Definition
Intangible Drilling and Development Costs (IDC) refer to expenditures associated with the drilling and development of oil and gas wells that cannot be recovered once the well is abandoned. These costs include services that cannot be physically counted or measured but are necessary for the complete development and operation of oil and gas wells. IDCs are a significant part of the accounting and taxation landscape in the oil and gas industry.
Examples
-
Labor Costs:
- Example: Payments to workers for the physical labor involved in drilling.
-
Core Analysis:
- Example: Expenses related to evaluating rock samples to assess the potential productivity of a well.
-
Fracturing:
- Example: Costs incurred in hydraulic fracturing (fracking) to enhance the extraction of oil and gas.
-
Drill Stem Testing:
- Example: Costs associated with testing the pressure, volume, and characteristics of the fluids in a well to determine its potential productivity.
-
Engineering Services:
- Example: Payments for planning and designing the drilling process and infrastructure.
-
Fuel Costs:
- Example: The costs of fuel used to power drilling rigs and other machinery.
-
Geologists’ Expenses:
- Example: Fees paid to geologists for surveying and analyzing the site.
-
Abandonment Losses:
- Example: Costs for services related to the abandoning and sealing of non-productive wells.
-
Management Fees:
- Example: Fees paid to managers overseeing drilling operations.
-
Delay Rentals:
- Example: Payments made to landowners to retain the lease rights when drilling has not yet commenced.
Frequently Asked Questions
1. What qualifies as an Intangible Drilling Cost (IDCs)?
Costs associated with activities necessary for drilling and well completion that do not result in a tangible asset are considered IDCs. This includes labor, engineering, surveying, and even certain administrative expenses.
2. Are IDCs tax-deductible?
Yes, under certain tax codes, like those in the United States, IDCs can often be expensed fully in the year they are incurred, offering significant tax advantages to oil and gas companies.
3. How do IDCs compare to Tangible Drilling Costs (TDCs)?
While IDCs are related to services and other non-physical aspects of drilling, Tangible Drilling Costs (TDCs) encompass physical assets like drilling rigs, casing, pipes, and well equipment.
4. Can IDCs be capitalized?
In some cases, companies may choose to capitalize IDCs, spreading the expense over the productive life of the well to match expenses with revenues.
5. Are abandonment costs part of IDCs?
Yes, the costs associated with the abandonment of a well, including all necessary procedures and regulatory compliance, are considered part of IDCs.
- Tangible Drilling Costs (TDCs): Costs related to tangible assets such as equipment and infrastructure used in drilling operations.
- Hydraulic Fracturing (Fracking): A method used to extract oil and gas from rock by injecting high-pressure fluids.
- Well Completion: The process of making a drilled well ready for production.
- Lease Operating Expense (LOE): Ongoing operational costs associated with producing oil and gas from wells.
References
Suggested Books for Further Studies
- Fundamentals of Oil & Gas Accounting by Charlotte J. Wright and Rebecca A. Gallun
- Oil & Gas Production in Nontechnical Language by Martin S. Raymond and William L. Leffler
- International Petroleum Accounting by Charlotte J. Wright and Rebecca A. Gallun
Fundamentals of Intangible Drilling and Development Cost: Accounting Basics Quiz
### Do intangible drilling and development costs apply to the drilling of all types of wells?
- [x] Yes, they apply to both exploratory and developmental wells.
- [ ] No, they only apply to exploratory wells.
- [ ] No, they only apply to developmental wells.
- [ ] No, they apply only to oil wells, not gas wells.
> **Explanation:** Intangible drilling and development costs are applicable to both exploratory and developmental wells in the oil and gas industry.
### Are labor costs involved in drilling considered intangible drilling costs (IDC)?
- [x] Yes, labor costs are included in IDCs.
- [ ] No, they are considered tangible costs.
- [ ] Only if the labor is related to machinery.
- [ ] Only if the labor cost exceeds a certain amount.
> **Explanation:** Labor costs are integral to the drilling process and are classified as intangible drilling costs.
### Can intangible drilling costs (IDCs) be fully expensed in the year they are incurred?
- [x] Yes, under certain regulations, they can be fully expensed.
- [ ] No, they must be capitalized and amortized.
- [ ] Only if they exceed a certain threshold.
- [ ] Only in certain countries outside the U.S.
> **Explanation:** Many tax jurisdictions allow IDCs to be fully expensed in the year they are incurred, providing immediate tax benefits.
### Does the expense for hiring geologists fall under IDCs?
- [x] Yes, geologists’ expenses are considered part of IDCs.
- [ ] No, they are considered part of administrative costs.
- [ ] Only if the geologist is hired for a specific well.
- [ ] Only in certain stages of the drilling process.
> **Explanation:** Geologists' expenses incurred in the surveying and analyzing of drilling sites are classified as IDCs.
### Are abandonment losses considered an IDC?
- [x] Yes, costs related to abandoning wells are part of IDCs.
- [ ] No, they are treated separately in financial accounts.
- [ ] Only if the well was productive at some point.
- [ ] Only in the year the well is closed.
> **Explanation:** Abandonment losses, which involve costs for closing and sealing a well, fall under IDCs.
### Would rentals paid for delay in drilling commencement be classified as IDCs?
- [x] Yes, delay rentals are included in IDCs.
- [ ] No, they are separate financial liabilities.
- [ ] Only if the delay is less than a year.
- [ ] Only if productivity is expected after the delay.
> **Explanation:** Payments made to landowners to retain lease rights when drilling has not yet begun are termed as delay rentals and are part of IDCs.
### Are engineering costs part of tangible or intangible drilling and development costs?
- [x] Intangible drilling and development costs
- [ ] Tangible drilling and development costs
- [ ] Only if they involve physical equipment
- [ ] Neither; they are administrative costs
> **Explanation:** Engineering costs, central to the planning and operational process of drilling, are considered intangible drilling and development costs.
### Do fuel costs for running drilling machinery come under IDCs?
- [x] Yes, fuel costs are included in IDCs.
- [ ] No, they are operational costs.
- [ ] Only if the fuel usage is monitored and documented.
- [ ] Only in certain drilling phases.
> **Explanation:** Fuel costs required to power drilling machinery form a part of the intangible drilling and development costs.
### Can IDCs be converted to tangible costs once drilling is complete?
- [ ] Yes, they can be reclassified.
- [ ] No, IDCs remain intangible.
- [x] No, IDCs are expensed as incurred and cannot be reclassified.
- [ ] Only if equipment is involved.
> **Explanation:** IDCs, once incurred, are reported as expenses and cannot be later converted to tangible costs.
### Are management fees related to overseeing drilling operations part of IDCs?
- [x] Yes, they are part of IDCs.
- [ ] No, they are operational fees.
- [ ] Only if linked to high-level executive oversight.
- [ ] Only when directly tied to logging activities.
> **Explanation:** Management fees associated with overseeing drilling operations are classified as part of intangible drilling and development costs.
Thank you for exploring the intricacies of Intangible Drilling and Development Costs with our comprehensive article and quiz. Continue enhancing your expertise in the field of oil and gas accounting!
