Oil and Gas Accounting Essay

If operation is conducted to a lower place Lease or c at onceding agreement, it is unlikely that the engage would contain supply that would permit bell convalescence of these cost If the operation is conducted under a psc or risk dish step forward agreement, the contractor may be permitted to recover G& angstromG related cost incurred after permit acquisition and possibly G& international ampereG be incurred before license acquisition Support equipment and facilities embody of acquiring deport equipment and facilities should be capitalized Any related depreciation or operating be become an exploration, discipline or drudgery cost, as appropriate. EntriesDb G&G outgo depreciation Cr Accumulated DepreciationDb G&G disbursal-operating cost Cr moneyReprocessing SeismicHow to account for cost of re-evaluation or reprocessing of the training? If the reprocessing relates to the search for embrocate consequently it should be accounted for according to SE provisio ns regarding prospecting and non patterning exploration be. If the purpose is to determine how best to develop the militia in the field, then they should be capitalized as development cost. License acquisition be be of evaluating business environment, feeling tribute, negotiating, etc should be capitalized intromission Db intangible assets- unverified airscrew Cr CashDevelopment and deed bon holdsIf the payment is very a deferred signing bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost. Accrue once the trading operations ar app arntly proceeding to the development phase. Entries To record touch modality bonus Db Intangible Assets un prove airplane propeller Cr Cash To transfer unproved quality be to proved ascribable to commercialized discovery Db Proved post Cr unproved spotTo record accrual of action bonus Proved property Cr production bonus payable To record payment of production bonus Db tak e bonus payable Cr Cash inside be relating to acquisitionCan every(prenominal)ocate capitalized costs to individual licenses acquired, on an acreage flat coat or an a potential licenses basis cost of carrying and retaining unproved properties be relating to maintaining unproved properties be charged to put down as incurred Ex delay rentals paid on carry mineral properties until qualify work is commenced, property levyes, accounting costs, legal costs impediment of unproved propertyImpairment has occurred if in that respect is some indication that the capitalized cost of an unproved property is greater than the future economic benefits expected to be derived from the property. under SE, loss should be currentized. Negative G&G in organic law and prohibitionist holes would typic eachy suggest that part of the propertys historical cost has expired and impairment should be recognized Db Impairment expense Cr eachowance for impairmentFASB permits impairment of individu ally peanut properties on a group basis. Apply the impairment percentage to the meat cost of the group of individually insignifi usher outt unproved properties. This determines the desired eternal rest in the modification for impairment account. Next the difference between the authentic balance and the desired balance is recognized as impairment expense. Entry Impairment Expense Cr Allowance for impairment, group basis defection of unproved propertyFull abandonment When an individually significant license theatre is addicted, its net capitalized acquisition costs should be charged to downfall 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 comp eachs assessment of the future economic benefit of the property, then the entire property should be assessed for additional impairment . Unproved property miscellaneaAn unproved property should be reclassified to a proved property stipulation if and when commercial reserves atomic number 18 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 only if the marketing price exceeds the original cost of the property. Loss recognition is not allowed. CHAPTER 5 news report for explorative Drilling and assessment CostsUnder SE, normal nondrilling exploratory costs atomic number 18 to be charged to expense as incurred exploratory drilling font costs be initially capitalized. Exploratory Well- rise drill to find and bring on anoint or heavy weapon in an unproved area to find a new germ in a another beginning or to extend a know reservoir. Stratigraphic test closely- drilling effort to obtain information pertaining to a specialised geologic condition. Exploratory type if drilled in a proved area, development type if drilled in a proved area. Exploration hygienic- advantageously drilled to discover whether oil colour colour or foul up exists in a previously unproved geological structure Appraisal intumesce- well drill to determine the size, characteristics, and commercial potential of a reservoir by digging 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 drop been discovered, the drilling in pr ogress account balances are transferred to another type of asset account that will be subject to depreciation The early successful exploratory wells cost will be reclassified from an unproved to a proved property account If well is unrealised, stopper and abandon hole and charges these costs to prohibitionist hole expense, net any equipment salvaged from well. If the license area is also relinquished, the net carrying value must be pen off. Capitalized G&GSE- G&G costs are to be charged to expense as incurred. occurrent systems may capitalize 3D and 4D seismic methods employ to determine drill sites. Time Limit on exploration and evaluation or estimate costsIn order for cost to be capitalized in SE, there must be identifiable future benefit. IF an exploratory wwell has found 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 exempt its finale and 2. Drilling of the additional swell is under way or planned for the near future All other wells, sshall not be carried as an asset for to a greater extent than one year following completion of drilling Post-balance Sheet PeriodGAAP