Oil and Gas Accounting Essay

If operation is conducted under Lease or concession agreement, it is unlikely that the contract would contain provisions that would permit speak to rec everywherey of these be If the operation is conducted under a psc or risk service agreement, the contractor may be permitted to recover G&G link expenditures incurred after permit attainment and possibly G&G termss incurred before license erudition Support equipment and facilitiesCost of acquiring support equipment and facilities should be capitalized Any tie in depreciation or operating cost become an exploration, phylogenesis or production cost, as appropriate. EntriesDb G&G expense depreciation Cr Accumulated DepreciationDb G&G expense-operating be Cr CashReprocessing SeismicHow to beak for cost of re-evaluation or reprocessing of the data? If the reprocessing relates to the search for crude then it should be accounted for according to SE provisions regarding prospecting and non drill exploration cost. If the consumpt ion is to determine how best to develop the militia in the field, then they should be capitalized as development costs. License acquisition costsCosts of evaluating business environment, signature bonus, negotiating, etc should be capitalized Entry Db Intangible additions-unproved station Cr Cash phylogenesis and production bon lend oneselfsIf the payment is actu tout ensembley a deferred signing bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost. Accrue once the operations argon app atomic number 18ntly proceeding to the development phase. Entries To record signature bonus Db Intangible Assets unproved seat Cr Cash To transfer unproved stead costs to proved due to commercial discovery Db Proved property Cr unproved propertyTo record accrual of production bonus Proved property Cr production bonus payable To record payment of production bonus Db Production bonus payable Cr Cash Internal costs relating to acquisitionC an each(prenominal)ocate capitalized costs to individual licenses acquired, on an acreage fanny or an a potential licenses basis Costs of carrying and retaining unproved propertiesCosts relating to maintaining unproved properties be charged to expense as incurred Ex delay rentals paid on lease mineral properties until specified work is commenced, property tax incomees, accounting costs, legal costs declension of unproved propertyImpairment has occurred if there is near indication that the capitalized cost of an unproved property is greater than the succeeding(a) economic benefits expected to be derived from the property. Under SE, loss should be realized. Negative G&G data and modify holes would typically suggest that part of the propertys historical cost has expired and impairment should be recognized Db Impairment expense Cr eitherowance for impairmentFASB permits impairment of individually insignifi undersidet properties on a group basis. Apply the impairment theatrical role to the total cost of the group of individually insignificant unproved properties. This determines the sought after balance in the allowance for impairment account. Next the difference between the current balance and the desired balance is recognized as impairment expense. Entry Impairment Expense Cr Allowance for impairment, group basis Abandonment of unproved property broad forsaking When an individually significant license area is abandoned, its shed light on capitalized acquisition costs should be charged to surrender and abandonment expense Ex Db Surrender and abandonment expense (equal to acquisition cost) Db Allowance for impairment (balance) Cr unproved property Partial Abandonment or RelinquishmentsIf the partial abandonment reflects a diminishment in the attach tos assessment of the future economic benefit of the property, then the entireproperty should be assessed for additional impairment. Unproved property classificationAn unproved property should be re sepa val uate to a proved property status if and when commercial reserves are discovered on the property. Ex Db Tangible Assets- proved property (acquisition costs) Db Impairment Allowance (balance) Cr In tangible assets- unproved property Sales of unproved propertyIf the property was individually significant, a gain or loss should be recognized on the sale. Ex Db Cash (sale price) Db allowance for impairment (balance) Db/Cr(gain or loss) Cr unproved property If the property was individually insignificant, a gain should be recognized sole(prenominal) if the selling price exceeds the original cost of the property. Loss recognition is not allowed. CHAPTER 5Accounting for Exploratory Drilling and Appraisal CostsUnder SE, general nondrilling exploratory costs are to be charged to expense as incurred exploratory drilling grammatical case costs are initially capitalized. Exploratory Well- puff up drilled to father and produce embrocate or gas in an unproved area to find a new reservoir in a a nother reservoir or to conk a known reservoir. Stratigraphic test salubrious- drilling effort to arrive at information pertaining to a specific geological condition. Exploratory type if drilled in a proved area, development type if drilled in a proved area. Exploration considerably- well drilled to discover whether oil or gas exists in a previously unproved geological structure Appraisal well- well drill to determine the size, characteristics, and commercial potential of a reservoir by barb an exploratory well. Classifying Drilling costsSeparate intangible drilling costs (IDC) from equipment costs. IDC deducted in year incurred for US tax law. Equipment costs may be depreciated over 7-10 years. Besides tax purposes, distinction has no significance Targeted DepthWhen evaluating after drilling if commercial reserves have been discovered, the drilling in progress account balances are transferred to another type ofasset account that will be subject to depreciation The first success ful exploratory wells cost will be reclassified from an unproved to a proved property account If well is unsuccessful, plug and abandon hole and charges these costs to dry hole expense, net any equipment salvaged from well. If the license area is also relinquished, the net carrying value must be written off. Capitalized G&GSE- G&G costs are to be charged to expense as incurred. Current methods may capitalize 3D and 4D seismic methods used to determine drill sites. Time Limit on exploration and evaluation or appraisal costsIn order for cost to be capitalized in SE, there must be identifiable future benefit. IF an exploratory wwell