development of oil & gas properties

7/23/2019 Development of Oil & Gas Properties

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DEVELOPMENTDEVELOPMENT

OF OIL AND GASOF OIL AND GASPROPERTIESPROPERTIES

PATRICK HENNESSEEPATRICK HENNESSEE



THE NATURE OF IDCTHE NATURE OF IDC

EXPENDITURESEXPENDITURES

WITHOUT A SALVAGE VALUEWITHOUT A SALVAGE VALUE

FOR DRILLING &FOR DRILLING &

PREPARATION FOR PRODUCTIONPREPARATION FOR PRODUCTION



IDC DEFINEDIDC DEFINED

REG. SEC. 1.612-4REG. SEC. 1.612-4

EXPENDITURES MADE BY ANEXPENDITURES MADE BY AN

OPERATOR OPERATOR FOR WAGES FUELFOR WAGES FUEL

REPAIRS HAULING SUPPLIES ETC.REPAIRS HAULING SUPPLIES ETC.

THAT ARE !1"THAT ARE !1" INCIDENT INCIDENT TO ANDTO AND

NECESSARY NECESSARY FOR THEFOR THE DRILLING DRILLING OFOF

WELLS AND THEWELLS AND THE PREPARATION FORPREPARATION FOR

PRODUCTIONPRODUCTION OF OIL OR GAS AND !2"OF OIL OR GAS AND !2"

DODO NOT NOT HAVE AHAVE A SALVAGE VALUE SALVAGE VALUE ..



DRILLING TODRILLING TO

TOTAL DEPTHTOTAL DEPTH



CEMENTINGCEMENTING

CASINGCASING



F#$%'() &

P*#+,#$'()

* +,#/$',(



COMPLETING THE

WELL



Oil



Drilling MudDrilling Mud Drill StemDrill Stem

Bit CuttingsBit Cuttings D#'00 B'D#'00 B'

DRILLINGDRILLING



H, W*00 A#* C,/30**H, W*00 A#* C,/30**

E5$0$* F,#/$',(

I,0$* * F,#/$',(

S'/0$* W*00

I($00 P#,%',( E7'3/*(



S*0+ S*0+ P,*('$0P,*('$0 R*''5'8R*''5'8

WELL LOGGINGWELL LOGGING



D#'00 S*/D#'00 S*/

P$%*# P$%*#

F,#/$',( T**# F,#/$',( T**#

DRILL STEM TESTDRILL STEM TEST



CEMENTINGCEMENTING

D#'00'() MD#'00'() M

C$'()C$'()

C*/*(C*/*(



OilOil

FlowsFlows

H8#$0'% P#*#*H8#$0'% P#*#*F#$%#* R,%F#$%#* R,%

HYDRAULIC FRACTURINGHYDRAULIC FRACTURING

S$( 0,)*S$( 0,)*

'( +#$%#*'( +#$%#*



WORKOVER COSTSWORKOVER COSTS

REMEDIAL OPERATION TO INCREASEPRODUCTION IN A PRODUCING WELL

GENERALLY9• COSTS FOR IMPROVING MAINTAINING OR

SUSTAINING PRODUCTION FROMCURRENTLY PRODUCTIVE RESERVOIRS :

OPERATING EXPENSE• COSTS TO OBTAIN PRODUCTION FROM NEW

RESERVOIR : IDC



OFFSHORE DRILLING OFFSHORE MOBILE RIGS



OFFSHORE MOBILE RIGSOFFSHORE MOBILE RIGS

ISSUE9 G&G VS. IDC

IF WELL COULD ACTUALLY

PRODUCE OIL IF DESIRED

TREAT AS IDCSTANDARD OIL CO. 6; TC <2=

SUN COMPANY >4 TC 14;1



OFFSHORE DRILLING

PLATFORMS



OFFSHORE DRILLING PLATFORMS

IDC COSTS OF DESIGNING AND

CONSTRUCTING THE PLATFORM TRANSPORTING THE PLATFORM TO

THE SEA

NO DEDUCTION FOR ACTUALMATERIALS USED IN CONSTRUCTION



P#,?0*/ 1P#,?0*/ 1

C0$'+8 * *@3*('#* '( 3#,?0*/1 $9

L*$*,0 %, !%$3'$0 *@3*('#*" I($()'?0* D#'00'() C, !IDC"

L*$* $( *00 *7'3/*( !E7."

