Exploration and drilling expenses with no salvage value (e.g., labor, fuel, drilling fluids), which are typically deductible for tax purposes, often largely in the first year.
Intangible Drilling Costs are the non-recoverable expenses incurred during drilling and preparing a well for production. These include items such as labor, site preparation, survey work, drilling mud and chemicals, and services like cementing and well logging. Since these costs have no salvage value, they can usually be expensed rather than capitalized. In the U.S., IDCs are often 100% deductible against active income in the year incurred, which can amount to a major tax write-off. IDCs typically constitute a large portion of a well’s upfront costs (often over half), making them a key factor in the economics of drilling projects.
IDCs provide one of the key tax benefits of oil and gas investments. By allowing investors to deduct most drilling expenses immediately, they reduce the effective cost of investment and improve after-tax returns.
