Instruction on Drilling and Brine
1. Introduction
This note provides instructions, taking into account both the pricing system and the particularities of certain sites, with a view to harmonizing accounting methods for costs associated with drilling (brine).
It is worth noting that mining licenses, prospection and extraction relating to minerals, oil, natural gas and non-renewable natural resources are specifically excluded from the scope of the IAS 16.
As IAS 16 excludes non-renewable natural resources (and thus drilling), we apply the general accounting principle of linking expenses with income (matching principle).
2. Constituent elements of cost price
A drilling site is a field within which a succession of holes are made to extract salt in the form of brine. A distinction should be made between:
- items relating to surface preparation and infrastructure and thus to the drilling site as a whole, and
- items relating to each of the holes to be drilled (the equipment is not generally recovered).
Income and expenses relating to drilling can thus be subdivided into two main categories:
2.1. Items attributable to the surface infrastructure of the drilling site
These items are part of the general infrastructure and depreciation or recognition is staggered over time. They include:
- exploration and pre-extraction costs incurred prior to the mining itself (site preparation costs, geological surveys, etc.),
- depreciation of the general infrastructure,
- depreciation of industrial lands (to be depreciated over the operating period). Depreciation ceases if the residual value of the land exceeds the carrying amount. The site must review at least annually whether or not the industrial land’s carrying amount is equal to or less than the residual value. If the review indicates the residual value is less than the carrying amount then depreciation must restart. Please note, that this is applicable to any extractive process that may reduce the residual value of the industrial land.
- establishment of provisions to cover any dismantling or rehabilitation costs, etc.
2.2. Items attributable to a specific drilling operation
These include:
- expenses relating to the mining itself (current operations) which depend on quantities extracted,
- the following expenses and income, entered by type in the appropriate balance sheet accounts as they arise and charged over time to cost prices on the basis of the tonnages extracted (*):
- expenditure on drilling equipment (equipment which is not part of the general infrastructure, such as bores, casing, connections with surface infrastructure, etc.),
- federal and regional subsidies,
- mining licenses,
- any fees or mining duties,
- downpayments on the subsequent sale of cavities,
- proceeds from sales of cavities (minus down payments) where the proceeds are certain,
- establishment of a provision to cover compensation for surface damage resulting, for instance, from subsidence following drilling.
(*) Some one-off expenses, and categories of income, relate to the entire lifetime of the drill. Charging them immediately to the period concerned at cost price would therefore distort cost prices
3. Tangible assets
On the basis of the above distinction, the rules listed under 3.1. and 3.2. below are to be applied.
Should there still be past expenditures recorded in some cases under working capital, they continue to be "depreciated" at the same rate, and should under no circumstances be transferred to fixed assets.
3.1. Budget application
The special budget procedure applies whenever the budget request exceeds 3 MEUR (e.g. drilling campaign = drilling of several cavities).
3.2. Depreciation
The general infrastructure should be recorded under fixed assets and depreciated over time.
Expenditures on drilling equipment relating to the drilling of each hole before extraction commences (bores, casing, connections with the surface infrastructure, etc.) are recorded as fixed assets, but depreciated as a function of the tonnage extracted on the basis of a conservative estimate of the total quantity to be extracted.
3.3. Budget requests
Fixed asset budget requests concern infrastructure and drilling equipment.
4. Pricing
A distinction should be made between the following two cases:
The brine is extracted and purified at the site of consumption
Distinct production costs are computed for raw and purified brine. On multi-division sites, the brine is managed by the preponderant brine consumer 
.
Not to be confused with the preponderant business on the same site.
The brine is extracted at one site and purified and consumed at another
The raw brine is purchased from Gaz de France at a contractual price (case in Tavaux). It is part of the cost price of raw brine together with transportation costs (pipeline for brine) and the cavity credit.
See also 5.2 below describing the case of SGW at Epe. The transfer price is set by the Board of SGW (includes external partners).
5. Specific cases
Some sites have their own particular problems.
5.1. Sale of cavities
In some cases, when the extraction is complete, the resulting cavity can (not always) be sold for gas storage. The proceeds from the sale are offset against the cost of the brine. In recording the proceeds, the degree of certainty attached to the sale must be taken into account.
Sale certain
In Bernburg, when the future sale of the cavities is deemed certain, the proceeds may be anticipated and offset against cost price over time on the basis of the tonnage extracted.
As this is a site where soda ash is the only brine consumer, the proceeds from the sale of the cavities are credited directly to the cost price of soda ash, there being no cost price for brine.
In Tavaux, cavities are dug and operated by Gaz de France. When operations start in a cavity a price set by contract is paid to Solvay. This income is anticipated and credited to the cost price of raw brine.
Sale uncertain (Epe)
In cases where the future sale of cavities is uncertain (e.g. SGW at Epe), in line with the caution principle the proceeds from the sale may not be anticipated. Payment income must be collected or a final takeover agreement must be signed before the amounts receivable can be entered as assets on the balance sheet or the proceeds from the sale credited to the income statement. For pricing purposes average assumptions are taken into consideration (see point 5.2 below).
5.2. SGW at EPE
SGW extracts raw brine and sells it to other sites where it is purified and consumed. It sells to:
- Rheinberg [Solvay Chemicals – division 25 ], which purifies the brine and:
- uses it on the same site and in the same division to produce light soda ash
- resells to the electrolysis on the same site (division 31 of Solvay Chemicals)
- resells to Solvic (Jemeppe)
- Vestolit, a minority partner.
Division 25 (soda ash) has the invested capital
As a minority third party takes a share of the output, a common contractual selling price applies to the raw brine.
- That same unit price applies to SGW sales to Vestolit and Solvay Chemicals (Rheinberg - division 25). This unit re-sale price is set with the assumption that exactly one cavity will be sold every year taking into account the average tonnage extracted per cavity.
- The sale of raw brine by SGW to Solvay Chemical (Rheinberg - division 25) and Vestolit generates losses at the gross margin level for SGW. On average, these losses on the sale are more than offset if one cavity is sold every year.
- However, the sale of the cavities generates an immediate profit (under "R38100 - Other recurring operating income and expenses" under the gross margin) whereas the losses mentioned earlier are taken over the whole year within the gross margin. If more than one cavity (or no cavity) is sold in any particular year, the selling division will record a higher (lower) income that year.
5.3. Spain
In Spain, Solvay benefits from special tax arrangements for mining operations. These offer partial and temporary tax exemption for profits from mining activities in the form of a 10-year tax-deductible reserve (depending on the depletion factor), to cover exploration and pre-extraction costs (geological surveys in particular). In line with the Group's move to separate economic result from book result, this purely fiscal matter should be dealt with locally, and not entered in the reporting system.