Reg. § 1.263A-13 Oil and gas activities.
(a) In general This section provides rules that are to be applied in tandem with through , , and in capitalizing interest with respect to the development (within the meaning of section ) of oil or gas property. For this purpose, oil or gas property consists of each separate operating mineral interest in oil or gas as defined in section , or, if a taxpayer makes an election under section , the aggregate of two or more separate operating mineral interests in oil or gas as described in section (section property). Thus, an oil or gas property is designated property unless the de minimis rule applies. A taxpayer must apply the rules in of this section if the taxpayer cannot establish, at the beginning of the production period of the first well drilled on the property, a definite plan that identifies the number and location of other wells planned with respect to the property. If a taxpayer can establish such a plan at the beginning of the production period of the first well drilled on the property, the taxpayer may either apply the rules of of this section or treat each of the planned wells as a separate unit and partition the leasehold acquisition costs and costs of common features based on the number of planned well units.
(b) Generally applicable rules
(1) Beginning of production period
(i) Onshore activities In the case of onshore oil or gas development activities, the production period for a unit begins on the first date physical site preparation activities (such as building an access road, leveling a site for a drilling rig, or excavating a mud pit) are undertaken with respect to the unit.
(ii) Offshore activities In the case of offshore development activities, the production period for a unit begins on the first date physical site preparation activities, other than activities undertaken with respect to expendable wells, are undertaken with respect to the unit. For purposes of the preceding sentence, the first physical site preparation activity undertaken with respect to a section property is generally the first activity undertaken with respect to the anchoring of a platform (e.g., drilling to drive the piles). For purposes of this section, an expendable well is a well drilled solely to determine the location and delineation of offshore hydrocarbon deposits.
(2) End of production period The production period ends for a productive well unit on the date the well is placed in service and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed. See .
(3) Accumulated production expenditures
(i) Costs included Accumulated production expenditures for a well unit include the following costs (to the extent they are not intangible drilling and development costs allowable as a deduction under section , , or ): the costs of acquiring the section leasehold and the costs of taxes and similar items that are required to be capitalized under section with respect to the section leasehold; the cost of real property associated with developing the section property (e.g., casing); the basis of real property that constitutes a common feature within the meaning of ; and the adjusted basis of property used to produce property (such as a mobile rig, drilling ship, or an offshore drilling platform).
(ii) Improvement unit To the extent section costs are allocated to a well unit, the undepleted portion of those section costs must also be included in the accumulated production expenditures for any improvement unit (within the meaning of ) with respect to that well unit.
(c) Special rules when definite plan not established
(1) In general The special rules of this must be applied by a taxpayer that cannot establish, at the beginning of the production period of the first well drilled on the property, a definite plan that identifies the number and location of the wells planned with respect to the property. A taxpayer than can establish such a plan is permitted, but not required, to apply the rules of this , provided the rules of this are consistently applied for all the taxpayer's oil or gas properties for which a definite plan can be established.
(2) Oil and gas units
(i) First productive well unit Until the first productive well is placed in service and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed, a first productive well unit includes the section property and all real property associated with the development of the section property. Thus, for example, a first productive well unit includes the section property and real property associated with any nonproductive well drilled on the section property on or before the date the first productive well is placed in service and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed. For purposes of this section, a productive well is a well that produces in commercial quantities. See of this section, which provides a special rule whereby the costs of a section property and common feature costs for a section property generally are included only in the accumulated production expenditures for the first productive well unit.
(ii) Subsequent units Generally, real property associated with each productive or nonproductive well with respect to which production activities begin after the date the first productive well is placed in service and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed, constitutes a unit of real property. Additionally, a productive or nonproductive well that is included in a first productive well unit and for which development continues after the date the first productive well is placed in service and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed, generally is treated as a separate unit of property after that date. See, however, of this section, which provides rules for the treatment of costs included in the accumulated production expenditures of a first productive well unit.
(3) Beginning of production period
(i) First productive well unit The beginning of the production period of the first productive well unit is determined as provided in of this section.
(ii) Subsequent wells In applying of this section to subsequent well units (as described in of this section), any activities occurring prior to the date the production period ends for the first productive well unit are not taken into account in determining the beginning of the production period for the subsequent well units.
(4) End of production period The end of the production period for both the first productive well unit and subsequent productive well units is determined as provided in of this section. See . Nonproductive wells included in the first productive well unit need not be plugged and abandoned for the production period to end for a first productive well unit.
(5) Accumulated production expenditures
(i) First productive well unit The accumulated production expenditures for a first productive well unit include all costs incurred with respect to the section property and associated real property at any time through the end of the production period for the first productive well unit. Thus, the costs of acquiring the section property, the costs of taxes and similar items that are required to be capitalized under section with respect to the section property, and the costs of common features, that are incurred at any time through the end of the production period of the first productive well unit (section costs) are included in the accumulated production expenditures for the first productive well unit.
(ii) Subsequent well unit The accumulated production expenditures for a subsequent well do not include any costs included in the accumulated production expenditures for a first productive well unit. In the event that section costs or common feature costs with respect to a section property are incurred subsequent to the end of the production period of the first productive well unit, those common feature costs and undepleted section costs are allocated among the accumulated production expenditures of wells being drilled as of the date such costs are incurred.
(6) Allocation of interest capitalized with respect to first productive well unit Interest attributable to any productive or nonproductive well included in the first productive well unit (within the meaning of of this section) is allocated among and capitalized to the basis of the property associated with the first productive well unit. See .
(7) Example The provisions of this are illustrated by the following example.
Example.
(i) Corporation Z, an oil company, acquired a section property in an onshore tract, Tract B, for development. In 1995, Corporation Z began site preparation activities on Tract B and also commenced drilling Well 1 on Tract B. Corporation Z was unable to establish, as provided in of this section, a definite plan identifying the number and location of other wells planned on Tract B. In 1996, Corporation Z began drilling Well 2. On May 1, 1997, Well 2, a productive well, was placed in service and all production activities reasonably expected to be undertaken with respect to Well 2 were completed. By that date, also, Well 1 was abandoned.
(ii) Well 2 is a first productive well (within the meaning of of this section). Well 1 is a nonproductive well drilled prior to a first productive well. Under of this section, Corporation Z must treat both Well 1 and Well 2 as part of the first productive well unit on the section property. In accordance with and of this section, the production period of the first productive well unit begins on the date physical site preparation activities are undertaken with respect to Well 1 in 1995 and ends on May 1, 1997, the date that Well 2 is placed in service and all production activities reasonably expected to be undertaken are completed. In accordance with of this section, the accumulated production expenditures for the first productive well unit include, among other capitalized costs, the entire section property costs capitalized with respect to Tract B and all common feature costs incurred with respect to the section property through May 1, 1997.
(iii) Any well that Corporation Z begins after May 1, 1997, is a separate unit of property. See of this section. Under of this section, the production period for any such well unit begins on the first day after May 1, 1997, on which Corporation Z undertakes physical site preparation activities with respect to the well unit. Moreover, Corporation Z does not include any of the section property costs in the accumulated production expenditures for any well unit begun after May 1, 1997.
[T.D. 8584, 59 FR 67213, Dec. 29, 1994; 60 FR 16575, Mar. 31, 1995]