provisions that relate to information about conditions that existed at the balance sheet date or that became know after the end of the power point but before the financial statements are issued. If well is determined 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, budget and monitoringAFE- Authorization for expenditureCHAPTER 6Drilling And Development Costs- US SEDevelopment costs- costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and shove along. More specifically, development costs, including depreciation 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, roadway 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 convalescence 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 existing field. Development type stratigraphic well- stratigraphic test well drilled in a proved area Capitalization of Development-Related G&G Exploration CostsRequires capita lization 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 being used to line of business the reservoir and perhaps where addition development wells should be drilled, theoretically the cost should be capitalized to the field as development cost. operating costAs a general rule, all G&A is expensed, merely where the company 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 relate requires that a portion of take costs incurred during the pull 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 endeavours own use 2. Assets mean 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 of interest costs incurred during the period when the asset is being constructed that could wealthy person 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 necessary 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 fourth dimension 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 result of expenditures for the asset is a part of the historical cost of acquiring the asset. CHAPTER 9Production CostsCosts of labor to make for 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 properties 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 make 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 regularize in an existing formation. In a currently or p reviously producing formation or zone should be treated as an expense since the purpose is to restore production 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 solvent of drilling Taxes (severance or production) should be expensed as production costs stark naked vegetable oil Production1 Barrel = 42 gallons of oil at 60 degrees FAPI gloom (measure of density) of oil = the higher, the lighter the oil All crude contains BS&W- basic sediments and waterDisposition unqualified 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 d egrees Fahrenheit(postnominal) Pre AcquisitionAcquisitionExploratoryDevelopmentProductionList the quaternary Oil & Gas Agreements used on a oecumenical 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 indebtedness 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. Payment 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 servi ce agreement- oil companies erform workovers aimed at restoring or stimulating production including application of current technology to currently producing fields. grant to national government at contract signing. Government retains ownership of reserve. Oil company incurs all costs and risks. Operating and capital costs incurred are recovered through payment of operating and capital fees. Government may participate in operations 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 involve to spend a predetermined amount of money, which is recoverable from future production. 2.) get wind the life cycle (Phases) of an Oil & Gas Project. Include 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) regularityThe Financial Accounting Standards display panel (FASB) has issued FASB Statement No. 19 dealing with 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 referable 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 unverified property until proved reserves are found or until the property is abandoned or impaired (a partial abandonment). If adequate reserves are discovered, the propert y is reclassified from unproven property to proven property. For tax purposes, acquisition costs are handled the same way except the cost cannot be partly 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 two diametric 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 merchantman hole contributions. These types of costs are expensed as they are incurred. For tax purposes, nondrilling costs are capitalized to the applicable property.b. Drilling Costs They are treated other than 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 equipment 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, certain costs associated with such equipment are eligible for treatment as deductible IDC. Tax depreciation methods unremarkably allow for a more accelerated rate of depreciation than bind or financial depreciation. Also, withstand 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 indispensable on the difference between the amount of book and tax depreci ation.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 must 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 larger percentage 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. geologic and geophysical (G & G) studies, successful and unsuccessful, are capitalized for book and financial purposes. For tax purposes, successfu l G & G costs are capitalized and unsuccessful G & G costs are expensed. An M-1 adjustment is necessary for the amount of unsuccessful G & G costs expensed. support 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 (exploratory or developmental) are capitalized unless the taxpayer elects to expense them. Since around 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 tout ensemble 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 acquisi tion, 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 the unlike capitalization rules, the amount of cost depletion allowable will vary.