Drilling and Development Costs SE

1
Drilling and Development Costs - SE

• Exploration Costs the costs of searching for
  oil or gas. Future benefits exist only if oil or
  gas is found
• Expense if unsuccessful
• Capitalize if successful
• Development Costs build a producing system of
  wells and related equipment to produce the proved
  reserves
• Capitalize the costs whether dry hole or producer

2
Accounting System

• Must provide sufficient information
• To report results of operations to investors and
  creditors
• For management to make decisions
• To account for costs to be billed to other joint
  participants
• To report to govt agencies (IRS, e.g.)

3
Introduction to Oil Gas Taxation

• The major difference between financial and tax is
  that, at the election of the taxpayer, IDC may be
  expensed.
• Another important difference is that some
  taxpayers are allowed to compute percentage
  depletion.

4
Wells in Progress Account

• Costs are entered here as an asset until it can
  be determined the status of the well (successful
  or dry)
• Two accounts are used
• Wells in progress IDC
• Wells in Progress Lease Well Equipment

5
Wells in Progress Account (Contd)

• If the well is to be capitalized, costs are
  transferred to
• Wells and related EF IDC
• Wells and related EF LW Eqpt.
• If the well turns out to be dry, costs may be
  either capitalized or expensed depending on
  whether the well is exploratory or developmental.

6
Intangible Drilling Costs

• Defined
• Expenditures for drilling
• Do not have salvage value
• Up to installation of the Christmas tree
• Valves, pipes, and fittings assembly that is used
  to control the flow of oil and gas from the
  wellhead
• Located at the top of the well on the surface of
  the land
• Includes costs such as building a road to get the
  drilling rig in and preparation of the drill site.

7
Equipment costs

• Defined
• All tangible or salvageable costs of drilling up
  to and including the Christmas tree
• Both tangible and intangible costs past the
  Christmas tree
• Roads built for production, are treated as
  equipment
• Exceptions
• Casing, which is tangible but not salvageable, is
  equipment
• Cement and mud, which are tangible but not
  salvageable, are IDC

8
Intangible Drilling Costs

• Up to and including installation of the Christmas
  tree
• Prior to drilling
• GG to determine specific well site
• Preparation of the drill site (leveling,
  clearing, building roads and disposal pits)
• Rigging up

9
Intangible Drilling Costs (2)

• During Drilling
• Drilling contractor charges
• Drilling mud, chemicals, cement, and supplies
• Wages and fuel
• Well testing, such as core analysis and analysis
  of cuttings

10
Intangible Drilling Costs (3)

• At target depth and during completion
• Well testing such as well logs and drillstem
  tests
• Perforating and cementing
• Swabbing, acidizing, and fracturing
• Installing subsurface equipment to the wellhead
  and installation of the Christmas tree
• If well is dry plugging and abandoning costs

11
Intangible Drilling Costs (4)

• After the Christmas tree, following completion
• Removal of drilling rig
• Restoration of land and damages paid to surface
  owner
• Wells other than original exploration or
  development well
• Intangible costs of deepening a well
• IDC of a water or gas injection well

12
Problem 10(a)

• W/P IDC 50,000
• Cash 50,000
• Dry Hole expense IDC 50,000
• W/P IDC 50,000

13
Problem 10(b)

• W/P IDC 80,000
• W/P LWE 10,000
• Cash 90,000
• Wells Related EF IDC 80,000
• Wells Related EF LWE 10,000
• W/P IDC 80,000
• W/P LWE 10,000

14
Problem 10(c)

• W/P IDC 100,000
• Cash 100,000
• Wells Related EF IDC 100,000
• W/P IDC 100,000

15
Problem 10(d)

• W/P IDC 200,000
• W/P LWE 30,000
• Cash 230,000
• Wells Related EF IDC 200,000
• Wells Related EF LWE 30,000
• W/P IDC 200,000
• W/P LWE 30,000