has be oil reserves in an area requiring major capital expenditure to be classified as proved. In this case, the cost of drilling the exploratory well shall continue to be carried as an asset as long as 1. The well has found a sufficient quantity of reserves to justify its completion and 2. Drilling of the additional rise up is under way or planned for th e near future All other wells, sshall not be carried as an asset for more than one year following completion of drilling Post-balance Sheet PeriodGAAP provisions that relate to information some conditions that existed at the balance sheet date or that became known after the end of the period but before the financial statements are issued. If well is refractory dry, capitalized costs are written off to dry hole expense If commercial reserves are found, the capitalized drilling costs are transferred to the wells and equipment accounts All the capitalized costs of an exploratory well are typically reclassified as dry hole expense or as wells and related equipment Cost approval, cipher and monitoringAFE- Authorization for expenditureCHAPTER 6Drilling And Development Costs- US SEDevelopment costs- costs incurred to obtain access to proved reserves and to house facilities for extracting, treating, gathering and storing the oil and gas. More specifically, development costs, including de preciation and applicable operating costs of support equipment and facilities and other costs incurred to Gain access to and prepare well locations for drilling, including surveying, draining, road building, etc Drill and equip developmental wells, including costs of platforms Acquire, construct and install production facilities such as lease flow lines, separators, etc Provide improved recuperation systemsDevelopment well- well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive Service well- completed for the purpose of supporting production in an existent field. Development type stratigraphic well- stratigraphic test well drilled in a proved area Capitalization of Development-Related G&G Exploration CostsRequires capitalization of G&G in development activities. Unless it is performed on a development land area but to an unknown structure- expensed. If 3d seismic is world used to study the reservoir and perhaps where addition development wells should be drilled, theoretically the cost should be capitalized to the field as development cost. OverheadAs a general rule, all G&A is expensed, however where the caller has a defined method for allocation is permitted to capitalize these costs as part of development Capitalization of Depreciation of Equip and FacilitiesDepending on nature, costs can be expensed or capitalizedCapitalization of Financing CostsCapitalization of Interest requires that a portion of interest costs incurred during the construction phase of assets should be capitalized as a part of the cost of the self-constructed asset. Interest capitalization only applies to qualifying assets 1. Assets that are constructed or otherwise produced for an enterprises own use 2. Assets intend for sale or lease that are constructed or otherwise produced as discrete projects (ships or real estate developments) Amount to interest to capitalize- the portion ofinterest costs incurred during the period when the asset is being constructed that could have been avoided if the spending on the asset had not been made. Capitalization period shall begin when 3 conditions are met Expenditures for asset have been madeActivities that are requirement to get the asset ready for its intended use are in progress Interest cost is being incurredOnce production begins- depreciate capitalized costsSole Risk or Carried InterestsIf an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a depart of expenditures for the asset is a part of the historical cost of acquiring the asset. CHAPTER 9Production CostsCosts of labor to operate the wells and related equipment and facilities Repairs and maintenanceMaterials, supplies, and fuel consumed and services utilized in operating the wells and related equipment and facilities Property taxes and insurance applicable to proved proper ties and wells and related equipment and facilities Severance taxesDepreciation, depletion and amortizationAccounting for Production CostsAll costs relating to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, shall be charged to expense as incurred. An expenditure that enhances original performance of the well should be capitalized Materials and supplies- capitalize if used in drilling or development. If used in repair or maintenance, they should be expensed. Recompletions- typically involve entering an existing well and deepening or plugging back in order to achieve production in a new formation or a geographical zone in an existing formation. In a currently or previously producing formation or zone should be treated as an expense since the purpose is to restoreproduction without an increase in commercial reserves If the objective is to develop reserves in a new formation or find new reserves, the activity would be new drilling. (drilling costs could be exploratory or development rather than production) Costs should then be capitalized or expensed depending on SE or FC and on outcome of drilling Taxes (severance or production) should be expensed as production costs Crude petroleum Production1 lay = 42 gallons of oil at 60 degrees FAPI staidness (measure of density) of oil = the higher, the lighter the oil All crude contains BS&W- basic sediments and water zest outright sales, direct supply, indirect supply, exchanges, fraccers, or oil used in operations Gas measurementMeasurement in mcf is affected by temperature., pressure, compressibility, gravity etc Standard pressure is 14.73 pounds per square inch at 60 degrees Fahrenheit Pre AcquisitionAcquisitionExploratoryDevelopmentProductionList the four Oil & Gas Agreements used on a worldwide basis and describe each one.1. US Domestic lease agreement- an oil and gas lease grants to the oil and gas company the right and obligation to operate a property. This includes the right to explore for, develop and produce oil and gas from the property and also obligates the company to pay all costs. (Company is a working interest owner). All costs, all risk. hire of a signature bonus to mineral rights owner or a royalty.2. Concession agreement- encountered in operations outside the united states where the mineral rights owner is the local government. Sometimes the government is involved with a joint working interest. Payment