Depreciation Pool

PetroVR supports the use of several alternative depreciation definitions on the same assets, which are calculated at the same time. This is achieved by using different depreciation pools. Each depreciation pool has its own set of depreciation definitions and is independent from the rest. Pools can have definitions for the same assets or not. Every depreciation pool is identified with a name, and one of them is always selected as the current pool. By default, every project depreciation definition starts with an empty depreciation pool called "Tax". You can add new pools by using the Add New Depreciation Pool link in the General Tab (Depreciation) or by right-clicking on the main node of the Tree.

Default Start Type: The following types are available to define when depreciation should begin at a global level. The global setting can be overwritten for each asset by changing the start type:

• As Built: An asset starts being depreciated during construction.
• In Service: If the asset is a well, depreciation starts when it goes online. For facilities it starts when the whole line of production facilities to which it belongs is ready (both upstream and downstream). For jobs, depreciation starts when the job is completed.
• When Completed: Depreciation starts with the completion of the drilling/completion job (wells), construction job (facilities), or other (jobs in general).

Assets: Add those items for which you want to define depreciation. Options are the following:

• Depreciable assets: All depreciable assets.
• Drilling & Completion: Well-related depreciable assets.
• Facility: Facilities.
• Job: Depreciable jobs (i.e. those that include CapEx).
• System Cost Category: Default categories. A depreciation definition for a system cost category will apply to all assets having that default cost category, unless a user cost category or individual asset depreciation definition is provided for them.
• User Cost Category: User-defined categories. A depreciation definition for a user cost category will apply to all assets having that cost category, unless a specific, individual asset depreciation definition is provided for them.

Method: The following depreciation types are available (cf. Mian 1992 Mian, M.A. Petroleum Engineering. Handbook for the Practicing Engineer. Volume I, Tulsa 1992., 32-8):

• Generalized declining balance: Constant annual percentage reduction on the remaining expense calculated thus: % Reduction = Factor*(Cost Price - Salvage Value)/Asset Life.
• Double declining balance: Constant annual percentage reduction on the remaining expense calculated thus: % Reduction = 2*(Cost Price - Salvage Value)/Asset Life.
• Simple declining balance: Constant annual percentage reduction on the remaining expense calculated thus: % Reduction = (Cost Price - Salvage Value)/Asset Life.
• Expensed: This is the simplest method: the asset is depreciated as CapEx is incurred and is complete when the CapEx is finished, taking Asset Life out of the calculation (see CapEx Proration).
• MACRS: Modified Accelerated Cost Recovery System. See MACRS Depreciation Method.
• Straight line: Constant annual reduction on the total expense calculated thus: Reduction = (Cost Price - Salvage Value)/Asset Life.
• Straight line partial year: Similar to Straight line, adding an adjustment to take into account the actual start date by including the month depreciation of the asset starts. The depreciation is calculated over the exact number of years of the Asset Life and so may span for one more fiscal year. The first year is calculated as (Month / 12) * ((Cost Price - Salvage Value ) / Asset Life) and the lat year as ((12 - M) / 12) * ((Cost Price - Salvage Value ) / Asset Life).
• Sum years digit: Constant annual reduction calculated as Reduction(year x) = (Cost Price - Salvage Value)*(Final Year Digit - Year x Digit + 1)/Sum of Years' Digits. Example: for an asset with a life of nine years, the Sum years digit would correspond to the sum from 1 to 9, this is, (9-1) * 9 / 2. Therefore, by the third year of that asset's life, its remaining life would be 9 - 3 + 1.
• Percentage: The asset will be depreciated at a given annual percentage value on the remaining expense; the Asset Life is not taken into account.
• Unit of Production: This method is available only for well and facility depreciation. This is similar to Sum years digit, but in this case the Asset Life is calculated in units of production rather than years. For wells: Annual depreciation = current produced BOE/Life of the well. For production facilities: Annual depreciation = current produced BOE/Life of the facility. (BOE is not applied to injection facilities.) The Life input represents the well ultimate recovery / facility ultimate production, and is (gas production in m3/ BOE conversion factor) + oil production in m3. The default conversion factor is 5.8 Mscf = 1 stb BOE, and can be modified from the Preferences Tab.

The following Parameters are required:

• Start: Specific start type for the tangible part of this asset, overriding the Default Start Type above.
• Life: Expected life of the asset. The default is "10" and the unit is usually "years". For the MACRS method, it refers to the MACRS class, slightly different from the expected life in years, whereas for the Unit of Production method it is measured in production units and defined as a variable. Not available for % and "expensed" type depreciations.
• Salvage: Minimum or residual value which cannot be depreciated and is never deducted as expense. The salvage value is subtracted from the asset CapEx before the CapEx depreciation schedule is calculated. There is no "automatic" recovery of the salvage value. It can be calculated as the difference between total cumulative CapEx and total cumulative depreciation. Note that a salvage value higher than the CapEx would produce negative depreciation values.
• Tangible: Depreciable assets can be tangible (e.g. a facility) or intangible (e.g. exploration rights or purchase options), or can represent a combination of tangible and intangible assets (e.g. a job that comprises both infrastructure and knowledge production). Use this option to define what percentage of the asset should be regarded as tangible (the default is 100%. i.e. the asset is regarded as completely tangible by default).
• Int. Start: Start type for the intangible part of the asset. Visible only if Tangible above is less than 100%.
• Days offset: The number of days tangible depreciation start should be deferred.
• Percentage: Annual depreciation percentage (only for the Percentage depreciation type).
• IDC: (Intangible Drilling Cost) Only for the MACRS depreciation type. This is an alternative accepted by the IRS in the Tax Reform Act of 1986. When enabled, 70% of intangible cost is allocated to the period of the expense, and the remaining 30% is depreciated along 6 years, with 10% for the first and last periods and 20% for each intermediate period.