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Private Transactions

Oil wells and oil fields are constantly being bought and sold in the real world. This also happens in OilFinancier—and the deal is good for both the buyer and seller. So there is a provision for sale and purchase of second-hand oil wells.

When a financier wants to sell a well, he can put it up for a private auction by using the “Sell Well” feature. The program will ask for a reserve bid (the minimum value for this well). Any financier bidding on this well should bid an equal or higher value.

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The reserve bid can be a negative number, i.e. the “seller” gives the “buyer” some money to take the well off the seller's books. Old wells with a fully accrued $500,000 abandonment liability will likely be sold for a negative value.

When the well is put up for auction, the seller can leave the well flowing up to the auction date (and earn money from the well during this auction process) or suspend the well (to make it more attractive to the potential buyers).

When a well is sold, the following accounting changes shall occur:

  1. The well title shall transfer from the seller to the buyer. The seller will still see some data for previous OF Days about the well, but there will be no production reported for current and future OF Days. The buyer will start seeing the newly acquired data from his well.
  2. The well's market value and its accumulated amortization shall be moved from seller to buyer.
  3. The accumulated abandonment liability will be moved from seller to buyer. The buyer becomes liable for the entire liability even though he may only operate the well for a short time.
  4. The seller shall record a gain/loss with the following formula: G/L = Transaction amount + Accumulated Abandonment - Book Value.
  5. The buyer shall record a gain/loss with the following formula: G/L = Book Value - Transaction Amount - Accumulated Abandonment.
  6. If the buyer or seller receives an accounting loss, it shall be put into the loss schedule for that province.
  7. If the buyer or seller receives an accounting gain, it shall be put in the province's Production Schedule and appropriate taxes will be immediately paid on that gain.
  8. The seller's CCA shall be reduced by the transaction amount, and the buyer's CCA shall be increased by the transaction amount.
  9. If the successful bid is negative, the CCA transfer shall be zero.

To show how this private transaction will be recorded, let's assume Financier Fred has a lone well in Daqing that is losing its profitability. He is looking at abandoning it soon, thus incurring a $50,000 cash outflow to abandon it properly. But if he can sell the well, he won’t have to pay that cost.

A likely customer would be Financier Bob who has several wells in Daqing. By buying this well, Financier Bob can reduce his operating costs (on a per well basis), prolong this new well's profitable life, and prolong the life of his other Daqing wells.

Fred puts the well up for auction. The well has a book value of $85,000 and an abandonment liability of $45,000. Fred puts a reserve bid of $1,500.

Bob bids $7,000 and wins the auction. There is no calculation of “market value” for public auctions. Instead, Fred gets an accounting loss of $33,000 ($7,000 + $45,000 - $85,000), which he puts into his Daqing loss schedule. Given that he no longer has any wells in Daqing, he can only use these losses when he acquires another well in Daqing.

On the other hand, Bob gets an accounting gain of $33,000 ($85,000 - $7,000 - $45,000). Bob would have to pay Daqing taxes based on an extra $33,000 for that OF day.

Fred's CCA for Daqing would be reduced by $7,000. Bob's CCA would be increased by $7,000.

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© 2014 Dave Volek. All Rights Reserved.