Example of Cost Depletion Purchase price of producing well $20.000 Total Reservce Beg of Year 1 (in Bbl) 100.000 Production (in Bbl) 35.000 $15.000 Production revenue Total reserve at end of year 1 (in Bbl) 65.000 Cost depletion rate (production/Beg Reserve) 0,3500 35000/100000 Cost depletion $7.000 Percentage of Depletion 2.250,00 15% revenu reduction Allowable depletion is greater of Cost or Percentage of depletion 7000 1st year
Our partner/operator has made this model - cost depletion example:
Cost Depletion Example there is either cost of purchase depletion or 15% depletion of revenue allowance (not both as I previously thought) in that year whichever is greater. It looks like with a basis of $20000 vs reserves, I estimate the write off to be 25-35% based on production vs remaining reserves. The greater the production the more percentage write-off there is.
Plus expenses are 100% write off. So that may up the total write-off to be a total +/- 45-50% of the original investment. Example 25-35% Purchase Cost Depletion write-off plus another amount (5-15%) from the 100% expense write-off would be +/- 50% of the total purchase price in 2023.
Or use this model