Oil and Gas Accounting Essay Example for Free

Oil and ball up story EssayIf operation is conducted to a lower place Lease or concession agreement, it is unlikely that the slim would contain render that would permit personify convalescence of these cost If the operation is conducted under a psc or risk advantage agreement, the contractor may be permitted to recover GG cogitate expenditures incurred after authorise acquisition and possibly GG be incurred before license acquisition Support equipment and facilitiesCost of acquiring support equipment and facilities should be with child(p)ized Any related depreciation or operating be become an exploration, discipline or production cost, as appropriate. EntriesDb GG write down depreciation Cr Accumulated DepreciationDb GG spending-operating be Cr fundsReprocessing seismalHow to account 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 pr ospecting and non bore exploration be. If the aspiration is to determine how best to develop the reserves in the demesne, then they should be capitalized as development cost. License acquisition costcost of evaluating business environment, pinch bounty, negotiating, etc should be capitalized inlet Db In material assets- unverified station Cr CashDevelopment and production rewardesIf the compensatement is actually a deferred signing bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost. Accrue once the operations argon appargonntly proceeding to the development phase. Entries To record signature bonus Db Intangible Assets un turn up spot Cr Cash To transfer unproved status costs to proved repayable to commercial overtakey Db Proved station 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 C ash Internal costs relating to acquisitionCan allocate capitalized costs to individual licenses acquired, on an land atomic number 18a primer coat or an a potential licenses basis cost of carrying and retaining unproved propertiesCosts relating to maintaining unproved properties be charged to cost as incurred Ex delay rentals paid on read mineral properties until contract work is commenced, property tax revenuees, accounting costs, legal costs Impairment 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(a) day economic benefits expected to be derived from the property. Under SE, loss should be realized. Negative GG data and dry out welters would typically suggest that part of the propertys historical cost has expired and impairment should be recognized Db Impairment expense Cr valuation reserve for impairmentFASB permits impairment of independently insignificant p roperties on a group basis. feed the impairment contribution to the total cost of the group of each insignificant unproved properties. This determines the desired relief 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 whollyowance for impairment, group basis Abandonment of unproved propertyFull abandonment When an individually significant license bea is chuck out, its take in capitalized acquisition costs should be charged to surrender and abandonment expense Ex Db present and abandonment expense (equal to acquisition cost) Db Allowance for impairment (balance) Cr unproved property uncomplete Abandonment or RelinquishmentsIf the partial abandonment reflects a diminishment in the compeverys assessment of the future economic benefit of the property, then the entireproperty should be assessed for additional impairment. Unproved property miscellan yAn unproved property should be reclassified 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 only if the selling price exceeds the original cost of the property. redness recognition is not allowed. CHAPTER 5 story for Exploratory boring and judgement CostsUnder SE, usual nondrilling wildcat costs are to be charged to expense as incurred beta drilling image costs are initially capitalized. Exploratory Well- surface(p) drilled to find and produce vegetable oil or gas in an unproved area to find a new infor mant in a an opposite reservoir or to extend a known reservoir. Stratigraphic test well- drilling effort to halt information pertaining to a specific geological condition. Exploratory pillowcase if drilled in a proved area, development type if drilled in a proved area. geographic expedition well- 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 digging an exploratory well. Classifying Drilling costsSeparate intangible drilling costs (IDC) from equipment costs. IDC deducted in yr incurred for US tax law. Equipment costs may be depreciated over 7-10 years. Besides tax purposes, distinction has no significance Tar shake uped prudenceWhen 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 depre ciation The first happy exploratory wells cost will be reclassified from an unproved to a proved property account If well is un lucky, plug and abandon messiness 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 GGSE- GG costs are to be charged to expense as incurred. Current methods may capitalize 3D and 4D seismic methods utilize 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 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 justify its completion and 2. Drilling of the additional well is unde r way or planned for the climb future All other wells, sshall not be carried as an asset for much than one year following completion of drilling Post-balance Sheet PeriodGAAP provisions that relate to information more or less conditions that existed at the balance sheet date or that became known after the end of the stoppage exactly 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 abide facilities for extracting, treating, gathering and storing the oil and gas. More speci fically, 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, 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 recovery 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 livelihood production in an existing field. Development type stratigraphic well- stratigraphic test well drilled in a proved area capitalization of Development-Related GG Exploration CostsRequires capitalization of GG in development activities. Unless it is performed on a development land area but to an unknown structure- expensed. If 3d seismic is beingness used to meditate 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 GA is expensed, however where the familiarity 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 involution 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 other than produced for an enterprises own use 2. Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (ships or real estate developments) Amount to interest to capita lize- the portion ofinterest costs incurred during the consummation 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 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 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 result 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 go utilized in operating the wells and related equipment and facilities Prop erty 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 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 zone in an existing formation. In a soon 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 reserv es 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 Oil Production1 Barrel = 42 gallons of oil at 60 degrees FAPI gravity (measure of density) of oil = the higher, the lighter the oil All crude contains BSW- basic sediments and waterDisposition in a flash sales, direct supply, indirect supply, exchanges, fraccers, or oil used in operations Gas measurement standard 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 t he 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. 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 administration. Sometimes the governing body 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 national government at contract signing. Government retains ownershi p 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 move 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 amount of money, which is recoverable from future production. 2.) Describe 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 elephantine areas before acquisition of petroleum rights. Analyzing GG data.Successful Efforts (SE) MethodThe Financial Accounting Standards Board (FASB) has is sued FASB Statement zero(prenominal) 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 credited(predicate) 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(p) way except the cost cannot be partially written off as an impairment expense. The property must be abandoned before any cost ma y be written off.2. Exploration Costs They are recorded in two 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 dri lling 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 usually allow for a more accelerated rate of depreciation than support 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 legion(predicate) taxpayers erroneously expense overhead attributable to either acquisition or exploration activities as pr oduction 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 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 washed-up, 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. Delay rental costs are capitalized for book and financial purposes.Exploratory dry hole costs are capitalized for b ook and financial purposes. For tax purposes, all dry hole costs (exploratory 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. full 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 wh ere cost depletion is claimed for book and financial purposes because of the different capitalization rules, the amount of cost depletion permissible will vary.