What does “investing at the well head” mean?
Investing at the well head means that an investor becomes an actual owner of the fractional working interest that he buys thereby entitling him to all the tax benefits offered by the IRS which include a 100% tax write off on all intangible drilling costs plus a depletion allowance.
What is IDC?
IDC means intangible drilling costs. These costs are related to any services or equipment that have no salvage value. These costs can be written off 100% in the year that your investment was made.
How much of my investment is intangible?
Normally about 75% to 80% of your investment in a drilling project is intangible.
What is a depletion allowance?
A depletion allowance is a percentage of your revenue received from the producing well that the IRS allows you to take as a deduction, thereby reducing your taxable income from the well.
How much of my revenue is considered a depletion allowance?
15% of the earned revenue from the well is considered a depletion allowance and is applied to your revenue recovery. In other words, you pay taxes on only 85 cents of every dollar received, less expenses.
Are there any other tax benefits to investing at the well head?
Yes. The remaining portion of your investment after the intangible drilling cost write off can be amortized over a 5 year period (or 60 months) so that you eventually write the whole investment off.
What is an increased density well?
An increased density well is one drilled on an existing unit that is currently being held by production from the first well drilled. Geologic evidence is presented to the oil and gas governing body proving that an additional well drilled in an existing unit will not harm the original well and will recover additional reserves.
Are drilling oil and gas wells considered a safe investment?
In the strictest form of the word safe, the answer is no. Every investment carries some degree of risk. At Red Rock, we do the best job we can in evaluating a prospect and prior to drilling we feel confident that oil and gas does exist and is likely to be in commercial quantities. This is not an exact science but practiced conservatively, may yield desirable results. Once the drilling begins, there is some risk that something mechanical could go wrong, thereby losing or damaging the well. An investor needs to be able to risk losing his capital without affecting his style of living when considering an oil and gas investment.
* These questions and answers are being provided for informational purposes only. Red Rock Energy Partners does not give tax advice and any investor/potential investor should consult a CPA regarding any and all tax issues regarding oil and gas investment.