Overview of

Oil and Gas Accounting

& PSC Accounting
Budi Hartono

Agenda
Overview of Overview of accounting principle in upstream oil
and gas
Overview of PSC Accounting
Other PSC consideration
PSC Accounting vs GAAP
Recording PSC Accounting & GAAP Operator &
NonOperator

Accounting Principles in Upstream Oil & Gas

Full Cost Method

Successful Effort Method

Full Cost Method

All property acquisition, exploration and development costs, even dry
hole costs, are capitalized as oil and gas properties.
These costs are amortized using a unit-of-production method based
on volumes produced and remaining proved reserves.
The net unamortized capitalized costs of oil and gas properties less
related deferred income tax MAY NOT exceed a ceiling consisting
primarily of a computed present value of projected future cash flows,
after income taxes, from the proved reserves.

Successful Effort Method

Only the cost of successful efforts is capitalized.
Cost of exploratory dry holes, geological and geophysical (G&G) costs
in general, delay rentals, and other property carrying costs are
expensed.
The net unamortized capitalized costs are amortized on unit-ofproduction method, whereby property acquisition costs are amortized
over proved reserves and property development costs are amortized
over proved development reserves.

Pre Licensing Cost

Costs incurred prior signing of agreement such as cash pays for data
and information to participate in a new PSC bid.

License Cost
Costs incurred upon signing of agreement such as signature bonus.

Acquisition Expenditures
Costs incurred to purchase, lease, or otherwise acquire a property
(whether unproved or proved). They include the costs of lease bonuses
and options to purchase or lease properties, the portion of costs
applicable to minerals when land including mineral rights is purchased in
fee, brokers' fees, recording fees, legal costs, and other costs incurred in
acquiring properties

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Geological & Geophysical Seismic

Information that will help decide (1) whether contractors should be
obtained in area of interest (2) whether and where exploratory areas
should be drilled.

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Exploration Expenditures
Exploration involves:
(a) identifying areas that may warrant examination and
(b) examining specific areas that are considered to have
prospects of containing oil and gas reserves, including
drilling exploratory wells and exploratory-type
stratigraphic test (appraisal) wells.
Exploration costs may be incurred both before acquiring
the related property (sometimes referred to in part as
prospecting costs) and after acquiring the property

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Appraisal drilling
Drilling carried out to determine the physical extent, reserves and likely
production rate of a field.
Accounting for appraisal wells under IFRS tends to be based on whether the
field or the reservoir is ultimately determined to be successful and developed,
justifying the capitalization of dry appraisal wells in the same field.
Under US GAAP, an appraisal well is treated exactly the same as an exploration
well and should be written-off if unsuccessful, even the very same field or
reservoir is determined to be successful and developed.

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Development Expenditures
Development costs are incurred to :
Gain access to and prepare well locations for drilling such as clearing ground,
draining, road building, gas and power lines;
Drill and equip development wells including the costs of platforms and of well
equipment such as casing, tubing, pumping equipment, and the wellhead
assembly;
Acquire, construct and install production facilities such as lease flow lines,
separators, production storage tanks, natural gas cycling and processing
plants, and central utility and waste disposal system.

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Production Expenditures
Costs incurred to operate and maintain wells and related equipment and
facilities, including depreciation, and applicable operating costs of
support equipment and facilities and other costs of operating and
maintaining those wells and related equipment and facilities.

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Impairment
Impairment Triggers:
Obsolescence
Physical damage: accidents, fire, natural disasters
Technical performance problems (lower production profile)
Evidence from internal reporting: worse profit (bigger loss) or cash flow,
anticipated loss on disposal, change in long term view of sales prices
Lower estimates of physical quantities of petroleum reserves
Lower reserves in PSC due to higher prices is not an impairment
trigger.

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Impairment
Under IFRS impairment includes license acquisition costs and exploration
and appraisal costs
Exploration licenses in unproved properties must be assessed periodically (at
least annually).
If dry hole has been drilled and there are no firm plans for further drilling or
appraisal activities, the property would be impaired.
Under US GAAP, FAS 121 are applicable for proved properties and related
equipment, and facilities whereas unproved properties are subject to the
impairment provision FAS 19 (Accounting for Suspended Well Costs).

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Decommissioning
Process conducted in accordance with license requirements and
relevant legislation and practice to:
Plug and abandon wells
Dismantle wellhead, production and transport facilities
Remediate and restore producing areas

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Decommissioning recognition
Decommissioning provisions are recognized when there is
Legal obligation
Constructive obligation:
Establishing a pattern of past practice
Publishing policies
Making statement to other parties that the company will accept
responsibilities
Creating a reasonable expectation that the company will act in a certain
way.

