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Abandoned Wells

Eventually all wells will decline to the point where the revenue is less than the operating expense. Financiers have a choice between keeping these wells suspended (incurring a reduced operating expense) or fully abandoning the well. If the well is abandoned, it can no longer be reactivated.

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Each province has its own abandonment laws which incur different expenses. Three jurisdictions have low abandonment costs ($50,000): East Texas, Bolivar, and Daqing. Three jurisdictions have high abandonment costs ($500,000): Pembina, Ghawar, and Statfjord. The other three juridictions have moderate abandonment expenses ($200,000). Properly incorporating abandonments, essentially an expense far into the future, into the spreadsheets will be an interesting challenge for financiers.

When a financier abandons a well, the financier incurs the cost of the abandonment. Either cash for the abandonment cost is automatically removed from the cash account or the bank loan is increased by the abandonment cost.

When the actual abandonment cost has been incurred, it is not regarded as a deduction from corporate taxes. This is because the abandonment cost has been slowly accrued—and applied against taxes—as the well was produced.

If a well is abandoned before its estimated well life, its unamortized value and unrealized abandonment expense will be deemed as a loss.

The option to “suspend a well indefinitely” is allowed in OilFinancier. The financier should compare the operating cost of keeping a well suspended against the opportunity loss for enacting the abandonment.

© 2014 Dave Volek. All Rights Reserved.