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WorksheetsChapter 6 - Drilling & Development Costs - SE
Total questions: 75
Worksheet time: 38mins
For income tax purposes, drilling and development costs are classified as:
Exploration costs and development costs
Intangible drilling costs (IDC) and tangible equipment costs
Capital costs and operating costs
Direct costs and indirect costs
Intangible Drilling Costs (IDC) refer to:
Costs that have significant salvage value
Costs incurred in relation to drilling a well that does not have salvage value
Only the costs of drilling equipment
Costs incurred after production begins
Which of the following is included in Tangible Equipment Costs?
Drilling mud and chemicals
Wages and fuel during drilling
Production flow valves and storage tanks
Well testing and core analysis
In the oil and gas industry, a "Christmas Tree" refers to:
A drilling rig configuration
The set of valves, fittings, and equipment installed on a wellhead to control flow
A type of geological formation
A seasonal bonus structure
IDC includes costs for access roads to drill sites:
Only if the road is temporary
Only if the road is permanent
Both construction and removal costs, even if the well produces before road removal
Only if the well is unsuccessful
Which of the following costs occur "up to and including the Christmas Tree"?
Flow lines installation
Storage tanks purchase
Perforating and cementing
Gathering equipment installation
Costs incurred after the Christmas Tree following completion include:
Installing production tubing
Removal of drilling rig and land restoration
Cementing and casing
Well logging and testing
If a company purchases casing for $400,000 and incurs installation costs of $100,000, the IDC amount is:
$500,000
$400,000
$100,000
$0
Flow lines and storage tanks are classified as:
IDC only
Equipment costs only
Both IDC and equipment costs
Neither IDC nor equipment costs
A permanent access road built to a producing well is classified as:
IDC
Equipment cost
G&G expense
Production expense
According to FASB, how many types of wells are defined?
Two
Three
Four
Five
An exploratory well is defined as:
A well drilled within the proved area of a reservoir
A well drilled to find a new field or new reservoir
A well drilled for water injection
A well drilled to support
A development well is:
Any well that finds new reserves
A well drilled within the proved area to a known productive horizon
A well drilled for observation purposes
A well drilled outside proved areas
Which of the following is a service well purpose?
Discovering new fields
Testing stratigraphic conditions
Gas injection or water injection
Initial field
The key to classifying a well as exploratory versus development is:
The depth of the well
Whether the well is being drilled in a proved area
The cost of drilling
The type of equipment
A drilling unit is defined as:
The crew operating the drilling rig
The area that can be drained by a single well
A measurement of drilling speed
The equipment used in drilling
The SEC replaced the term "Drilling Unit" with:
Development Spacing Area
Production Unit
Reservoir Block
Drilling Section
Infill wells are:
Always classified as exploratory wells
Wells drilled outside the original development area
Classified as development wells because they are drilled in a proved area
Never used to accelerate recovery
An offset location is:
A drilling unit adjacent to a productive area
A well drilled at an angle
A location outside the lease boundary
An abandoned well location
Under successful efforts accounting, G&G costs are:
Always capitalized
Expensed as incurred
Capitalized only if reserves are found
Deferred indefinitely
When an exploratory well is being drilled, costs are initially classified as:
Wells and Equipment
Wells-in-Progress
Dry-hole Expense
If an exploratory well is determined to be dry, the costs are:
Capitalized as wells and equipment
Charged to dry-hole expense
Deferred for future periods
Allocated to other wells
Seismic costs incurred to select a specific drill site are:
Expensed as G&G costs
Considered part of the cost of drilling the well
Capitalized separately from the well
Charged to lease acquisition costs
When clearing and leveling a drilling site, the costs are recorded as:
Land improvements
Wells-in-Progress—IDC
Site preparation expense
Unproved property
Costs for drilling contractor charges are classified as:
Wells-in-Progress—L&WE only
Wells-in-Progress—IDC (except for equipment furnished by contractor)
Operating expense
G&G expense
Well testing such as well logs and drill stem tests are classified as:
IDC
Equipment costs
Operating expenses
G&G expenses
When production tubing is purchased for $80,000 and installation costs are $10,000:
Total $90,000 is IDC
Total $90,000 is equipment
$80,000 is equipment, $10,000 is IDC
$80,000 is IDC, $10,000 is equipment
When a successful exploratory well is completed, costs are transferred from Wells-in-Progress to:
Proved Property
Wells and Equipment
Production Expense
Unproved Property
When proved reserves are booked on an exploratory well, the lease cost is reclassified from:
Proved Property to Unproved Property
Unproved Property to Proved Property
Wells-in-Progress to Wells and Equipment
No reclassification is needed
Capitalized costs of drilling an exploratory well may continue to be capitalized if:
The company wants to defer expenses
The well has found enough reserves to justify completion AND sufficient progress is being made
Only if the well is producing
For an unlimited time period
If an exploratory well does not meet suspended well criteria, it is:
Kept as wells-in-progress indefinitely
Deemed impaired and charged to dry-hole expense
Transferred to development wells
Reclassified as unproved property
Which is NOT a factor indicating "sufficient progress" for suspended wells?
