Silver Lake Ledger, Holton Recorder, McPherson Sentinel and McLeansboro Times Leader to name a few. All of KIOGA opinion editorials focus on relaying messages that our state and nation must continue to move forward to promote comprehensive energy policy that will improve America s energy supply and national security and that oil and natural gas must be a part of our energy solution. KIOGA Chairman Dwight Keen had an excellent article about the oil and natural gas industry, and the role of our industry moving forward in the January 2013 American Oil & gas Reporter. KIOGA also continues to engage in on-site opportunities. We provided field tours of oil and gas operations, including hydraulic fracturing, to state legislators and governmental decision-makers including Governor Brownback. We also provided a tour for U.S. Senator Pat Roberts and his staff. We continue our onsite presence at the Kansas legislature with our annual Kansas Oil & Gas Day Legislative Reception in Topeka and the 2013 Kansas Workforce Summit in Topeka. A better public understanding of the oil and natural gas industry and energy issues fosters better public policy and promotes economic growth. Major Kansas media outlets depend on KIOGA s expertise and explanations and turn to KIOGA as the leading oil and natural gas industry news source. We Need Energy Intelligence KIOGA Tells Groups Across Kansas Secure, affordable, accessible, and ample supplies of energy are essential to both economic growth and a reasonable standard of living. If our nation is to achieve energy security and maintain economic competitiveness and not let our standard of living slip, we can no longer tolerate the misleading and often inaccurate rhetoric and quick fi xes. We need a well-reasoned, fact-based comprehensive energy strategy. KIOGA has delivered this message to 63 public forums over the last year including 48 forums discussing hydraulic fracturing. 20 KIOGA on-air awareness messages are broadcast on 58 radio stations across Kansas providing important information about the oil and natural gas industry to folks in every Kansas county. The radio advertising campaign in conducted in conjunction with Kansas State University, University of Kansas, and Wichita State University sporting event venues where KIOGA also provides ingame live interviews. A number of KIOGA members have provided interviews to radio, television, newspaper, and other media outlets on a variety of oil and gas and energy issues. KIOGA has been especially prominent in media coverage of hydraulic fracturing by participating in investigative TV reports and extended coverage on public television in the Sunflower Journeys program produced by KTWU public television in Topeka. Moving Forward Events in Topeka and Washington will determine the direction of KIOGA s public information initiatives going forward. KIOGA s public information efforts will continue to play an increasingly active role in helping determine how, when, and to what extent those events unfold. We will continue to confront and correct our opposition on...continued on page 21

21 Energy Security...continued from page 20 every plane and platform on which they operate. We will continue to advance messages and materials that redefi ne the terms of the debate, and inspire outside groups and everyday Americans to stand up and act on our behalf. KIOGA will be taking advantage of several public information opportunities in the year ahead speaking at public forums, writing editorials, participating in onsite educational events, and more. KIOGA s public information efforts are making a huge positive difference for the Kansas oil and gas industry by fostering a better public understanding of the energy issues and creating legacy value for the Kansas oil and gas industry. Our guidance document entitled What We Say and How We Say It! provides a basic overview about how we communicate with the media. Please contact the KIOGA Wichita Offi ce at for more information. Need More Information? Visit the KIOGA website at to fi nd the latest fact sheets, talking points, etc. on current topics and learn more about KIOGA s public information and advocacy efforts. Contact KIOGA for background materials, data and statistics, industry information, and issue briefs. KIOGA can provide assistance writing Letters to the Editor, opinion editorials, press kits, speeches, and PowerPoints. Complete line of Oilfield Repair Parts, Rig Supplies, New & Used Equipment Spivey, KS Pratt, KS Hugoton, KS Oakley, KS Waynoka, OK Coldwater, KS Medicine Lodge KS Great Bend, KS Check out our web 21