L*$* ,3*#$'() %, !LOE"



1. R**$#% ,+ 0*$* 0,%$',( ?8 *()'(**# )*,0,)' *%. 2. A/'('#$'5* %, '( %,((*%',( ' #'00'() %,(#$%. <. S#+$%* %$'().

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3#,3*#8.

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#'00'() #') , $( +#,/ * #'00 '*.

1=. C, ,+ *00 %$'().



16. G#$'() *@''() #,$ '( ,#*# , #$(3,# ,'0 , * #*+'(*#8.

1>. T#*$-,-0'* $( ,*# /$*#'$0 $( 330'* %,(/* '(,3*#$'() * 0*$*. 1;. S$0 $*# '3,$0 *7'3/*( $( *00. 1. C, ,+ *'() * #') ,( #'00 '*. 2. T#$(3,#$',( %, ,+ /,5'() #'). 21. T*%('%$0 *#5'%* ,+ )*,0,)' *()'(**# $( ,*# *()$)*

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,?$'( *$*/*( *%. 24. D#'00'() / +0' $( ,*# 330'* %,(/* '( #'00'()

* *00. 2=. T#$(3,#$',( ,+ #'00 3'3* $( %$'(). 26. C*/*('() ,+ * %$'() !? (, * %$'() '*0+". 2>. R*( ,+ 3*%'$0 *7'3/*( $( $( , ?* * '(



2;. T#$(3,#$',( ,+ ?'() , 3308 8$# ? (, +#,/3308 8$# , *00.

2. C, ,+ 3#,%',( ?'().

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41. C, ,+ $( +0, 0'(* #*$*# *3$#$,# *%. '(%0'() #$(3,#$',(.

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4=. C, ,+ $%'''() +#$%#'() * +,#/$',( $( ,*#%,/30*',( %,.

46. S*'/'% ,# , **#/'(* * '* ,+ * #**#5,'# ,##**#5*.

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$*# +0,,'(). =1. L$8'() 3'3*0'(* '(%0'() '# ,# $( *$*/*(.

=2. S$0$#'* +,# 3$'('() $( %0*$('() ,( * 0*$*. =<. I($00$',( %, ,+ $( $( 3#,%',( *7'3/*(. =4. C,(#%',( %, ,+ #% #($#,( 3$ $( ,5*#+0,

3' $ (* $( ?$*#8. ==. B,,/-,0* %,(#'?',(.

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3#,%',(. 6. R*/$'('() ?$' '( *7'3/*( '% ' #$(+*##* ,

$(,*# 3*#,( (*# $(8 83* ,+ #*5*#',($#8 $)#**/*(.



THE ELECTIONTHE ELECTION

DEDUCT IN 1ST YEAR IDC ISDEDUCT IN 1ST YEAR IDC IS

INCURREDINCURREDNO FORMAL STATEMENTNO FORMAL STATEMENT

REUIREDREUIRED

BUT MAKE ONEBUT MAKE ONE



STATEMENTSTATEMENT

TAXPAYER HEREBY ELECTS TOTAXPAYER HEREBY ELECTS TO

EXPENSE ALL INTANGIBLEEXPENSE ALL INTANGIBLE

DRILLING AND DEVELOPMENTDRILLING AND DEVELOPMENT

COST OF OIL AND GAS WELLSCOST OF OIL AND GAS WELLS

UNDER THE AUTHORITY OF SEC.UNDER THE AUTHORITY OF SEC.26<!%" AND REG. SEC. 1.612-4!$".26<!%" AND REG. SEC. 1.612-4!$".



PARTNERSHIPPARTNERSHIP

PARTNERSHIP MAKES THEPARTNERSHIP MAKES THE

ELECTIONELECTIONNOT THE INDIVIDUAL PARTNERSNOT THE INDIVIDUAL PARTNERS

TO BE SAFE9TO BE SAFE9 ATTACH A STATEMENT TO THE 16=ATTACH A STATEMENT TO THE 16=



SECOND ELECTIONSECOND ELECTION

USED ONLY WHEN TAXPAYERUSED ONLY WHEN TAXPAYER

ELECTED TO CAPITALIE IDCELECTED TO CAPITALIE IDC

ELECTION TO EXPENSE DRYELECTION TO EXPENSE DRY

HOLESHOLES

STATEMENT ON THE RETURNSTATEMENT ON THE RETURN• FIRST YEAR TAXPAYER DRILLS A DRYFIRST YEAR TAXPAYER DRILLS A DRY

HOLEHOLE



IDC - PROBLEM 2K80* OJT#$%8 '(5** 1 '( $( ,'0 $( )$

5*(#* ,( D*%*/?*# 1; 1X6. > ,+ '

