I am trying to understand SEC filings of various oil royalty trusts. To really understand what is going on with them, I need to know the answer to the question in the title. To expand on it a bit:

An oil well will obviously have high capital costs during drilling and completion, Later, it will continue to be capital costs, but after a point they will become much lower and sporadic, as opposed to the early high level.

My question is, once an oil well has started producing, are the expensive early capital costs done with? Or do they frequently continue?

I am asking as a general matter. I realize there can be exceptions. Those don't presently interest me. I am asking about what usually happens.


Oil and Gas accounting can be quite complex. There are various methods for accounting for capital costs, But in general, you are correct that there are massive initial capital costs

That said, whether a cost is capitalized or expensed has more to do with the nature of the expense rather then the timing. There are costs that can be incurred before production that are still expensed (e.g. site maintenance) and costs that occur after production that are capitalized (e.g. recompletions, addition of telemetry).

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Do significant initial oil well capital costs overlap with early production?

In general, the answer is no. The well is drilled then completed, then production starts.

Please note that these capital costs are not paid by the royalty trusts. They are paid by the working interest ownership partners.

There might be recompletion/workover expenses later. Also, there might be repair expenses on the production equipment. However, those are the obligations working interest owners and not the royalty owners.

In some of the reports that I have read, you will see the a phrase like "XXX has met is drilling obligations to the Trust on this day Y".

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    This is true in general, but for offshore drilling there might very well be large capital expenditure after drilling and completion - infrastructure such as hotel rigs, land electrification (decomissioning of the gas power plant) etc etc etc... and they can be a real kick in the wallet. – Stian Yttervik Oct 21 '19 at 7:28

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