Legal Definitions - cost depletion

Cost depletion is a method used by oil and gas producers to recover their investment in a producing well. It involves deducting the investment proportionately over the producing life of the well. This is different from percentage depletion, which is based on a percentage of the gross income from the sale of oil and gas.

For example, if an oil and gas producer invests $1 million in a well and the well has a producing life of 10 years, the producer can deduct $100,000 per year ($1 million divided by 10 years) from their income as oil and gas are produced and sold.

The formula for cost depletion takes into account the current unit sales of oil and gas and the total anticipated sales from the property. The investment is recovered ratably over the life of the reserves.

Overall, cost depletion allows oil and gas producers to recover their investment in a more accurate and fair way, based on the actual production and sales of oil and gas from the well.