#*3#**(* IDC 2= $ +,# *7'3/*( $( = $+,# 0*$*,0 %,. T* *00 $ %,/30** ,( D*%*/?*#2; 1X6 $ $ 3#,%*#. T' $ * +'# '/* K80* $'(5** '( $( ,'0 $( )$ *00. K80* $#* , +'0* ' $@

#*#( +,# 1X6 !$ ;9 3./. A3#'0 1= 1X>" *( '),, +#'*( M$?0* %$00* $( '(5'* '/ , $ 3$#8 $$#* $ 9 3./. K80* ?*'() /,#* ,+ $ 3$#8 $('/$0$( S3 M%'(*8 7'%08 %,/30** F,#/ 4;6;A330'%$',( +,# A,/$'% E@*(',( ,+ T'/* , F'0* U.S.

I('5'$0 I(%,/* T$@ R*#( $( #,33* ' '( * /$'0,( ' $8 , * 3$#8.

W$ ' K80*J $ #*)$#'() ' IDC *0*%',(*( * +'($008 +'0* ' #*#( ,( A) 1= 1X>

IDC PROBLEM <



IDC - PROBLEM <S*$( P$#'% $( '('5'$0 !, $ (*5*# ?**(

'(5,05* '( * ,'0 $( )$ ?'(* ?*+,#*" $%7'#* $(,'0 $( )$ 0*$* +#,/ ' ?#,*# ,( M$#% 2 1X6.

S*$( *%'* , *5*0,3 * 3#,3*#8 0$* '( 1X6 $( $*00 $ 3* '( ,( D*%*/?*# 1; 1X6. B8 * *(,+ * 8*$# S*$( $ %$ ?$' $@3$8*# $ 3*(2; '( #'00'() %,. T* *00 $ %,/30** ?8 /'

$($#8 ,+ 1X>. S*$( 3*( $ ,$0 ,+ 1>; '( #'00'()$( %,/30*',( %, $( 42 '( *7'33'() * *00.B*%$* S*$( $ 5*#8 0'0* $@$?0* '(%,/* '( 1X6 **%'* , *@3*(* * *('#* *00 '( 1X>. T*#*+,#* ,(' 1X6 #*#( S*$( $ #*3,#* (,'() #*)$#'() ','0 $( )$ $%'5''*.

W$ , 8, '( S*$(J $ #*)$#'() * IDC*0*%',( ' $ ' 3,'(



SECTION =!*" ELECTIONSECTION =!*" ELECTION

ONLY IF TAXPAYER HAS ELECTED TOONLY IF TAXPAYER HAS ELECTED TO

EXPENSE IDCEXPENSE IDC

THIS ELECTION IS USED TOTHIS ELECTION IS USED TOCAPITALIE ANY AMOUNT OF IDCCAPITALIE ANY AMOUNT OF IDC

AND AMORTIE OVER = YEARSAND AMORTIE OVER = YEARS

AMOUNT CAPITALIED IS NOT TAXAMOUNT CAPITALIED IS NOT TAXPREFERENCE IDCPREFERENCE IDC

PARTNER MAKES ELECTIONPARTNER MAKES ELECTION



INTEGRATED OILINTEGRATED OIL

COMPANIESCOMPANIES

MUST CAPITALIE < OF THEIRMUST CAPITALIE < OF THEIR

DOMESTIC IDCDOMESTIC IDCAMORTIE THIS OVER 6 MONTHSAMORTIE THIS OVER 6 MONTHS

BEGINNING WITH THE MONTH THATBEGINNING WITH THE MONTH THAT

COSTS ARE INCURRED OR PAIDCOSTS ARE INCURRED OR PAID

E0 ' P '



E0*%'() L$#)* P$#(*#'3E0*%'() L$#)* P$#(*#'31> A% - S'/30'+'%$',(

E0*%'() L$#)* P$#(*#'3 -- 1 D*30*',(

AMT

S*%',( 2 C#*'

