How to determine allocation of Unit expenses to individual well Revenue

Accounting and Taxes
1

We own Working Interests in Cedar Lake Unit SE (Cross Timbers Operator). We are billed (JIBS) on a well basis and receive revenue on a Tract basis. Several wells, several tracts. My CPA told me to allocate well expenses to the associated tract revenue. I have been all over the Texas RRC site and can’t figure out the tract for each well.
Division order does not have that information either. I actually have this issue with several units so in place of an answer for a specific well, I would like to know where to find the information. Thank you for any help!

2

Often you can find the tract locations with the plat drawing attached to the drilling permit, but I did see that the drilling permits for the Cedar Lake Unit SE in Dawson County A-253 didn’t seem to be in the RRC data. That information still probably exists somewhere but maybe not online.

3

Most likely the oil and gas is being sold on a unit basis (i.e. all wells together), rather than measured at the individual well level. Some operators will allocate the revenues based on the acreage in the various tracts which make up the unit. For this method, if a tract is 10% of the unit, then 10% of the revenues are allocated to that tract and then each owner (WI or RI) is paid based on his royalty decimal in that tract. So if you own in 3 out of 8 tracts, then you would have 3 different royalty decimals, each applied to the allocated share of the total sales. This is your case. Other operators will allocate revenues based on 100% of the unit acreage and pay on a lower decimal but on 100% of the revenues. It usually does not make any total difference to income. With respect to the costs, most likely the operator is simply allocating 100% of the costs based on your net WI in the well. If one well has a workover, all the WI will pay regardless if they in are that tract or not. For this reason, you might consider simply allocating the expenses based on the the proportionate income from each tract. Alternatively, treat the unit on a consolidated basis and combine the wells into one entry for both income and expenses.

1 Like
4

Thank you both. Exactly what I needed to hear. I think I was in the woods and you helped with the bigger view.

5

This topic was automatically closed after 90 days. New replies are no longer allowed.