of a bonus by the oil company to the government at the time the contract is signed. Payment of a royalty to the government. Responsible for paying all of the costs incurred in developing.3. Risk service agreement- oil companies erform workovers aimed at restoring or stimulating production including application of current technology to currently producing fields. Bonus to guinea pig government at contract signing. Government retains ownership of reserve. Oil company incurs all cost s and risks. Operating and capital costs incurred are recovered by dint of payment of operating and capital fees. Government may participate inoperations as a working interest owner.4. Production Sharing contracts- companies obtain the rights from the government to explore for, develop and produce oil and gas. Company pays bonus to national government at contract date. Pays royalties to government. Government maintains ownership of reserves. Companies incur all risk and costs. Company required to spend a predetermined tally of money, which is recoverable from future production. 2.) Describe the life cycle (Phases) of an Oil & Gas Project. involve the Accounting Treatment (ie. Successful Efforts or Full Cost Pool) for each phase. 1. Pre-license prospecting- geological evaluation of relatively large areas before acquisition of petroleum rights. Analyzing G&G data.Successful Efforts (SE) MethodThe Financial Accounting Standards Board (FASB) has issued FASB Statement No. 19 dealing w ith the successful efforts method. Under the SE method, costs incurred in searching for, acquiring, and developing oil and gas reserves are capitalized if they directly result in producing reserves. Costs which are attributable to activities that do not result in finding, acquiring, or developing specific reserves are charged to expense. The cost center for the SE method is a lease, field, or reservoir. The various types of costs are treated under the SE method as follows1. Acquisition Costs They are capitalized to unproven property until proved reserves are found or until the property is abandoned or impaired (a partial abandonment). If adequate reserves are discovered, the property is reclassified from unproven property to proven property. For tax purposes, acquisition costs are handled the same way except the cost cannot be partially written off as an impairment expense. The property must be abandoned before any cost may be written off.2. Exploration Costs They are recorded in tw o different ways, depending upon the type of costs incurred.a. Nondrilling Costs Examples of these type of costs are geological and geophysical (G & G) costs, costs of carrying and retaining undeveloped properties, and dry hole and bottom hole contributions. These types of costsare expensed as they are incurred. For tax purposes, nondrilling costs are capitalized to the applicable property.b. Drilling Costs They are treated differently depending on whether the well drilled is classified as an exploratory well or a developmental well. An exploratory well is a well drilled in an unproven area. A developmental well is a well drilled to produce from a proven reservoir.1) If an exploratory well is a dry hole, the costs incurred in drilling the well are expensed. If the exploratory well is successful, the costs incurred in drilling the well are capitalized to wells and related equipment and facilities.2) The costs incurred in drilling developmental wells are capitalized to related equipme nt and facilities even if a dry hole is drilled.The costs associated with tangible well equipment and facilities are capitalized, regardless of the type of well drilled. For tax purposes, current costs associated with such equipment are eligible for treatment as deductible IDC. Tax depreciation methods usually allow for a more accelerated rate of depreciation than book or financial depreciation. Also, book depreciation will be computed on 1-10the developmental dry holes and IDC which are capitalized for book purposes but expensed for tax purposes. Therefore, an M-1 adjustment will be required on the difference between the amount of book and tax depreciation.3. Production Costs These costs are expensed as incurred, which is the same treatment used for tax purposes. It should be noted, however, that many taxpayers erroneously expense overhead attributable to either acquisition or exploration activities as production costs. Overhead attributable to acquisition and exploration costs mu st be capitalized. 4. Depletion This usually requires an M-1 adjustment. Although the cost depletion formula is the same for book and tax purposes, the amount for the basis used in the computation of cost depletion will vary due to the difference in capitalization. In addition, many taxpayers will be allowed to use a largerpercentage depletion deductionFull Cost MethodUnder the FC method, all costs incurred in exploring, acquiring, and developing oil and gas reserves in a cost center are capitalized. Geological and geophysical (G & G) studies, successful and unsuccessful, are capitalized for book and financial purposes. For tax purposes, successful G & G costs are capitalized and unsuccessful G & G costs are expensed. An M-1 adjustment is required for the amount of unsuccessful G & G costs expensed. persist rental costs are capitalized for book and financial purposes.Exploratory dry hole costs are capitalized for book and financial purposes. For tax purposes, all dry hole costs (ex ploratory or developmental) are capitalized unless the taxpayer elects to expense them. Since most taxpayers expense these costs for tax purposes, an M-1 adjustment is required. Impaired or abandoned property costs remain capitalized in the cost center for book and financial purposes. For tax purposes, no deduction is allowed unless a property is totally worthless. An M-1 adjustment is required only when an abandonment is claimed for tax purposes.General and administrative costs which are not associated with acquisition, exploration, and development activities are expensed. However, overhead that can be associated with acquisition, exploration, and development activities is capitalized. The costs are handled the same way for tax purposes. Depletion usually will require an M-1 adjustment. In many instances, taxpayers may be able to claim a larger percentage depletion deduction in lieu of cost depletion. Even where cost depletion is claimed for book and financial purposes because of t he different capitalization rules, the amount of cost depletion allowable will vary.