The Leary Petroleum Company is looking for leases in the Bakken Shale in North Dakota. LPC conducts an aerial reconnaissance survey of 90,000 acres costing $45,000. Based on the information obtained from the aerial studies, LPC identifies 40,000 acres as interesting and pays $2 per acre for seismic shooting rights on that acreage. Seismic studies on the acreage cost $100,000. As result of these preliminary investigations, four non-contiguous areas of interest are identified. "West" contains 6,000 acres; "East" contains 8,000; "South" contains 10,000 acres; "North" contains 6,000 acres.
Additional exploration work was performed on the four areas of interest. The following costs were incurred and the following results were obtained in Year One.
West Area of Interest
G&G costs of $1,000,000 were incurred. LPC leased one property, Property A - obtaining a 100% working interest in 3,000 acres, for $2,000 per net acre.
East Area of Interest
G&G costs of $1,800,000 were incurred. LPC leased two properties.
• LPC leases Property B - obtaining a 50% working interest in 2,000 acres, for $2,000 per net acre.
• LPC leases Property C - obtaining a 100% working interest in 2,000 acres, for $2,000 per net acre.
South Area of Interest
G&G costs of $500,000 were incurred. LPC acquired two properties.
• LPC purchased Property D, a one-eighth overriding royalty interest on 2,000 acres for $1,000,000.
• LPC leased Property E - obtaining a 100% working interest on 1,500 acres, for $2,000 per net acre.
North Area of Interest
LPC incurred G&G costs of $800,000. The G&G revealed little possibility of economic quantities of oil or gas. LPC acquired no properties in the North Area of Interest.
1. LPC is an independent oil and gas company. Determine how the all costs should be treated and compute capitalized costs and deductions by year (if you have sufficient information to determine the deductions).
2. LPC is a "Major Integrated Oil Company." Determine how the all costs should be treated and compute capitalized costs and deductions by year (if you have sufficient information to determine the deductions).
3. The costs are incurred in Australia, not in North Dakota. Determine how the all costs should be treated and compute capitalized costs and deductions by year (if you have sufficient information to determine the deductions).
NOTE: IF IT EVER IS CONSIDERED IN YOUR ANSWERS, DOUBLE WEIGHT NONOPERATING INTERESTS IN ACREAGE CALCULATIONS.