DATE April 14, 1988
TO Head Office Audit Applications Division K.R. Warren Director
FROM Resource Industries Section C. Bowen 957-2094
SUBJECT: Classification of Oil and Gas Production Assets
We are writing in reply to your letter of February 16, 1988, wherein you request our comments on a classification list of oil and gas production related assets. Attached is a revised list, incorporating our suggestions, which has been discussed with John Kurrant.
Director Bilingual Services and Resource Industries Division Rulings Directorate
Capital Cost Allowance Classification of Oil and Gas Assets in Canada
A. Natural gas gathering systems where the gas is processed through a natural gas processing plant
Class 10
(1) Equipment and structures, other than a well casing, acquired to be used in a gas field in the production therefrom of natural gas. This includes the wellhead and equipment above it, well tubing, separators, and dehydrators.
(2) A natural gas compressor that is used in conjunction with a gathering system
(3) Piping from the well to the field separators and dehydrators
(4) Pipelines from the field facilities in (3) above to the inlet separator of the gas plant including the cost of the compressors, metering equipment and the equipment shelters
(5) In cases where the gas is produced in conjunction with oil, the gas conservation facilities where no marketable gas is produced, but the gas is shipped to a processing plant for further processing
(6) Installation costs of above equipment, but excluding the cost of a right of way which is an eligible capital expenditure
B. Natural gas gathering systems where the gas is sweet and not processed through a natural gas processing plant
From a practical point of view and especially for large companies that have a large number of varying interests in facilities of this nature, it has been Revenue Canada, Taxation's practice to classify the cost of the assets similarly to A above. This practice is extended to both large and small companies.
However, a taxpayer may classify the assets as follows:
Class 10
(1) Includes item 1 from section A above
(2) Piping to the inlet field separator
Class 29
(1) Field separators and dehydrators
(2) Any other field plant facility
Class 2
(1) Pipeline from facilities described in Class 29 above to the main transmission line
Class 8
(1) Metering facilities and compressors associated with the Class 2 pipeline above
C. Crude oil gathering system
Class 10
(1) Equipment and structures, other than a well casing, acquired to be used in an oil field in the production therefrom of crude oil. This includes well tubing, down-hole retrievable pumps, artificial lift or pump, the wellhead and equipment above it.
(2) Piping to the batteries
(3) Battery equipment
Class 2
(1) Pipeline from the battery to the main sales line
(2) In the case of heavy oil, the condensate pipeline to the field blending facilities
Class 6
(1) Oil storage tanks downstream from the battery
(2) Condensate storage tanks
Class 8
(1) Metering facilities and pumping equipment associated with the Class 2 pipeline above
D. Natural gas processing plant
Class 29
All of the facilities from and including the inlet separator except the following:
Class 8
Assets used in the storing and selling of finished goods including:
(1) Propane and butane storage tanks or vessels
(2) Sales gas compressors
(3) Sales gas metering equipment
(4) By-product loading facilities
(5) Sulphur handling equipment
Class 10
(1) Compressors used for oil field reinjection systems
(2) The pipeline used for reinjection
Class 6
(1) Condensate storage tanks
(2)Fencing
(3)Buildings
Class 3
(1) Building
Class 2
(1) Pipeline (lateral line) from the plant gate to the main transmission sales line
(2) Water supply pipeline from the river or any other source to the plant
Class 17
(1) Roads, or similar surface construction
E. Pipelines other than gathering systems
Class 2
Includes the following pipelines:
(1) Crude oil pipelines from the field battery to the main transmission sales line
(2) Condensate pipelines used to transport condensate to the field to blend with the heavy oil
(3) Main transmission sales lines for all products
(4) Product sales lines from gas plant to loading facilities or transmission line
(5) LPG pipelines from straddle plants to main transmission lines or storage facilities
(6) Ethane pipelines from ethane extraction plants to main transmission lines or storage facilities
Class 8
(1) Compressors used in conjunction with the above Class pipelines
(2) Pumping equipment - same treatment as (1) above
(3) Metering equipment - same treatment as (1) above
(4) Electronic monitoring equipment associated with the pipeline system
Class 17
Roads and parking surfaces at compressor, pumping and metering stations
Class 6
Fencing around compressor, pumping and metering stations
Class 3 or 6
Class 3 or 6 depending on the date of acquisition and the construction of the building
Buildings at the compressor or pumping station sites such as office building, control building, maintenance shop, and supply warehouse
F. Oil or gas injection system
Class 10
Equipment, structures and connecting lines for the purpose of 1) disposing of waste substances produced from a gas or oil well, 2) injecting gas or liquids into a gas or oil formation to facilitate production therefrom or 3) enhancing the recovery from a gas or oil well
This Includes:
(1) Pipeline from gas plant or water wells
(2) Compressors or pumps relating to this system
(3) All wellhead equipment relating to this system
G. Underground Storage Facilities
Where the asset is not considered to be part of gas or oil well equipment, it is classified as follows:
Class 10
Costs incurred in respect of developing underground facilities for the storage of petroleum, natural gas or other related hydrocarbons (such as salt caverns and abandoned gas wells)
Class 2
(1) Pipelines leading to and from the underground storage facilities
Class 8
(1) Injection pumping equipment
(2) Pumps relating to the above pipeline
(3) Metering equipment
(4) Above ground storage tanks or vessels for LPG or ethane. These tanks are generally associated with the transmission of the underground product stored.
Class 6
(1) Dug-outs or ponds used for the storage of injection water
CDE
(1) Payments for the right to use underground storage facilities
H. Roads
CEE or CDE
(1) Temporary access roads to a drilling site or well
Class 17
(1) Costs of upgrading the roads described in (1) above to permanent all-weather status
I. Eligible capital expenditure
(1) Cost of easements and right-of-ways for pipelines and gathering systems
Revenue Canada, Taxation May, 1988