r&d activities in oil & gas
DESCRIPTION
Presented to: Inventta+BGI Workshop for Oil and Gas Industry Rio de Janeiro, September 4th, 2012TRANSCRIPT
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R&D Activities in Oil & Gas Presented to: Inventta+BGI Workshop for Oil and Gas Industry
Presented by: Serge de Blois, CEO Braithwaite Global Inc., Houston, Tx
Rio de Janeiro, September 4th, 2012
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Agenda 1. Who we are 2. Why and How R&D Tax Incentives are offered 3. Types of R&D Incentives 4. Research Tax Incentives Delivery Model 5. Defining what is a QRA 6. International perspective on Research Tax Credits
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Who We Are: •Worldwide firm solely providing R&D
Tax Incentive services with strong
science base
•27 years of history with exceptional
filing records
•Offices in Brazil, Canada, France,
Ireland, UK and the USA
•750 fulltime specialists worldwide
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Who We Are:
Reputable firm with worldwide expertise
• Canada since 1985 • USA since 2000 • UK and France since 2005 • Ireland since 2011 • Brazil: Inventta + BGI since spring 2012
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Research Tax Credit Services
Diagnostic Assessment
Audit Defence and Tax controversy
Compliance and Due Diligence
(Tax provisions, Opinion, Review, etc.)
Recovery (from turn key to task specific)
Methodology Development and training
(In house claims, Tax Packages, etc)
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INVENTTA+BGI APPROACH
Identify
Qualify
Quantify
Recover
Right skilled team of client and Research Experts Project schedule and resource commitments Credit utilization barriers
Existence of Qualifying Activities-projects mapping Sufficiency of Cost Structure Base Period Parameters (France and USA) Probability of Credit Operational Profiling Personnel Profiling Activity Identification Documentation Systems Review Costing Systems Review Build-up of Activity Costs
Credit Calculation State Applicability Return Preparation Project Deliverables
Some Canadians clients
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Why governments invest in private R&D?
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• Produce technological
advancements
• Contribute to:
• Productivity
• Competitivity
• Growth
• Improve our living standards
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How governments invest in private R&D?
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Five Major Mechanisms:
• Public research centers
• Research contracts (i.e. US military)
• Grants and contributions
• Tax incentives (credit and super-
deductions)
•Patent or Innovation Boxes
Two Types of Public R&D Tax Incentives
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Discretionary | Selective Fiscal | Entitlement Grants and loans Tax Credits
Government procurement Super deductions
Direct equity investments Accelerated capital depreciation
R&D resource investments Patent or innovation boxes
Tax holidays
Favorable sales tax or VAT treatment
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Why Tax Incentives:
•Cheaper to deliver (no prior approval)
•Not subject to trade retaliations (GATT)
•Business people thought that Industrial
secret better protected
•Preferred a legal process over a
discretionary one
Research Tax Credit Delivery Model
Qualifying Research Activities
Documenting and linking projects to expenses
Qualifying Research Expenditures
Calculation and allocation methods
Tax Credit or Saving Amount 16
Projects Mapping
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Defining what is a QRA
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The tax definition of R&D is more than you think!
• It is more than white lab-coat
• It’s Experimental Development
•As defined by Frascati Manual (OECD, June
1963 and revised)
Frascati Manual Early 60’s OECD defined R&D for National
Accounting (manual)
1. Basic Research 2. Applied Research 3. Experimental Development
Refers to a standard definition for R&D activities
Similar to GAAP and IFRS in financial
auditing
Qualifying Research Activities
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Frascati Manual Inspired extensively industrialized countries
through the early 80’s
Designed to provide common definitions to R&D tax incentives
New countries with R&D tax incentives increasingly “based on the Frascati definition(s)”
Not legally binding on national authorities
Qualifying Research Activities
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MAIN TESTS OR CRITERIA
1. Business Component
2. Technological or Scientific
3. Uncertainty – Advancement
4. Process of Experimentation
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1-BUSINESS COMPONENT
The Purposes of the R&D Activities Related to the: Func-tion
Perfor-mance
Reliabi-lity
Quality Durabi-lity
Product Yes Yes Yes Yes Yes
Process Yes Yes Yes Yes Yes
Software Yes Yes Yes Yes Yes
Technique Yes Yes Yes Yes Yes
Formula Yes Yes Yes Yes Yes
Invention Yes Yes Yes Yes Yes
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2-TECHNOLOGIES OR SCIENCES
•Includes – Hard sciences: • Physics
• Chemistry
• Biology
• Computer Science
• Etc.
• Excludes – Soft Sciences: • Economics, psychology, humanities, manage-
ment sciences, etc.
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3-ELIMINATION OF UNCERTAINTY
•Activities Must be Intended to: • Discover information
• Eliminate uncertainty concerning the companies capability, process or final design.
• Exists if Taxpayer in Uncertain: • Can We? –Can de company develop or improve
the product or process
• How? --How can company develop or improve the product or the process
• Final Design? –What the final product look like?
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4-PROCESS OF
EXPERIMENTATION
•Development Activities Must: • Evaluate a process and it’s alternative
• Result that was uncertain
•May involve: • one or more hypothesis
• testing and analyzing the hypothesis
• Refining or discarding the hypothesis as part of a design process
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PROCESS OF EXPERIMENTATION
•Must Engage in Process of
evaluation & testing alternatives
through: • Modeling
• Simulation
• Systematic trial and error
•Failure: • The taxpayer does not need to “succeed”
Two Types of Research Activities
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1-Planned R&D* Lab type of activities Systematic Project driven:
• Approval steps • Reviews • Budgets • Periodic reporting • Closely managed, etc.