Commitment of appropriately skilled project personnel
Costs being incurred to assess reserves
Waiting for oil prices to increase
Active negotiations for sales contracts
Long delays in assessment or development plans lead to:
Automatic capitalization
Concerns regarding progress in capitalizing costs
Immediate production
Transfer to proved reserves
For a suspended well, existence of firm plans and established timetables indicates:
The well should be expensed
Sufficient progress is being made
The well is dry
Production has commenced
According to ASC 932-360-25-14, development costs shall be:
Expensed as incurred
Capitalized as part of wells and related equipment
Deferred until production begins
Allocated to exploration expense
All costs incurred to drill and equip development wells are:
Capitalized whether successful or unsuccessful
Expensed if unsuccessful
Capitalized only if successful
Treated as operating expenses
When development wells are drilled in a proved area, reclassification from unproved to proved property:
Must be done when the well is completed
Is not necessary because it was done when proved reserves were first booked
Is optional
Occurs only if the well is successful
Service wells include wells drilled for:
Exploring new fields
Water injection, gas injection, and observation
Initial field development
Stratigraphic testing
In-situ combustion refers to:
Burning gas at the surface
Heating oil shale underground so liquid can be pumped
A drilling technique
A type of well completion
Flow lines installation costs are recorded as:
IDC
Wells-in-Progress—L&WE
Operating expense
G&G expense
Upon completion of flow lines installation, costs are transferred to:
Proved Property
Wells and Equipment—L&WE
Production facilities
Operating expense
Development costs in the amortization base are amortized based on:
Proved reserves
Proved developed reserves
Undeveloped reserves only
Time basis
Depreciation on support equipment used in drilling should be:
Expensed in the period incurred
Allocated to the wells being drilled
Capitalized separately from wells
Ignored for accounting purposes
If an automobile used by a drilling foreman supports multiple wells, depreciation is:
Expensed entirely in the current period
Allocated between all wells being drilled
Capitalized to one well only
Not recorded until drilling is complete
Operating costs related to support equipment used in exploration activities should be classified as:
Administrative expense
Exploration cost
Development cost
Production cost
Seismic costs are generally assumed to be:
Drilling costs
G&G related and expensed
Equipment costs
Always capitalized
When seismic is used to identify specific drilling sites for exploratory wells, the costs are:
Always expensed
Classified as either wells and equipment or dry-hole expense based on reserve discovery
Capitalized separately
Allocated to all wells in the field
If seismic costs are incurred for a development well, they would ultimately be recorded as:
G&G expense
Wells and equipment
Dry-hole expense
Operating expense
Workover operations involve:
Drilling a new well
Reentering a well to restore or stimulate production
Abandoning a well
Workover costs are:
Capitalized as wells and equipment
Expensed as production expense
Treated as development costs
Deferred until production
A replacement well is:
Classified as an exploratory well
Classified as a development well and costs are capitalized
Expensed immediately
Not subject to depreciation
When a replacement well is drilled, the cost of the original well is:
Written off as a loss
Charged to the field accumulated depreciation account with no gain or loss
Transferred to the new well
Expensed as production cost
Recompletion operations involve:
Drilling a new well
Reentering an existing well to move from one producing zone to another
Abandoning a well permanently
Initial well completion
When reentering a well to access PDNP (proved developed nonproducing) reserves, costs are:
Expensed as production costs
