Allocating unit revenue and expenses

Two Questions: First: I’m trying to create a year end depletion statement for a unit where I hold Royalty and Working Interest. For the Unit, the JIBs show expenses on well level and on unit level. Revenue statements show Royalty revenue and Working Interest Revenue on Unit level but no revenue on well level. To determine depletion, should unit revenue and expenses be allocated to well level or can wells be rolled up to unit level ?

Second: How do I tell which wells are in a Unit? I see the names are almost the same - with a numeric identifier at the end - but then I have similar property names with Tract number in the name - can they all be part of same unit or are Tracts handled differently? or perhaps is “Tract” just part of the name?

Thank you! TMW

You need to separate your WI and RI data.

WI income and expenses, including related depletion, are reported on Schedule C as earned income and subject to additional sentence-employment taxes (Medicare and social security taxes) of 15.3%. Royalty income and related expenses are reported on Schedule E and no self-employment tax. Keep in mind that depletion is calculated on the gross income, before expenses.

So you should have 2 spreadsheets, each with columns for gross income, severance tax, other costs to get to net income. WI sheet will have column for LOE (lease operating costs) which can be separated into its components or left as a whole. Some operators pay on unit basis which is lower DOI (decimal) as it is applied to 100% of unit production and revenues. Tract basis is higher DOI because it is only your interest in tract within the unit. However the reported production and revenues are reduced to the tract share, rather than 100%.

Example, assume unit is 500 acres and your tract is 50 acres = 1/10. 100% is 1000 bbl and revenues are $40,000 and unit DOI is 0.020 so your income is $800 and 20 bbl (0.02 X revenues). On tract basis, your DOI is 0.20, but reported gross volumes will be 1/10 at 100 bbl and $4,000. Your net will still be $800 (0.20 X $4000).

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TennisDaze, Yes. Thank you so much for your time and reply. I do track RI and WI separately. In fact I am using Well Profits software by Sherware. And thank you, I see I got tied up in the Royalty snag. A Royalty is a Royalty whether on well or unit. So that is not allocated. Got it. But the WI revenue and expense in the unit…

I do use Gross Income for the Depletion calculation, however as I understand it, (and Please correct me if you think I am wrong) depletion is limited to the LESSER of EITHER

  1. 15% Gross revenue OR
  2. Net Revenue So for WI properties, there are some properties (unfortunately) which right now are not breaking even - whether due to Workovers or other issues. So for these wells - even if I have some gross revenue once I net LOE etc there is not net revenue and thus no depletion is allowed. So in the case of my WI in UNIT - where the UNIT presents Revenue and Expense But WI wells are presenting with expenses only, don’t I need to allocate the unit WI revenues and expenses to the WI wells to determine net revenue on the well basis?
    I am worried that if I do not do this, I will record a higher depletion allowance than is correct.

Pioneer is one operator I’m working with. They show revenue and expense on Unit basis and additional expenses on Well basis. In this case I must allocate both WI revenue and Expense to wells. It would be easier to “roll up” expenses into the unit level - instead of determining proportion allocation from unit to well.

Any thoughts on this? or am I again making it too complicated? Thank you! TWM

A unit is really a single operation as any one well can keep it in effect. So you should be able merge all the related WI revenues and expenses together.