22 22 Energy Policy for 2013 A Message from your KIOGA President Edward Cross With a newly elected Congress and a president beginning his second term, we are standing on the threshold of a new year one that presents tremendous opportunities to move forward on building our economy and creating jobs for Americans who are looking for work. The independent oil and natural gas industry has been a bright spot in the last few years of sluggish economic growth and listless job creation. And we are ready to do more. We have a vision of an America holding the reins of her energy security and future prosperity. This vision is built on the incredible potential our industry offers to spur more economic growth. And with greater economic growth comes greater opportu nity for workers and for the nation. Americans are looking for a new, forward-looking approach that embraces innovation, imagination, resolve, and a focus on things that work. Many Americans, with diverse opinions, lament the absence of a national energy policy. But what would a national energy policy look like? What should its goals be? Energy is fundamental to every nation s economy. In the U.S., oil and natural gas supply most of the energy we need to run our businesses, transport our goods and products, support our lives, heat our homes and move our families through the day. There is no question we will need more energy of all types to meet the needs of an expanding economy and provide for a growing population in the years ahead. And we can produce more of that energy right here at home. The U.S. independent oil and natural gas industry is vital to economic growth and fundamental to our nation s future! More domestic energy development equals economic growth, job creation, government revenue, and energy security. USA Today recently looked at how oil and natural gas development is driving up income in rural and small town areas and is shifting prosperity to the nation s heartland, at least temporarily. And energy s fundamental role in our nation s employment picture was evident in a recent U.S. Labor Department s jobs report which indicated oil and natural gas extraction employment is up 6.5% over the last year. American oil and natural gas companies provide a substantial economic stimulus every year. Last year, the industry invested over $545 billion in economic development and job creation in the U.S. Think of it this way, every two years the oil and natural gas industry invests $1 trillion in economic development without a single taxpayer dollar spent. Oil and natural gas companies currently support 9.2 million American jobs. The Kansas oil and natural gas industry supports 67,000 jobs with an annual income of almost $60,000, and over $3 billion in family income! Job creation continues to be a key priority for policymakers, our industry, and for the millions of Americans who are looking for work. The oil and natural gas industry is committed to job creation and is poised to create a signifi cant number of new jobs. But key to that is government policies that enable increased domestic energy production. With the right energy policies, our industry could support an additional 1.4 million new jobs nationwide by Energy access, not taxes, is the key to unlocking new jobs for Americans and new revenues for our government. We have a new energy reality in the U.S. We no longer live in a world where energy is scarce. We have enough fossil fuel energy resources right here in America to provide reliable and affordable energy for decades, even centuries, to come. Our energy supply is now American and abundant, greatly enhancing our national security. Policies that encourage the development of America s vast oil and natural gas resources combined with measures to strengthen our partnerships with Canada and Mexico could rebalance energy geopolitics making North America energy independent. If we seize the opportunity now, we will be positioned to lead for decades and realize the economic and energy security benefi ts of that leadership. America s independent oil and natural gas industry has a unique and foundational role in our country. We provide the fuels that power our economy, create jobs, and support our national interests. This is a uniquely American movement. Private investment in domestic oil and natural gas production has brought us to a turning point that is unmatched anywhere in the world. Not because they don t have oil and natural gas, but because we have brought our entrepreneurial spirit to energy. Independent oil and natural gas producers embody the spirit of the American entrepreneur by taking chances on new wells, new techniques, and new technologies that provides the energy that supports our way of life. These investments and benefi ts don t occur in a vacuum. As congressional policymakers and President Obama search for anwers on tax policy, fi scal policy, and regulatory regimes, we need to focus on solutions that will support our ability to provide for a secure American energy future. The role of public policy in the production and consumption of energy is a major challenge. Laws, regulations, and subsidies have the power to dictate how energy sources are priced and what the development costs are. Domestic policies also have far-reaching implications, as competition for resources continues to increase across industries and geographic regions. How involved should the government be in this process? What should the role of policy be in determining the winners and losers of the future energy profi le? I believe the goal for energy policy should be to get the government out of the energy sector and let markets direct energy investment. President Obama has promised to support oil and natural gas development as part of an all-of-the-above strategy. We can offer solutions to some of the pressing...continued on page 25

