Aggie Oil Company incurred $275,000 in drilling costs prior to the time to decide whether to complete the well. Estimated completion costs are $175,000. The expected net cash flows from the sale of the oil and gas from this well are $300,000. Should the well be completed?

Case:

Mr. Hopeful owns the mineral rights in a property in Macon County, Georgia. He leases the property to Wishful Oil Company, reserving a 1/5 royalty. Wishful drills a successful well and begins producing oil. Revenue from the first year of operations totaled $20,000 and costs of development and operation totaled $150,000. How much revenue will each party receive? How much of the costs will each party pay?

Case:

Universal Oil Company owns a working interest in an oil and gas lease. Lacking the funds to develop the lease, Universal assigns the working interest to Droopy Oil Company reserving 1/32 of 6/7 of production. What kind of interest has Droopy acquired? What kind of interest has Universal retained?

Case:

Lotus Oil Company owns the working interest in a tract of land in Texas. Lacking the funds to develop the property, Lotus assigns Jones Oil 30,000 barrels of oil to be paid out of 1/7 of the WI's share of production in exchange for $600,000 in cash. What type of interest has Jones acquired?

 

Case:

Ibis Company enters into a concession agreement with the British Government. Ibis pays the government a $10,000,000 (U.S.) signing bonus and agree to pay the government royalties of 8% of gross production and 5% Severance tax. Ibis bears all of the costs associated with exploration, development, and production. During 2013, Ibis spends $7,000,000 on exploration and drilling costs. Gross revenue was $5,000,000, and production costs were $2,000,000. The income tax laws allow deduction of all production costs, with exploration and drilling costs deductible over a seven – year period. The tax rate is 40%. Show how the gross revenue for 2012 would be shared by the parties.