Generally extremely well documented Involves predominately labor costs Well accounted for Easily:
• Identifiable • Defendable
Two Types of Research Activities
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2-Ad Hoc R&D* Shop floor and Field type of activities Reactive in nature Problems or opportunities driven Reactive and often pressing:
• Less planned • Less documented • Poor accounting with hidden cost • Multiple a-typical costs Documentation generally not a priority Experimentation can be at full scale QREs can be extremely high Sometime arising before or after an planned
R&D project
Upstream Projects –Too many examples
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Platform Hibernia (world's largest oil platform)
Generated thousands of R&D projects from many parties involved in the projects.
From advance modeling systems to new type of concrete and cement
Canadian Department of Revenue had to put together a special audit task group to review these claims
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1-Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • New technology for SAGD (steam assisted gravity
drainage wells) and other thermal heavy oil wells.
• Electrical heating techniques and equipment to enable early production from horizontal wells prior to the onset of steam-assisted production
• Developed a numerical model to aid in system design.
• New pressure sensor technology capable of operating at the high downhole temperatures.
• Equipment and methods for more rapid and less expensive installation and/or replacement of electric submersible pumps in live SAGD wells during completions
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2-Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • Processes which injected aqueous surfactant solutions
at superheated steam temperatures to remove wax/asphaltene blockages in formation faces and prevent the buildup of wax/asphaltene deposits in production tubing of suitable oil wells.
• A customised truck with robust automated equipment and systems to safely implement, monitor, and control the treatment processes.
• Process to reactivate watered out natural gas wells. The process was based on injection of a proprietary hydrophilic resin that preferentially blocked water rather than hydrocarbon production channels.
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Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • Well selection methods, treatment methodologies for
achievement of sustainable gas production
• Customized radial inflow model to improve understanding of how the treatment process worked in different wells and formations.
• High-efficiency waste gas incinerators for oil and gas industry applications. R&D claims included projects that improved fuel train performance, support structures, and insulation of smaller units, and that improved performance and increased capacity for pipeline gas blow down applications.
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Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • Smaller scale units, reduced SO2 emissions and
recovered excess heat from flue gas, and developed a multiple unit system for high volumes of very sour waste gas.
• An oil and gas field chemical supply company’s R&D claims included development of improved paraffin inhibitors, demulsifiers for difficult oil/water emulsions, and corrosion inhibitors for sour gas recovery and gathering system pipelines.
• Pre-Extraction Mixing Tool to Prevent Sand Plugging at the Pump Inlet
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3-Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • Multi-Intake Progressive Cavity Pump • Hydraulic Stroking Pump for Service in Problem Wells
(PSU)
• Hydraulic Stroking Pump for Convention Well Applications (Super Pumpjack)
• Stuffing Box That Uses Injectable Packing to Seal the Wellhead Pump Driving Rod (XL Stuffing Box)
• Tubing Head That Allows Circulating and Foam Jobs To Be Performed Without a Blow Out Preventer (Circulating Tubing Head)
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4-Upstream Projects related to Conventional Oil and Gas and Heavy Oil Production • SKUD/Emulsion Characterization to Enable Prediction
of Performance for New Applications
• Development of a Hydrocyclone Water Polishing Element
• Improved Atmospheric Process to Dehydrate and Remove Solids from Oil (RAT)
• Development of a Process for Pre-heating Emulsion Using Waste Engine Heat (Ken-Heat Scavenger)
• Development of an Exchanger to Preheat Combustion Air and Increase the Efficiency of Oil Field Tank Burners
Downstream Oil & Gas Projects –Too many examples
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Development of improved fuel, lubricant and asphalt products to meet changing industry and government requirements.
Engine laboratory trials of improved fuels and lubricants.
Refinery process improvements for fuels, lubricants, and asphalts.
Trials during refinery operations to investigate effectiveness of process improvements.
Theoretical and experimental studies of methods for improving flow of natural gas and other products through pipelines
Etc.
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Who Has the Best Tax Research Incentive Program?
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Salaries √ √ √ √ √ √
Material √ √ √ √ √
Sub-Contractors √(65%) √ √ (65%) √(65%
SMEs) √ √
Overhead expenses
√
(50% of Salaries)
√
(55% of Salaries)
√ √
Patent Cost √ √
Capital √ √
Eligible Expenditures
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Effective rate of assistance
6.5% to 14%
30% to 40%
15% to 35%
TC SME: 24.5%
SD SME: 14.25%
SD LC: 7%
26.56% 20.4% to 34%
Significant other R&D incentives (Provinces/States)
√ √ √ N/A √
√
Audit Predicta-bility
Fair Fair Low Good Good Good
Effective Saving Range, Audits
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Where are they spending the money?
42 Source: Own computation from US, Canada, UK, France, Brazil
and Ireland Statistics and Treasury Departments
43 Source: Own computation from US, Canada, UK, France, Brazil
and Ireland Statistics and Treasury Departments
2004-2010 2004-2009 2006-2009 2004-2008 2004-2007 2006-2008
44 Source: Own computation from US, Canada, UK, France, Brazil
and Ireland Statistics and Treasury Departments
2004-2010 2004-2009 2006-2009 2004-2008 2004-2007
45 www.braithwaiteglobal.com
Obrigado !
Thank You !
Merci !