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25 Presidents Message..continued from page 22 issues that will impact our economic future. KIOGA works and regularly communicates with a number of key Democratic and Republican policymakers to offer tax reform solutions that don t compromise our ability to grow the economy and create jobs through domestic production and regulatory reforms that don t add unnecessary layers of compliance burdens on top of existing protections. There is plenty of work to be done. Our economy continues to struggle. Millions of Americans are out of work and millions more have stopped looking for work altogether. Many Americans wonder if Washington can work in a bipartisan manner to solve the most pressing issues before us. KIOGA works diligently to offer bipartisan solutions to key oil and gas issues to ensure domestic energy is available to provide the foundation for revitalizing our economy. Thanks to the vast U.S. oil and natural gas resources, the independent oil and natural gas industry stands ready to continue the investments made in jobs, communities, technology, environment, and American energy security. Quietly, without much fanfare, America s oil and gas entrepreneurs have revolutionized our domestic energy business. In the process, they have created a path to economic and energy security we can count on for centuries. America now has the largest combined energy resources on earth. We now have the ability to secure our economic and energy future. By developing and using what s here, we can dramatically decrease imports, add thousands upon thousands of jobs, and rapidly rebuild our economy. This message has been brought to you by America s energy entrepreneurs and independent oil companies the people responsible for 94% of all the oil wells drilled in the United States. Learn more at depagoodthings.org 25

26 Federal Regulatory Onslaught Continues KIOGA Expands Regulatory Advocacy The oil and natural gas industry continues to see troublesome signs from President Obama s second term with the December release of EPA s new air quality standards for soot or fi ne particulate matter. The fi nished rule was mostly as stringent as the one that EPA submitted for White House review last summer. That is a turnaround from the experience of the last couple of years, in which White House pressure forced the EPA to postpone a new rule on smog and placed regulations on toxic coal ash into a deep freeze. Many fear that the latest EPA action is just the beginning of EPA s post-election onslaught, which is not good for an economy struggling to recover. American oil and natural gas producers are under siege from agencies like the EPA, USFWS, OSHA, and others. As Americans face a fragile economy and skyrocketing energy prices fueled by President Obama s agenda, it is important to pull back the curtain on the ideological-driven processes EPA, USFWS, and other agencies are using to justify an avalanche of costly rules. Hydraulic Fracturing The EPA continues efforts to regulate hydraulic fracturing under its underground injection control (UIC) program. EPA has proposed a permitting guidance for oil and natural gas hydraulic fracturing activities using diesel fuel. EPA s plan is to require any operations that use diesel fuel in their hydraulic fracturing process to obtain a class II UIC well permit. The applicability of the EPA s regulatory actions will hinge on the defi nition of the term diesel fuel, which is not defi ned in the Safe Drinking Water Act (SDWA). KIOGA submitted comments to the EPA late last year expressing our serious concerns that EPA s attempt to regulate hydraulic fracturing under the SDWA will likely create bureaucratic uncertainty for both state regulators and producers and runs the risk of upsetting state-based regulatory systems with possible primacy issues arising from the implementation of the EPA draft guidance. We anticipate a fi nal EPA rule in early 2013 and KIOGA is working with our partners to take legal action if, as expected, the Obama Administration does not restart the process. The EPA avoided the Administrative Procedure Act and skipped the traditional rule making process. We feel the EPA should do a real rule making and look at hydraulic fracturing in the context of both what Congress intended