Question:
Unit of account - dry well
An oil and gas company concludes, based on a number of exploration wells, that oil and gas reserves are present. However, it needs to drill a number of delineation wells to determine the amount of reserves present in the field. The first delineation well that is drilled is a dry hole, i.e. no reserves are found.
There are two ways of looking at the cost of drilling the dry hole:
• the dry hole provides important information about the extent of the oil and gas reserves present in the oil field and should therefore be capitalised as part of the oil field; or
• the dry hole will not produce oil in the future and in the absence of future economic benefits the costs should be expensed immediately.