Legal Definitions - intangible drilling cost

Intangible drilling costs refer to expenses that are directly related to the process of drilling and preparing an oil or gas well for production, but which do not result in a physical asset that can be salvaged, sold, or reused once the well is complete. These are essential costs for the drilling operation itself, but they are for items or services that are consumed, integrated into the well, or have no lasting value beyond their immediate use in creating the well.

A key characteristic is that these costs cannot be recovered by selling the associated items later. For tax purposes, businesses can often deduct these costs in the year they are incurred, rather than having to spread them out over many years as they would with permanent equipment or infrastructure.

• Example 1: Labor and Site Preparation

  A company drills a new natural gas well. The wages paid to the drilling crew, engineers, and geologists who work on-site during the drilling phase are considered intangible drilling costs. Similarly, the expenses for clearing and leveling the land to create the drilling pad, and then restoring it after the well is operational, also fall into this category. The labor performed cannot be salvaged or resold, and the site preparation costs are consumed in the process of creating the well, not resulting in a separate, reusable asset.

• Example 2: Consumable Materials

  During the drilling of an oil well, specialized drilling mud, chemicals, and cement are continuously pumped into the wellbore. These materials are crucial for stabilizing the well, controlling pressure, and sealing off different rock formations. Once used, these substances are either consumed, become a permanent part of the well's structure (like the cement lining), or are disposed of. They cannot be salvaged or reused for another well, making their cost an intangible drilling cost.

• Example 3: Temporary Services and Structures

  An exploration company sets up a remote drilling operation that requires temporary facilities for its crew, such as rented portable offices, sleeping quarters, and communication equipment for the duration of the drilling project. The rental fees for these temporary structures and services, which are necessary for the drilling but are removed once the well is completed, are considered intangible drilling costs. The cost is for the temporary use and support of the drilling process itself, not for a permanent asset with salvage value to the well owner.