Question

Friesen, Sell and Thompson, a successful junior oil and gas firm in Alberta, have discovered a small but rich bitumen deposit on their property. The deposit is about 100 meters deep so they have to use steam injection to recover the oil. The managers expect to spend $6,000,000 to purchase and install the steam generators and the associated computer controls. Other equipment and infrastructure will cost an additional $1,000,000.

Based on their experience and geological reports, the production levels are forecasted in Table 3 below. At the end of 10 years, the resource will be unproductive and the company will cease operation.

Table 3

Year	Production bbls/yr
1	50,000
2	100,000
3	150,000
4	200,000
5	200,000
6	180,000
7	150,000
8	120,000
9	100,000
10	50,000

a) Calculate the unit depletion rate per barrel.

b) Calculate the depletion allowance for each year over the life of the resource.

Answer 1

Req A:
Cost of Equipment (6000,000+1000,000): $7000,000
Life of Assets: 10 years
Total production:		1300,000 bbls/ year
Depletion cost per unit: Cost -salvage / Total production units = (7000,000 -0 ) 1300,000 = =$ 5.38 per unit
Req B:
Depletion Allowance:
Year	production		Depletion Expense @5.38
1	50000		269230
2	100000		538460
3	150000		807690
4	200000		1076920
5	200000		1076920
6	180000		969228
7	150000		807690
8	120000		646152
9	100000		538460
10	50000		269230