Depreciation as Applied to Oil Properties

Discussion of the paper of PHILIP W. HENRY, presented at the New York meeting, February, 1915, and printed in Bulletin No. 97, January, 1915, pp. 23 to 30. C. ,E. GRUNSKY, JR., San Francisco, Cal. (communication to the Secret ary*).-The difference of opinion of engineers on the subject of depreciation is justified, to some, extent, by the many viewpoints from which such a subject can be considered when applied to properties of widely differing physical characteristics. Mr. Henry takes up the subject of depreciation as applied alone to oil properties, and in doing so makes a clear distinction between amortization and the repair or renewal requirement. After carefully reading the paper the purpose of its author in suggesting a "depreciation" reserve or fund to keep the property at a constant value does not seem clear. As shown by Mr. Henry, the depreciation element as compared with the operating expense per gallon of oil is very large because of the comparatively short life of the oil properties, and it is also evident that such a "depreciation" fund would in a short time contain a very large amount of money. It seems desirable and permissible in income-tax matters to take into account the depreciation of property and to separate from the income such money as is necessary to amortize the invested capital to an extent warranted by the depreciation. However, it does not seem either necessary or desirable to create a large fund which will in time approximate the entire invested capital and which may he invested by the directors, as Mr. Henry suggests, "in the property itself or in outside securities." This method seems cumberome and liable to offer in the reinvestment of such a fund temptations to a directorate that might show more devotion to its own interests than that of the stockholders. A reserve fund is very frequently desirable in mining and oil operations, but to keep up a fund of this magnitude or to reinvest it in outside securities does not seem desirable from a stockholders' standpoint. The. money withdrawn from the receipts to be placed in the depreciation fund (not including replacements and the drilling of new wells necessary to keep up the productiveness) should he returned to the stockholders of the company, not as dividends, but as an amortization of the invested capital.