IDC

• G*(*#$008 $/* $ ?*+,#* - 3$#(*#'3

0*5*0• D'7$0'+'* P*#,( - #*$'0*# #*+'(*#

– P*#/'* , /$* *'# ,( =!*" *0*%',(



FOREIGN IDCFOREIGN IDC

CAPITALIE ALL PRODUCTIVE IDCCAPITALIE ALL PRODUCTIVE IDC

AMORTIE OVER 1 YEARSAMORTIE OVER 1 YEARS

OROR

RECOVER ADD TO COST BASISRECOVER ADD TO COST BASIS

AND USE COST DEPLETION TOAND USE COST DEPLETION TO



WHEN TO DEDUCT IDCWHEN TO DEDUCT IDC

GENERAL RULESGENERAL RULES

ACCRUAL BASISACCRUAL BASIS

• DEDUCT IN YEAR INCURREDDEDUCT IN YEAR INCURRED

CASH BASISCASH BASIS

• DEDUCT IN YEAR PAID IF COST HAVEDEDUCT IN YEAR PAID IF COST HAVEBEEN INCURREDBEEN INCURRED



PREPAID IDCPREPAID IDC

IMPORTANT FACTORSIMPORTANT FACTORS NOT A MERE DEPOSITNOT A MERE DEPOSIT

NOT RESULT IN A MATERIAL DISTORTION OFNOT RESULT IN A MATERIAL DISTORTION OF

INCOMEINCOME

BONAFIDE BUSINESS PURPOSEBONAFIDE BUSINESS PURPOSE

MUST BE REASONABLE AMOUNTMUST BE REASONABLE AMOUNT

LEGALLY REUIRED TO MAKE THE PREPAYMENTLEGALLY REUIRED TO MAKE THE PREPAYMENT

HELPFUL TO HAVE A DATE WHEN DRILLING IS TOHELPFUL TO HAVE A DATE WHEN DRILLING IS TO

BEGINBEGIN HELPFUL IF ALL WORKING INTEREST OWNERSHELPFUL IF ALL WORKING INTEREST OWNERS

PARTICIPATE IN THE PREPAYMENTPARTICIPATE IN THE PREPAYMENT

HELPFUL IF CONTRACT IDENTIFIES THE WELLS TOHELPFUL IF CONTRACT IDENTIFIES THE WELLS TO

BE DRILLEDBE DRILLED



PREPAID IDC TO A TAX SHELTERPREPAID IDC TO A TAX SHELTER

MAY BE DEDUCTED WHEN9MAY BE DEDUCTED WHEN9

CASH IS PAID & IT ISCASH IS PAID & IT IS NOTNOT RAISED BYRAISED BY

LOANS SECURED BY THE TAX SHELTERSLOANS SECURED BY THE TAX SHELTERS

ASSETS OR LOANS ARRANGED BYASSETS OR LOANS ARRANGED BY

PERSONS INVOLVED WITH THE TAXPERSONS INVOLVED WITH THE TAXSHELTERSHELTER

ANDAND

IF THE WELL IS SPUDDED DURING THEIF THE WELL IS SPUDDED DURING THE

FIRST DAYS OF THE FOLLOWING YEARFIRST DAYS OF THE FOLLOWING YEAR..



TAX SHELTER DEFINEDTAX SHELTER DEFINED

AN ENTERPRISE !,*# $( $ C C,#3."AN ENTERPRISE !,*# $( $ C C,#3."

REUIRED TO BE REGISTERED WITHREUIRED TO BE REGISTERED WITH

STATE OR FEDERAL AGENCIESQSTATE OR FEDERAL AGENCIESQ

A PARTNERSHIP THAT <= OF ITS LOSSESA PARTNERSHIP THAT <= OF ITS LOSSES

ARE ALLOCABLE TO LIMITED INTERESTQ ORARE ALLOCABLE TO LIMITED INTERESTQ OR

AN ENTITY OR PLAN WHOJS PRINCIPALAN ENTITY OR PLAN WHOJS PRINCIPALPURPOSE IS AVOIDANCE OR EVASION OFPURPOSE IS AVOIDANCE OR EVASION OF

TAXESTAXES

IDC PROBLEM 4



IDC - PROBLEM 4

E0'$?* 3$' 4 +,# $ 0'/'* 3$#(*#'3

'(*#* '( $ #'00'() 3#,)#$/ * 3 ?8 B') O* O'0C,/3$(8 '% $0, ?*%$/* )*(*#$0 3$#(*#. I(D*%*/?*# 1X> E0'$?*J 4 '(5*/*( $ *, /$* +,# '++*#*( 83* ,+ 3#*3$8/*(9

