WHAT IS Commercial Well
A commercial well is any oil or gas drilling site that produces enough oil or gas to be commercially viable. All wells that investors are willing to put money into are considered to be commercial wells. Sites with non-producing wells fall outside this category, as do sites with only one or two wells, unless their production is extremely high on a consistent basis.
BREAKING DOWN Commercial Well
A commercial well is often a popular investment because they are inherently profitable. Limited partnerships typically will syndicate a share of a commercial well. In addition, owners of working interests and those who receive royalties also invest in commercial wells.
Limited partnerships are also commonly known as a direct participation program. They are a tax structure that holds certain types of investments, such as interests in oil and gas projects, land and real estate. Investors in this kind of structure participate directly in the success or failures of the investment. Investors receive a share of the income, gains, losses, deductions and tax credits of the entity, which is structured as a limited partnership or subchapter S corporation, in this case the commercial well. Partnerships have a limited life and limited transferability of share interests.
Terminology for Oil and Gas Investors
When investing in oil and gas, it helps an investor to understand a little of the vocabulary that is used in the oil and gas industries. Along with commercial wells, there are exploratory wells and development wells.
An exploratory well is a deep test hole drilled by oil and gas exploration companies to locate proven reserves of recoverable gas and oil, both onshore and offshore. Areas that might contain oil or gas reserves are first identified using seismic data before exploratory wells are used to gather more detailed geological data on rock and fluid properties, initial reservoir pressure, reservoir productivity, etc. If oil or gas is discovered, a development well will be eventually be drilled to extract the oil. It typically takes several years before an exploratory well can be brought into production.
A development well is a well drilled in a proven producing area. It is drilled to a depth that is likely to be productive, so as to maximize the chances of success. Development wells are drilled with various different objectives, such as flowing production, artificial lift production, injection of water or gas and to monitor the performance of a well. The costs of dry development wells are usually capitalized as an asset on the balance sheet, whereas the costs associated with dry exploratory wells are immediately expensed on the income statement under International Financial Reporting Standards and United States Generally Accepted Accounting Principles.