by removing hydraulic fracturing from the scope of the SDWA and applying the standards within the SDWA. Pavillion, Wyoming Hydraulic Fracturing Study Federal environmental regulators have once again lengthened their investigation into potential groundwater contamination at Pavillion, Wyoming. The U.S. geological Survey noted that in constructing the monitoring wells, the EPA used a black painted/coated carbon steel casing and EPA photographs show that investigators used a painted device to catch sand from the wells. Paint can contain a variety of compounds that distort test results so it is poor scientifi c practice to use painted or coated materials in well-monitoring tests. U.S. Geological Survey again confirms hydraulic fracturing does not pose a serious risk of polluting drinking water sources A recent USGS study examined the water quality of 127 shallow domestic wells in the Fayetteville shale in Arkansas, a region with 4,000 completed producing natural gas wells. The USGS report concluded that none of the data looked at as part of the study suggests that any groundwater contamination is resulting from natural gas production activities. Northeastern states threaten to sue EPA over oil and gas methane emissions New York is leading seven states in threatening to sue EPA while demanding that the agency change course in its decision to exclude methane from its recent emissions rule for oil and gas operations. New York Attorney General Eric Schneiderman, along with Attorney Generals from Connecticut, Delaware, Maryland, Massachusetts, Rhode Island, and Vermont fi led a notice of intent to sue the agency in December. Republican Governors and Attorney Generals ask that Fracking Rule be Withdrawn The Republican Governors Association and the Republican Attorneys General Association want the proposed Bureau of Land Management (BLM) rule to regulate hydraulic fracturing withdrawn because they say it ignores states track records for regulating the practice and would discourage future development. The groups wrote a letter to President Obama saying the rule institutes sweeping new regulations without an expressed need. The groups said they wrote a similar letter last July and received no response from the Administration continued on page 30

27 Rod Andersen - Kansas Petroleum Resources LLC - Wichita, KS Kyle Taylor - 101st Earthborn Environmental Technologies, LP - Colby, KS Hans Hinrichs - Hughes Energy, LLC - Denver, CO Lee Butler - Cessna Aircraft Company - Wichita, KS Marc Bridgen - Oil & Gas Awards - London, UK Steve Dickin - Tesla Exploration, Inc. - Greenwood Village, CO David Dulak - BP Energy Company - Houston, TX Dave Oller - McCoy Petroleum Corporation - Wichita, KS Nick Hummel - Tomcat Drilling, LLC - Wichita, KS Terry Bailey - EMI, LLC - Washington, KS Mitch Sorby - Lonquist & Co., LLC - Austin, TX Patrick Kellerman - Mississippi Sand, LLC - Andover, KS John Oberly - In-Line Plastics, LC - Houston, TX Peg Nally - Accelacare Occupational Services - Garden City, KS Thomas M. Wasinger - Chemstation of Kansas - Wichita, KS CONSOLIDATED Oil Well Services, LLC Visit our website at South Grant Chanute, KS We are the industry leader in customer service in pressure pumping. Our unique approach to pumping services allows us to provide excellent value regardless of the well s depth or location. Utilizing advanced technology in chemicals, software and equipment and our highly experienced staff, we outperform our competitors and treat each customer and each well as our number one priority. Serving the Mid-Continent region and the Rocky Mountains, we provide all types of cementing, acidizing and fracturing. Service Quality Experience Value Proven Results Technical Leaders Adapt to Unique Challenges 27

28 2013 Kansas Legislature...continued from page 8 power at a higher generation cost? and 2. If the oil producer is allowed to construct and operate a private distribution facility, will it be a system available for other customers to take power provided it has the incremental capacity? Sunfl ower responded by saying that at this time they do not expect a need to add generating capacity until 2019 even with accommodating the projected load growth from oil development during that time. Sunfl ower also said that it is their opinion that under Kansas statute a customer may build private distribution systems; however that private system would not be able to serve other customers. Therefore, Sunfl ower is concerned about the impact on those they serve. They said if a customer builds private distribution lines to widely disbursed loads, it could encumber their ability to serve other customers, be they agricultural, commercial, residential, or other oil companies. KIOGA is actively participating in ongoing discussions and meetings. Hydraulic Fracturing Hydraulic fracturing has been and continues to be effectively regulated by the Kansas Corporation Commission (KCC). All of the laws, regulations, and permits that apply to oil and natural gas exploration and production activities also apply to hydraulic fracturing. These include all laws and regulations related to well design, location, spacing, operation, and abandonment as well as environmental activities and discharges, including water management and disposal, waste management and disposal, underground injection, surface disturbance, and worker health and safety. Clearly, hydraulic fracturing is well-regulated in Kansas. Many states have or are developing hydraulic fracturing chemical disclosure regulations. KIOGA is not opposed to transparency, but we do not believe a one-size-fi ts-all model is the best solution. Several KIOGA members including KIOGA Chairman Dwight Keen, Jon Callen, David Bleakley, and KIOGA President Edward Cross are working with the KCC to develop disclosure regulations that work best for the Kansas oil and gas industry. Adequacy of Annular Cementing The KCC recently had questions about pipe size, borehole size, and adequacy of annular cementing, particularly with respect to wells in western Kansas. At the request of the KCC, KIOGA identifi ed three prominent fi eld experienced engineers who graciously gave of their time and effort to advise the KCC on these issues. Leon Rodak of Murfi n Drilling Company, Inc., Jay Schweikert of Lario Oil & Gas, and Carl Durr of Woolsey Operating provided professional knowledge and experience to help the KCC develop fact based regulation of casing/cementing concerns. Other Issues The 2013 Kansas legislative session is expected to bring at atmosphere that could be very challenging. KIOGA will be staying vigilant throughout the 2013 session for legislative and/or regulatory issues and concerns that could impact the Kansas oil and gas industry. KIOGA will diligently advocate for the Kansas independent oil and gas industry throughout the 2013 legislative session. Tim Miller Oilfield Sales Miller Plastics 115 S. Patton Road Great Bend, KS or omwinc@opiwireless.com 28 Selling Oil & Gas Production at Auction Since 1975 Regularly scheduled bi-monthly auctions February 7, March 27, N. Rock Road, Suite 140 Wichita, Kansas W.C. Norris Sucker Rods ~~ Polyethylene Pipe Oilfield Transportation or Domestic Distribution ~~ PVC Plastic Pipe Pipe (40 Joints w/ Deep Socket Couplings)- Fittings ~~ *Seal Tite* Lined Steel Tubing *Fiberglass Pipe-Tanks-Fittings* *Steel Pipe-Tanks-Vessels-Fittings* ~~ *FULL LINE OF OILFIELD SUPPLIES* *LARGE INVENTORIES OF ALL PRODUCTS* *Delivery Available Statewide*

29 Check out the jobs and resumes on our career center. Lesli Town Phone: (913) Fax: (913) Oil & Gas Consulting Services KCC Filings via KOLAR Accounting/Records keeping Operator License Insurance Management Drilling Intents Oil & Gas Lease Research Waste Transfer Coordinate sub contractors Pit Closure KDOT Compliance Completion Reports Oil & Gas Lease Exemptions Injection Well Application GPS Mapping Transfer of Operator Personnel Management Well Inventory Oil & Gas County Assessments Water Injection Reports Tier II Reporting/SPCC plans Experience Bachelor s Degree in Business 3 rd Generation Oil Business QuickBooks KOLAR/LEO7 KS Dept. of Revenue Oil & Gas Div. of Property Valuation Training EKOGA & KIOGA Member 29

30 Federal Regulatory...continued from page 26 Senator Vitter (R-LA) asks Obama to look at employment impact of hydraulic fracturing Senator David Vitter (R-LA) wrote a letter to President Obama in December asking that an analysis of what the unemployment rate in this country would have been over the last four years without hydraulic fracturing. Vitter praised the United Kingdoms December decision to lift a ban on hydraulic fracturing in the U.K. The Boring Legacy: Promised Land fracking hunt finds little good will Promised Land, a movie starring Matt Damon released in January found little favor. The Washington Post called the movie attractive, wellintentioned dry well and the Los Angeles Times said it was an echo of a convincing fi lm rather than the real deal and the New York Times said the fi lm was unable to fulfi ll its own promise. Interestingly, the media failed to communicate the fact that Qatar helped fund the Promised Land propaganda fl op. Left-wing cable TV station founded by Al Gore sold to Al-Jazeera Al-Jazeera, the anti-israeli network funded by Qatar, closed a deal with the struggling left-wing cable station Current TV founded by Al Gore which gives them access to 40 million U.S. homes. Endangered Species Oil and gas producers across the country are having problems caused by the Endangered Species Act (ESA). While we are currently addressing the Lesser Prairie Chicken (LPC) in Kansas, the U.S. Fish & Wildlife Service (USFWS) have more than 250 species determinations pending under a settlement agreement the USFWS made with anti-development groups. Last November, the USFWS announced it was proposing