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Simple English definitions for legal terms
cost depletion
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A quick definition of cost depletion:
Cost depletion is a way for oil and gas producers to recover their investment in a producing well. It works by deducting the investment proportionately over the life of the well as oil and gas are produced and sold. This means that the investment is recovered gradually over time, based on the current sales of oil and gas compared to the total anticipated sales from the property. It's like slowly getting your money back as you sell more and more oil and gas from the well.
A more thorough explanation:
Cost depletion is a method used by oil and gas producers to recover their investment in a producing well. It involves deducting the investment proportionately over the producing life of the well. This is different from percentage depletion, which is based on a percentage of the gross income from the sale of oil and gas.
For example, if an oil and gas producer invests $1 million in a well and the well has a producing life of 10 years, the producer can deduct $100,000 per year ($1 million divided by 10 years) from their income as oil and gas are produced and sold.
The formula for cost depletion takes into account the current unit sales of oil and gas and the total anticipated sales from the property. The investment is recovered ratably over the life of the reserves.
Overall, cost depletion allows oil and gas producers to recover their investment in a more accurate and fair way, based on the actual production and sales of oil and gas from the well.