1. P#*3$8/*( *#* /$* , '(*3*(*( '#3$#'* (*# +,,$)* $( $8,# #'00'() %,(#$%. T*$/,( 3$' *#* ?$* ,( *'/$* ,+ , /% ',0 %, , #'00 * *00 ,( $ %, 3*# +,, ,# 3*# $8

?$'. T* 3$#(*#'3 $ * #') , %$(%*0 * %,(#$%$ $(8 '/*. I+ ' ' , ' ,0 ?* *('0* , $ #*+( ,+* #*3$8/*( #*%* ?8 $*5*# $/,( *%,(#$%,# $ ?8 *( *$#(* (*# * %,(#$% +,#*#5'%* $%$008 3*#+,#/*.



2. P#*3$8/*( *#* /$* , '(*3*(*( '#3$#'* (*# #(*8 #'00'() %,(#$%. T** %,(#$%*#* +,# $ +0$ +** $( *#* (, #*+($?0*. I+ ,*5*# $*00 $ %$(%*0* * 3#*3$' $/,( $ , ?* $330'*, * #'00'() ,+ $ '++*#*( *00.

IDC - PROBLEM 4 -- %,('(*

<. P#*3$8/*( *#* /$* , '(*3*(*( '#3$#'* ,( *00 *#5'%'() %,(#$%. T* $/,( ,+ *3#*3$8/*( $ ?$* ,( $( *'/$* ,+ * *#5'%* , ?*3#,5'* (*# * %,(#$%. T* %,(#$% %,0 ?*

%$(%*0* $ $(8 '/* '( '% %$* * 3#*3$8/*( $#*+($?0* *@%*3 , * *@*( *$#(* ?8 * %,(#$%,#$ $ '/*.



4. P#*3$8/*( *#* /$* , B') O* (*# $%,(#$% #*7'#'() B') O* , 3*#5'* * #'00'() ,+ **00 3#,5'* +,# '( * #(*8 +,,$)* $( $8,#

%,(#$%. T* 3#*3$8/*( $ ?$* ,( $( *'/$* ,+* ,# , ?* ,(* ?8 B') O*. T** 3#*3$8/*(*#* (, #*+($?0*.

W,# ,( /, ,+ * *00 %$00* +,# (*# *#(*8 +,,$)* $( $8,# %,(#$% $ (,%,//*(%* ('0 * +,00,'() 8*$#. T* IRS '00%,(%** $ $00 3#*3$8/*( '(5,05* '00 7$0'+8 $ IDC.

C$( E0'$?* !, ' ,( * %$ ?$' $ ' *

3$#(*#'3" %$( %0$'/ * *('#* $/,( ,+ *# 4'(5*/*( $ $ *%',( ,( *# 1X> #*#(

IDC PROBLEM =



IDC - PROBLEM =O( D*%*/?*# 1; 1X6 K80* OJT#$%8 %$ ?$'

%$0*($# 8*$# $@3$8*# 3$' 1= , B') O*

P$#(*#'3 !$0, %$ ?$' %$0*($# 8*$# *('8" +,# $ 20'/'* 3$#(*#'3 '(*#*. K80*J 1= $ #$'* $+,00,9.....= $ ' ,( /,(*8......= +#,/ $ 0,$( $##$()* ?8 B') O*J )*(*#$0

3$#(*#......= +,# $ 0,$( +#,/ P*((8 S7$#* B$( !$( (#*0$* '# 3$#8.

T* *00 $ 3* '( ,( M$#% 1 1X>. B') O*3$' * 1= , * #'00'() %,(#$%,# ,( $ #(*8%,(#$% ' $ 5$0' ?'(* 3#3,* ?8 * *( ,+ 1X6.C$( K80* *% $(8 ,# $00 ,+ * 1= 3$8/*( '( 1X>



WHO CAN DEDUCT IDCWHO CAN DEDUCT IDC

ONLY WORKING INTEREST OWNERSONLY WORKING INTEREST OWNERS

DURING THE COMPLETE PAYOUT PERIODDURING THE COMPLETE PAYOUT PERIOD

MUST PAY FOR THE IDCMUST PAY FOR THE IDC

AND ONLY FOR THE COST ATTRIBUTABLEAND ONLY FOR THE COST ATTRIBUTABLE

TO THEIR FRACTIONAL SHARETO THEIR FRACTIONAL SHARE

development of oil & gas properties

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