Treated as drilling costs and capitalized
Deferred indefinitely
Allocated to operating expense
If reentering an existing well to discover new proved reserves due to new information, costs are accounted for as:
Production expenses
Development drilling costs
Exploratory drilling costs
Workover expenses
Fishing operations refer to:
Drilling for reserves
Attempting to recover lost equipment in the hole
A completion technique
Testing well productivity
Costs for damaged or lost equipment in an exploratory well are:
Always expensed immediately
Initially capitalized, then either kept as Wells & Equipment or expensed as dry-hole costs
Allocated to other wells
Never capitalized
If equipment is lost in a development well, the associated costs are:
Expensed immediately
Initially capitalized and remain capitalized regardless of outcome
Allocated to exploratory wells
Written off to retained earnings
Sidetracking involves:
Drilling a horizontal well
Plugging the lower portion, backing up, and drilling at an angle
Abandoning the well
Completing at multiple zones
When an exploratory well is plugged and sidetracked due to drilling challenges, some companies:
Capitalize all costs
Expense the costs of the abandoned section
Defer the decision
Allocate costs to other wells
The argument for expensing the abandoned portion of a sidetracked exploratory well is that:
It reduces current year income
The abandoned portion did not contribute to the completed well's value
It is required by regulation
It simplifies accounting
Some companies capitalize the entire cost of drilling a sidetracked well because:
It increases asset values
The entire drilling effort was necessary to find new proved reserves
It is always required
It defers expenses
If an exploratory well reaches target depth unsuccessfully but is completed at a shallower successful depth:
All costs are capitalized
All costs are expensed
Many argue incremental costs beyond the successful depth should be expensed
No distinction is made
When drilling beyond a successful target depth to a dry horizon, the incremental costs can be argued to be:
Fully capitalized
Expensed as dry-hole costs
Deferred indefinitely
Allocated to future wells
When a lease is acquired for exploratory purposes, it is initially classified as:
Proved Property
Unproved Property
Wells-in-Progress
Development Property
Drilling mud, chemicals, and cement are classified as:
Equipment costs
IDC
Operating expenses
G&G costs
Perforating and acidizing services are classified as:
Equipment costs
Production expenses
IDC
Operating costs
When plugging and abandoning a dry exploratory well, the costs are:
Capitalized as wells and equipment
Added to dry-hole expense
Allocated to other wells
Deferred
The lease cost remains in Unproved Property when:
A well is drilled
Only the well is abandoned, not the lease
The well is successful
Never, it always transfers
Amortization of development costs is based on:
Total proved reserves
Proved developed reserves
Time
Production revenue
Costs to be excluded from the DD&A calculation include:
All development costs
Proved developed reserves produced only after significant future development costs
Deferred costs
Operating expenses
What is the distinction between IDC and Equipment costs?
IDC costs are capitalized, Equipment costs are expensed
IDC costs are expensed, Equipment costs are capitalized
Both IDC and Equipment costs are capitalized
Both IDC and Equipment costs are expensed
What is the purpose of the Christmas Tree in well operations?
It is used for drilling
It acts as a dividing point
It is a type of well
It is used for exploration
Which type of well costs are always capitalized?
Exploratory well costs
Development well costs
Replacement well costs
Workover well costs
What should be understood when comparing workover, recompletion, and replacement wells?
They all have the same cost implications
They are all types of exploratory wells
They have different operational purposes
They are all capitalized costs
