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AAPG Bulletin

Abstract


Volume: 44 (1960)

Issue: 4. (April)

First Page: 409

Last Page: 422

Title: Application of Geology in Computing Depletion of Producing Properties

Author(s): Thomas C. Hiestand (2)

Abstract:

Discussion of depletion depends upon two initial assumptions: (A) Privately owned property (land) is the basic capital asset in economy of the United States, and (B) A property (tract of land) extends geologically from surficially surveyed boundaries to a point at the center of the earth as a prism containing rocks, minerals, and fluids which are natural resources and which are measured in acre-feet.

By definition, the depletion of a property is reduction in sales value equal to value of minerals, rocks, and fluids produced and sold from the premises, daily and annually. Depletion involves producers possessing oil and gas which are produced and sold from a lease property and including Royalty Interest (Lessor) owner, Working Interest and Overriding Royalty Interest (Lessee) owners.

Depletion of a typical lease property is illustrated by taking into account its entire recovery of oil and gas (100,000 barrels of crude sold at stock tanks for $277,000;) and by establishing what the crude is worth on a market to a willing buyer and willing seller at reservoir level the instant crude enters well bore ($92,000). On the producers' books the accountant figures depletion as 33 1/3 per cent of crude price per barrel recorded on sales receipts for the typical lease property per day or per year.

Recoverable oil and gas estimates are fundamental in establishing operators' Assets and Liabilities, and Present Worth. During economic life of lease property, qualitative (geologic) conditions always divide into six critical stages and events in operating; quantitative (engineering) conditions can not be extrapolated from one stage to the other. Properly such estimates are stated, stage by stage, in three amounts: maximum, probable, and minimum. Accordingly these estimates are not wieldy in accounting for depletion of a property when self-assessing tax on oil and gas produced and sold during each taxable year.

When geologic principles and concepts are dovetailed with the economic conditions prevailing, depletion can be computed for all properties, including all minerals, rocks, and fluids produced and sold from the premises. Annual reduction in sales value of property, when self-assessing tax, is expressed commonly as a percentage of the price recorded in sales receipts per property per year. Statutory amendment by Congress in 1926 established temporary percentage provisions for oil and gas inasmuch as figures were arbitrary in compromise between Senate and House. Proper percentage provisions can be established by the geologic-economic method of computing value; therefore, proper depletion should be authorized by Congress and the President to enable the Treasury Department to accept tax on he amounts of oil and gas sales receipts per property which will not be confiscation of private property (capital assets.)

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