Drilling down: SR&ED opportunities for E&P companies beyond capital - TSGI Corp. - Canadian Energy News, Top Headlines, Commentaries, Features & Events

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SR&ED: Benefits beyond capital

In our first White Paper, we established that E&P companies can take advantage of SR&ED, but what is the size of the prize if such a company is eligible? If capital costs are disallowed, why is the program a major consideration for producing companies of all sizes?

The potential benefit

The SR&ED program rewards companies for taking financial risk in order to address a limitation in technology. Financial benefit is returned to the company as a percentage of eligible costs relating to a SR&ED project (in Alberta, 23.5-41.5% depending on corporate/governance structure and taxable capital/income). Eligible cost categories include wages, contractor costs, materials, and overhead. Although capital costs are disallowed, other cost categories can support a substantial claim.

Drilling and completions

The largest expenses within the development budgets for E&P companies are typically drilling and completions costs. The good news is that intangible costs such as D&C can be included as eligible SR&ED expenses if they meet specific criteria.

D&C costs are eligible where the activity is undertaken to answer a specific technological question. While planning, the company must identify upfront why this well is different from status quo, and what, from a scientific standpoint, is unknown and must be tested. In other words, if the intention of the well design, drilling technique, and/or completion design is intentionally investigating a proposed solution or attempting to gain new technical or scientific knowledge, the costs associated can be considered for SR&ED.

While the scope of some SR&ED projects do not merit the inclusion of all drilling or completion cost for a well, in scenarios where the well is part of a larger investigation and is drilled entirely for the purposes of answering a specific technological question it is possible to claim all of the associated D&C costs.

E&P PRODUCER EXAMPLE

ProducerCo experiments with multiple frac designs and is uncertain how the targeted geological setting will respond to stimulation.

The company has limited experience with the associated physical parameters. The trial is performed in two vertical wells, whereas the ultimate goal will be to apply the technology in horizontal wells. The pilot isolates the effect of the frac treatment such that the company gains an understanding of the stimulation’s effect on frac geometry and stimulated reservoir volume.

Eligible SR&ED expenditures
$4M

Eligible SR&ED expenditures include the drilling and completion costs for the two vertical wells, incremental operator time collecting non-routine data and wages for technical staff to analyze the results ($4M total).

ProducerCo’s Return
$940K (23.5% of expenditures)

ProducerCo receives a return of $940K in Investment Tax Credits (ITCs). A portion is returned as Federal “non-refundable” ITCs ($540K), while $400K is returned as Provincial “refundable” ITCs (i.e. cash).

Takeaways

While capital costs are not eligible under the SR&ED program, producer companies can attract a substantial return on their development plans – without a budgetary expansion for R&D. Most E&P companies evolve over time by investigating how to best exploit their assets year over year. With the correct approach, these organizations can recapture a portion of their budgets and enhance their competitive edge.

To explore the size of the opportunity for your company please contact us for a free assessment.

Michael Bosdet, BSc, PhD
President
TSGI Corporation