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Decommissioning Obligation

Decommissioning costs are typically cost recoverable based on

actual cash funding.

Most PSCs have decommissioning obligations for the contractor,

despite ownership of assets by government.

Usually cash funding is required to make sure there will be enough

fund to carry out decommissioning activities. Both contractor and
government have control over the cash fund.

Full Cost vs Successful Efforts Accounting

Costs
General costs prior to
acquisition of licence
Specific pre-licence,
licence acquisition,
exploration and
appraisal costs
Development costs
Production costs

FULL COST

SUCCESSFUL
EFFORTS

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Full Cost vs Successful Efforts Accounting

Costs

FULL COST

General costs prior to

acquisition of licence
Specific pre-licence,
licence acquisition,
exploration and
appraisal costs
Development costs

Expensed

Capitalised

Capitalise initially
then write off, unless
commercial reserves
established
Capitalised

Production costs

Expensed

Expensed

Capitalised

SUCCESSFUL
EFFORTS
Expensed

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Overview of PSC Accounting:

Acquisition cost

Operating costs
Capital expenditures
Non-capital expenditures
Exploration expenditures
Development expenditures
Supporting equipment and facilities
Depreciation, depletion and amortization
Inventory

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PSC Accounting
Acquisition cost
Acquisition cost is not classified as part of the operating costs
as based on the constitution, the ownership of the natural
resources stays with the state and is not transferred to the
contractors.
Signature Bonus IS NOT classified as part of the operating
costs (cost recovery) but classified as deductible expense for
tax purposes.

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PSC Accounting
Operating costs (cost recovery)
For any year in which commercial production occurs,
operating costs consist of:
Current year non-capital costs

Current years depreciation for capital costs

Current year allowed recovery of prior years unrecovered
operating costs.

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PSC Accounting
Capital cost
Expenditures made for items which normally have a useful life
beyond the year incurred
Non-capital cost
Expenditures relating only to current operation, including costs
of surveys and the intangible drilling costs of exploratory and
development wells.

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PSC Accounting
Exploration expenditures
All non-capital and Intangible Drilling Costs (IDC) exploration
expenditures are expensed as operating expenditures as
incurred, without considering whether they relate to a
successful or unsuccessful exploration. Whilst for Tangible
Drilling Costs (TDC) exploration, is capitalised for successful
exploration and is classified as non-capital for unsuccessful
expenditures.

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PSC Accounting
Development expenditures
Upon dry-hole, all expenditures, the IDC and TDC
development expenditures, are classified as non-capital and
therefore expensed.
Upon successful, the IDC development expenditures are still
classified as non-capital and therefore expensed, whilst the
TDC development are capitalised.

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PSC Accounting
Supporting equipment and facilities
The treatment is the same as the development costs

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PSC Accounting
Depreciation, depletion and amortization (DD&A)
DD&A will be calculated beginning the year in which the
assets is placed into service. The method used to calculated
the DD&A is double declining balance method, whereby in the
last year, the residual value is recovered in full and therefore
does not consider the amount of reserves

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PSC Accounting
Inventory
The costs of non-capital items purchased for inventory will be
recoverable at such time the items have landed in Indonesia.

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Other PSC Considerations

First Tranche Petroleum
Domestic Market Obligation
Investment Credit
Cost recovery
Flow of PSC

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First Tranche Petroleum

20 Percent of current year production or certain amount refers to
contract
Split between government and contractor
Based on PSCs sharing percentage
FTP is taxable income

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DMO (Domestic Market Obligation)

A contractor has to surrender a part (25%) of its production for domestic
market
DMO fees received by a contractor:
- The first 5 years production, fee is
average ICP
- After 5 years, fee is USD .20/bbls or 10%
of average ICP (pack II), 15% of average
ICP (pack III)

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Investment Credit
Investment credit is an additional allowance when a contractor invests in a new field
Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pretertiary)
Rate investment credit is:
- 20% of direct investment amount (if tax rate
is 56%)
- 17% of direct investment amount (if tax rate
is 48 %)
- 127%, 142% (oil); 55%, 110% and 125% (gas)
in deep sea and pre tertiary areas.

