Further Comments on Considerations in Bank Financing of Producing Oil Properties
- R.G. Humphries (Toronto-Dominion Bank)
- Document ID
- Petroleum Society of Canada
- Journal of Canadian Petroleum Technology
- Publication Date
- June 1962
- Document Type
- Journal Paper
- 90 - 93
- 1962. Petroleum Society of Canada
- 4.6 Natural Gas
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The budget proposals contained in the Minister of Finance budgetspeech of April 10th, 1962, will have rather significant effects on theeconomics of the oil and gas industry in Western Canada, assuming they areimplemented by the next Government after the June, 1962 election. With respectto the acquisition of producing oil properties, Resolution 8, which proposesthat the amount paid for the right, license or privilege to explore for, drillfor, or take petroleum and natural gas in Canada, are to be classed as drillingor exploration expenses for the purpose of computing deductions from income,will be most significant. The effect of this change is demonstrated byreference to the numerical examples which were part of the paper"Considerations In Bank Financing of Producing Oil Properties" presented to the13th Annual Technical Meeting of the Petroleum and Natural Gas Division of theCanadian Institute of Mining & Metallurgy.
The total acquisition cost of a producing property would be apportionedbetween tangibles, which are depreciated as formerly, and intangibles, whichwould be written off against income to the extent that it is available.
In the case of Tables I and II, where the purchaser of the working interesthas a full tax liability with no other write-offs, the net cash income to theworking interest after tax is increased by $216.8 thousand or 16.6% where theproperty is purchased by cash and 27.6% where the property is purchased by cashand loan. The increase in net cash income is equivalent to the tax which wouldbe paid on the intangible portion of the acquisition cost after depletion underthe present tax laws.
Depletion allowance will still be allowed, so that in the case of Table Ithe total of the write-off plus depletion over the life of the property will be$940.6 thousand compared with $507.2 thousand under the present tax laws. InTable II the total write-off plus depletion will be $918.6 thousand compared with $485.2 thousand at present.
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