to list the LPC as threatened under the ESA, and would use the next year to determine whether the species should be listed as threatened, endangered, or not warranted for listing. The LPC range includes parts of Colorado, Kansas, New Mexico, Oklahoma, and Texas. KIOGA is working with our colleagues from state oil and gas associations in the affected states to analyze existing data and research on the LPC. KIOGA believes the best available science does not prove the species warrants threatened status. KIOGA is working with our partners in DEPA in preparation for potential legal challenges to the ESA listing of the LPC as threatened. We question the biology and science (or lack of science) used to determine ESA species determinations, the lack of prudent economic...continued on page 31 TANK RENTALS Frac Tanks Mud Tanks Open Top Tanks Gas Busters Weir Tanks Containment Berms Manifolding

31 Federal Regulatory...continued from page 30 impact analyses, and the need for reform of the USFWS process of sue and settle arrangements with antidevelopment groups. Part of this effort will also include the fi ling of a reverse listing petition. Climate Change The Kyoto Protocol on climate change used to be so big that the future of humanity was said to hinge on its implementation. The Kyoto Protocol expired on January 1, 2013 and very few even noticed. President Obama s re-election and Hurricane Sandy are giving environmental activists hope that 2013 is the year when Congress fi nally tackles climate change. A slew of possible scenarios could play out in 2013 and in the rest of Obama s term. Congress could fi nd common ground on several energy-related measures that would have the side effect of reducing greenhouse gas emissions. But most likely, the main action on climate change will happen in the executive branch. President Obama has sent mixed signals. He used his fi rst post-election news conference to make the point that the climate was not at the top of his second term agenda. But in a December interview for Time magazine s person of the Year award, he said the primary focus for his second term would be the economy, immigration, climate change, and energy. Obama said Proven Technology Practical Solutions Field Expertise delivering top quality pressure pumping products & services Pratt, KS Liberal, KS Cushing,OK Pawhuska, OK Ada, OK Gainesville, TX Cisco, TX Jacksboro, TX Albany, TX Graham, TX Electra, TX Longview, TX Eldorado, AK Wichita, KS Sales (316) Midland, TX Corporate Office ((432) he s pushing for taking the long view when it comes to climate change and investing in solutions. IPCC Climate Assessment The Intergovernmental Panel on Climate Change (IPCC) is scheduled to publish their 5th assessment report in September However, one of the 800 expert reviewers recently said the agreement was vitiated by the systematic dishonesty of the report, and cited one sentence about solar irradiance as gamechanging evidence that discredits the idea that man-made forces are the main drivers of global climate change. Conclusion KIOGA is engaging not only in advocacy on the regulatory front, but also in legal challenges. The EPA has a record with other industries of implementing a strategy to negotiate industry commitments in areas where they have no authority. The EPA does this through enforcement initiatives. The EPA continues to increase administrative and civil enforcement penalties while the number of cases the agency takes on continues to drop as the EPA pursues larger, more complex, risk-based enforcement cases. The Administrations selective prosecution of the oil and natural gas industry is abundant. And they cost businesses and consumers billions of dollars. A recent study showed that current federal regulations costs businesses and consumers $1.75 trillion, or nearly 12% of America s GDP. States need to assert their rights to oversee oil and gas activities within their borders. Some states have begun to stand up to EPA and other federal agencies to protect their state rights and more states need to stand up. We need a regulatory approach that invites input from industry and bases rulemaking on sound science, legitimate cost/ benefi t analyses, and economic impact. This is the model that Kansas regulatory agencies have used for decades and other states too. To address issues of regulatory strangulation, KIOGA has been actively engaged in regulatory advocacy since early We have expressed our concerns on several regulatory issues to several key policymakers including Congressman Doc Hastings (R-WA), Chair of the House Natural Resources Committee as well as Senator Dan Coats (R-IN), Senator Orrin Hatch (R- UT), Senator Ron Wyden (D-OR), Senate Republican Leader Mitch McConnell (R-KY), Senator Mark Udall (D-CO), Congressman Fred Upton (R-MI), and our entire Kansas Congressional delegation. But our advocacy also extends to the regulatory front. KIOGA submitted comments to EPA and USFWS on the issues of air emissions, hydraulic fracturing, and endangered species listings. Federal agency economic analyses frequently ignore jobs lost, competitiveness, and energy reliability. KIOGA written comments underscore these points. KIOGA is working with our partners to fi le legal challenges to EPA s air emissions, and USFWS endangered species determinations and are prepared to join a legal challenge of EPA hydraulic fracturing regulation if necessary. 31

