a. c.
solution it devises to see if (i) lease/unit operating expenses were exceeded by lease/unit revenues prior to the attempted lease/unit oil production reduction and (ii) after lease/unit oil production reduction, whether those reduced lease/unit revenues exceed lease/unit operating expenses. If under (i) or (ii) lease/unit expenses are not exceeded by revenues, (iii) would a reasonably prudent operator continue to operate the lease for the purpose of making a profit in the future and not for speculative purposes (See Part II of the PPQx test below), thereby still perpetuating the pertinent lease/unit by production in paying quantities. Such lessee will have to be able to accurately calculate operating and marketing expenses as well as pick a reasonable period of time over which to make its PPQx analysis.
Overhead charges actually traceable to lease/unit producing and marketing activities ( Fick v. Wilson, 349 S.W.2d. 622 (Tex.App. – 1961); Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961))
a. d.
Lease/unit treating and transportation costs ( Fick v. Wilson, 349 S.W.2d. 622 (Tex.App. – 1961))
a. e.
Lease/unit charges and labor repairs (except for workover costs) ( Fick v. Wilson, 349 S.W.2d. 622 (Tex.App. – 1961); Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961)) Depreciation on salvageable production equipment ( M. K. Bales v. Delhi-Taylor Oil corp., 362 S.W.2d 388 (Tex.App. – 1962, ref ’d n.r.e.); Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961))
Items To/Not to Include in Operating and
Marketing Expenses – General Principles
1. 1.
Items Excluded As Expense Items:
a. f.
a. a.
Original costs of drilling, completing and equipping an oil well ( Garcia v. King , 164 S.W. 2d. 509 (Tex. 1942); Clifton v. Koon tz, 325 S.W. 2d. 684 (Tex. 1959); Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961)) Reworking expenses are not included in the PPQx calculation of expenses ( Pshigoda v. Texaco, Inc. , 703 S.W.2d 416 (Tex.App. — 1986)) Depreciation of the original investment ( Clifton v. Koont z, 325 S.W. 2d. 684 (Tex. 1959))
i. i.
Depreciation is, at best, a difficult issue to address when calculating the costs and expenses of operating a lease/unit well. The following quote appears to accurately define what portion of depreciation on salvageable production equipment may be included in the PPQx expense calculation. “All this points up the one inescapable conclusion that the bookkeeping entry of depreciation is in no sense an “out-of-pocket” lifting expense and it should never be included as an item to be deducted from revenue to determine whether a lease is still producing in paying quantities. There is a possibility, however, that the lessor in a carefully prepared case could establish “actual depreciation” (as distinguished
a. b.
a. c.
a. 2.
Items Included As Expense Items:
a. a.
Royalty, including overriding royalty ( Morgan v. Fox, 536 S.W.2d 644 (Tex.App. — 1976)) Taxes (severance taxes and ad valorem taxes) and overhead expenses ( Fick v. Wilson, 349 S.W.2d. 622 (Tex. App. – 1961); Skelly Oil Co. v. Archer, 356 S.W.2d 774 (Tex. 1961))
a. b.
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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