Oil and Gas Accounting Essay Example for Free

Oil and Gas Accounting EssayIf operation is conducted under Lease or concession agreement, it is unlikely that the contract would contain alimentation that would licence appeal recovery of these comprise If the operation is conducted under a psc or risk service agreement, the contractor may be permitted to recover GG related expenditures incurred later license attainment and possibly GG be incurred earlier license acquirement Support equipment and facilitiesCost of acquiring support equipment and facilities should be capitalized Any related disparagement or direct be become an exploration, increase or production cost, as appropriate. EntriesDb GG expense depreciation Cr Accumulated DepreciationDb GG expense-operating be Cr bullionReprocessing SeismicHow to fib for cost of re-evaluation or reprocessing of the data? If the reprocessing relates to the search for oil then it should be accounted for according to SE provisions regarding prospecting and non cut exploratio n be. If the purpose is to gibe how best to develop the reserves in the field, then they should be capitalized as development cost. License acquisition be be of evaluating business environment, signature reward, negotiating, etc should be capitalized Entry Db Intangible assets-unproven keeping Cr CashDevelopment and production bonusesIf the payment is actu entirelyy a deferred sign bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost. Accrue once the operations are manifestly proceeding to the development phase. Entries To record signature bonus Db Intangible Assets unproved property Cr Cash To transfer unproved property be 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 take bonus payable Cr Cash Internal costs relating to acquisitionCan allocate capitalized cos ts to individual licenses acquired, on an acreage basis or an a potential licenses basis cost of carrying and retaining unproved propertiesCosts relating to maintaining unproved properties be charged to expense as incurred Ex delay rentals paid on allow mineral properties until specified get is commenced, property levyes, 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 great than the approaching sparing benefits expected to be derived from the property. Under SE, loss should be realized. Negative GG data and dry holes would typically suggest that part of the propertys historical cost has expired and check should be know Db Impairment expense Cr Allowance for impairmentFASB permits impairment of individually insignificant properties on a group basis. Apply the impairment percentage to the total cost of the group of individually insignificant unprov ed properties. This determines the desired 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 put down Cr Allowance for impairment, group basis Abandonment of unproved propertyFull abandonment When an individually significant license area is abandoned, its net 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 lodges 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 categorise to a proved property status if and when commercial reserves are discovered on the propert y. 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 cut-rate 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. Loss recognition is not allowed. CHAPTER 5Accounting for Exploratory oil production and Appraisal CostsUnder SE, general nondrilling exploratory costs are to be charged to expense as incurred exploratory drilling type costs are initially capitalized. Exploratory Well- swell(p) drill to find and produce oil or grease-gun in an unproved area to find a bare-ass reservoir in a another reservoir or to extend a known reservoir. Stratigraphic show well- drilling effort to nonp lus training pertaining to a special(prenominal) geological condition. Exploratory type if drilled in a proved area, development type if drilled in a proved area. Exploration 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 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 by and by drilling if commercial reserves hold back been discovered, the drilling in progress account balances are transferred to another type ofasset account that will be subject to depreciation The first successful exploratory wells cost will be reclassified from an unproved to a proved property accou nt 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 moldiness be written off. Capitalized GGSE- GG costs are to be charged to expense as incurred. Current methods may capitalize 3D and 4D seismic methods employ 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 base 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 wells is under vogue or planned for the near future All other wells, sshall not be carried as an asset for more than one year following completion of drilling Post-balance Sheet Periodgenerally accepted accounting principles provisions that relate to information about conditions that existed at the balance sheet date or that became known after the end of the period but before the pecuniary 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 toprovide facilities for extracting, treating, gathering and storing the oil and gas. More specifically, development costs, including depreciation and applicable operating costs of su pport 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 prudence 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 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 being 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 GA is expensed, however 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 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 intended 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 co uld 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 incurred at once 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 function 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 services utilized in operating the wells and related equipment and facilities proportion taxes and insurance applicable to proved properties and wells and related equipment and fac ilities Severance taxesDepreciation, depletion and amortizationAccounting for Production CostsAll costs relating to production activities, including workover costs incurred alone 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 currently or previously producing formation or zone should be treated as an expense since the purpose is to depositproduction 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 c osts 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 outright sales, admit supply, indirect supply, exchanges, fraccers, or oil used in operations Gas measurementMeasurement in mcf is affected by temperature., compact, 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 rig ht to explore for, develop and produce oil and gas from the property and also obligates the company to pay all costs. ( lodge 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 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 ownership of reserve. Oil company incurs all costs and risks. Operating and capital costs incurred are recover ed through 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 needed 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 discussion (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 GG data.Successful Efforts (SE) MethodThe fiscal Accounting Standards Board (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 attributable to activities that do not result in finding, acquiring, or developing specific reserves are charged to expense. The cost spunk 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 two different ways, depending upon the type of costs incurred.a. Nondril ling 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 equipment and facilities even if a dry hole is drilled.The costs associated wi th tangible well equipment and facilities are capitalized, regardless of the type of well drilled. For tax purposes, certain costs associated with such equipment are entitled for treatment as deductible IDC. Tax depreciation methods normally allow for a more accelerated rate of depreciation than arrest 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 must be capitalized. 4. Depletion This usually requires an M-1 adjust ment. Although the cost depletion formula is the same for book and tax purposes, the amount for the basis used in the figuring of cost depletion will vary due to the difference in capitalization. In addition, many taxpayers will be allowed to use a largerpercentage depletion conclusionFull Cost MethodUnder the FC method, all costs incurred in exploring, acquiring, and developing oil and gas reserves in a cost pore 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. Delay 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 e xpense 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 the different capitalization rules, the amount of cost depletion allowable w ill vary.