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34 34 Chairman s Letter...continued from page 4 If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation - Old Farmer s Almanac The tax deductibility of IDC s and percentage depletion are critical to the economic viability and sustainability of the domestic independent oil and gas industry. Credible estimates anticipate that eliminating IDC s and percentage depletion would result in the loss of thousands of industry jobs, a 30% decrease in drilling activity, increased energy costs for consumers and a decrease in the U.S. gross domestic product. Domestic oil and natural gas are the lifeblood of our industrialized society and underpin our standard of living. Our nation is blessed with a huge supply of these commodities that are ready to be tapped. If the opportunities to develop and expand the production of our energy resources are not artifi cially constrained by government, the result will be more high paying jobs, more tax revenues and stronger economic growth. The Kansas independent oil and gas industry has always been powered and nurtured by a spirit of entrepreneurial risk taking a willingness to undertake calculated business risks and yet continue to persevere through the occasional failures and setbacks that that risk taking entails. However, these risk factors should not be unnecessarily compounded by ill conceived and unnecessary political risks arising from government tax policies that selectively pick business and industry winners and losers. For the fi rst time since the late 1940 s, U.S. energy independence is within our grasp. The proposed repeal of tax deductions for IDC s and percentage depletion, if enacted, will foster many unintended consequences and will adversely affect an industry that holds the key to job creation, improving our nation s balance of trade and enhancing our national security. Public policy should not punish the independent oil and gas industry by imposing higher tax burdens through the denial of ordinary business tax deductions that are widely available to many other industries. If these deductions are repealed, the viability of the domestic independent oil and gas industry will be jeopardized and America s march toward greater energy independence and security will be at risk. Your Chairman, Dwight D. Keen THE POWER BEHIND THE ENERGY FOLEY POWER SOLUTIONS. POWERING KANSAS ENERGY INDUSTRY. Foley Power Solutions is a valued and trusted partner to the Kansas oil and gas industry. Cat engines have the proven reliability and high power-to-weight ratio to make them the contractor s choice for drilling, workover, fracking, acidizing and cementing. Cat engines move oil and gas from where it is to where you need it. And whether at the well site or downstream distribution, Foley provides 24/7 service to keep the energy flowing. Diesel & gaseous-fueled engines Well site service and support Prime movers Engine rebuild & exchange Park City (316) Topeka (785) Dodge City (620) Caterpillar All rights reserved. CAT, CATERPILLAR, their respective logos, Caterpillar Yellow, the Power Edge trade dress as well as corporate and product identity used herein, are trademarks of Caterpillar and may not be used without permission.

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36 KIOGA Members Among Finalists for the Rocky Mountain Oil & Gas Awards The Rocky Mountain Oil & Gas Awards recognize the achievements that are made on an annual basis within the Rocky Mountain oil and gas industry. The awards are a platform for the industry to demonstrate and celebrate the advances made in the key areas of environment, efficiency, innovation, corporate social responsibility, and health & safety. The awards show industry s motivation to develop by recognizing and rewarding the efforts of corporations and individuals. The award candidates have been reduced to 50 finalists for the Rocky Mountain Oil & Gas Awards and they include KIOGA members: McPherson & McVey IMA, Inc. High Sierra Energy Black Hills Corp. ONEOK KIOGA congratulates each of these companies. It is a great achievement to be voted a finalist and we wish each of you the best of luck when the winners are announced on March 12th at the Grand Hyatt in Denver, Colorado. Share your newsletters! Encourage non-members to join! If you would like extra copies, please contact the KIOGA office 36

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