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Cost Recovery
Current year non capital costs

Inventories will be recoverable at the time when landed in

Indonesia
Current years depreciation for capital cost

Declining balance method, yearly, grouping per PSC

Current years allowed recovery of prior years un-recovered operating costs

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Cost Recovery (continued)

Operating cash directly associated with production of natural gas will be
directly chargeable against natural gas revenues
Other costs:
- Overhead allocation, should be consistent
and approved by BP Migas (generally max
2% of operating costs)
- Interest recovery, has to be approved by BP Migas

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Compensation and Production Bonus

Signature bonus, when getting the PSC
Production bonus, after reaching certain production volume
Unrecovered cost but tax deductible

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FLOW OF PSC

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PSC Accounting vs GAAP

PSC

US GAAP

IFRS

Acquisition cost

Expense

Capitalize

Capitalize as long as
meet with IFRS assets
recognition criteria*

Exploration
expenditures:

Expense

Expense

Expense

Successful:

Expense

Capitalize

Capitalize

- IDC

Capitalize

Capitalize

Capitalize

Dry hole

- TDC
(*)
it is probable that future economic benefits associated with the item will flow to the entity; and
the cost of the item can be measured reliably.

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PSC Accounting vs GAAP

PSC
Appraisal drilling

US GAAP

IFRS

A dry appraisal could

Unsuccessful
A dry appraisal could
still be carried forward
exploratory wells
still be carried forward
in the Balance Sheet, drilled to delineate a in the Balance Sheet,
provided that the
potential reservoir are
provided that the
intend to drill more
expensed
intend to drill more
wells or to develop the
wells or to develop the
field still exists.
field still exists.

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PSC Accounting vs GAAP

PSC

US GAAP

IFRS

Expense

Capitalize

Not specified.
Capitalized as long as
meet with IFRS assets
recognition criteria

- IDC

Expense

Capitalize

- TDC

Capitalize

Capitalize

Not specified.
Capitalized as long as
meet with IFRS assets
recognition criteria

Supporting equipment
and facilities

Capitalize

Capitalize

Capitalize

Development expenditures

Dry hole

Successful:

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PSC Accounting vs GAAP

PSC

US GAAP

IFRS

DD&A of capital costs

Double decline

Unit of production

Not specified, to be
allocated over useful life,
reflecting consumption of
assets benefits

Non-capital inventory

Expensed upon receipt

Expensed as consumed

Expensed as consumed

Obsolete inventory or
assets

Write off upon approved

by BPMIGAS

Expensed/impaired upon
identified

Expensed/impaired upon
identified

Big table liabilities /

severance

Cash basis (pay as you

go)

Accrual basis based on the

discounted present value of
the expected expenditures
required to settle the
obligation

Accrual basis based on the

discounted present value of
the expected expenditures
required to settle the
obligation

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PSC Accounting vs GAAP

Abandonment /
decommissioning
liabilities

PSC

US GAAP

IFRS

Cash basis.

Accrual basis - based on the

discounted present value of
the expected expenditures
required to settle the
obligation. The provision
should be provided in the
period in which it is incurred
if a reasonable estimate of
fair value can be made, or
as soon as a reasonable
estimate of fair value can be
made.

Accrual basis - based on the

discounted present value of
the expected expenditures
required to settle the
obligation. The provision
should be provided as soon
as the decommissioning
obligation is created, which
is normally when the facility
is constructed and the
damage that needs to be
restored is done.

New recent PSC contract

accrual basis, but no
further guidance issued
yet by BPMIGAS.

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PSC Accounting vs GAAP

Impairment

PSC

US GAAP

IFRS

Written off assets upon

agreement from
BPMIGAS

All impairments are

recognised in the
income statement.

The same as US
GAAP, except that an
impairment loss
(downward
revaluation) may be
offset against
revaluation surpluses
to the extent that it
relates to the same
asset; any uncovered
deficit is recorded to
the income statement.

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Recording PSC Accounting & GAAP (Operator)

General industry practice use the JV book and Corporate book
JV Book
represent the recording of the transaction in the level of joint venture transaction (such
as cash call request, cash call receipt, joint venture expenditures).
Corporate Book
represents the recording of transaction in the level of corporate as a separate entity.
Consist of:
joint venture transaction (multiplied by its shares)
transaction which only incurred in corporate level (corporate adjustment) such as
revenue, DD&A, deferred tax and other GAAP adjustment.

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Recording Joint Interest Transactions (Nonoperator)

General industry practice use the proportionate consolidation method of
accounting.
Under proportionate consolidation, each owner picks up its proportionate
share of each assets, liability, revenue and expense item in accordance with
its own account classification.
The principal source document is the monthly Joint Interest Billing (JIB) from
the operator.
The JIB do not coincide with GAAP or income tax accounting.

The recording of Joint Interest Transactions of NonOperator will be

detailed in Cash Call section

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Question & Answer Session