sWright, C. (2017). Fundamentals of Oil & Gas Accounting, 6th Edition.

Tulsa,
OK: PennWell Corp.
Chapter 15. Conveyances
• Define conveyances and the types of interests covered under a conveyance, including working
interests, royalty interests, production payment interests, and net profits interests

- Mineral interests are generally conveyed by 3 basic methods: leasing, sales / exchanges or
sharing arrangements
- Non-operating interests can be classified as overriding royalty interests, production payment
interests, or net profit interests
- Working interest = have to pay for exploration, development and production
- Royalty Interest
o Basic royalty interest
 Retained by mineral rights owner who receives fraction of gross revenue but is
not required to pay any cost of exploration, development or production
 Created from original mineral rights
o Overriding royalty interest – created from the working interest
 Retained ORI – created when WI owner sells its WI in the property and retains
an ORI
 Carved out ORI – created when WI owner keeps the WI but sells ORI to another
party
- Production payment interest
o Non-operating interest created out of the WI
o Retained production payment – sells WI but retains a production payment interest
o Carved-out production payment interest – keeps WI but sells a PPI
- Net profits interest – receive share of net profits instead of production
o Not required to pay for his share of losses
o Losses may be recovered by WI owner out of future net profits payments, but has to be
clearly stated in contract

• Describe the circumstances in which a farm-in or farm-out arrangement is used

- Farm-in / farm-out
o Arrangement in which owner of a WI assigns all or part of the WI to another party in
return for exploration and development of the property
o Exchange transactions for which there is no gain or loss recognition
- Farm-in / farm-out with reversionary working interest
o WI to revert back to the farmor at some point in time
o When farmee has generated enough income from the property to recover the costs it
expended on exploring, drilling and developing the property, the farmor’s ORI reverts
back to a WI.

• Define the term sole risk, under what circumstances sole risk can arise, and its financial implications
 - Any party electing not to participate is referred to as a carried interest or carried party
- Its interest is temporarily transferred to the carrying parties and will revert back when the
carrying parties reach payout (cost + additional premium)
- Actually a farm-in / farm-out is a carried interest arrangement, but no penalty assessed on the
farmor’s share of costs
- No ORI is created
- In accounting for carried interest, no gain or loss is to be recognized

• Understand how a working interest may be sold to a third party; calculate the payouts distributed
under a working interest

Note: always calculate # of breakeven barrels first for payout scenario (to recover costs)!

• Explain how working and nonworking interests are affected by pooling or unitization decisions and
how the interests are valued after pooling or unitization

- Pooling refers to a combination of unproved properties

- Unitizations usually refer to a larger combination involving an entire producing field for
purposes of EOR
- A JOA is entered into to combine and form a single operating unit
- Maybe voluntary or mandatory according to state law
- May be forced if certain percentage of the involved parties agrees to the unit
- Two significant issues must be resolved – the participation factors, FMV of wells, equipment,
and facilities
- Contributions must be equalized, because participation factors do not account for the fact that
the properties may be in different stages of development.
o Total agreed-upon FMV of the IDC and equipment will be multiplied by WI /
participation factors
o If participation factor / WI is 40%, and that party contributes less than 40%, then he has
to top up with cash
o Cash received is treated as recovery of cost, and cash paid is treated as additional
investment
o No gain or loss is recognized
Chapter 17. Reserve Valuation
• Understand the specific categories of information that must be included in the financial statements
of oil and gas companies

Following discussions are required

- Proved reserve quantity information

- Capitalized costs relating to O&G producing activities
- Costs incurred for property acquisition, exploration, and development
- Results of producing operations
- Standardized measure of discounted NCF relating to proved O&G reserve quantities
- Prices and volume (avg sales price, avg lifting cost, volumetric production information)
- Drilling activity (net productive, dry exploratory, dry development wells)
- Info on productive wells (gross, net productive wells, gross and developed and undeveloped
acreage)
- Delivery commitments under existing contracts or agreements

• Describe and calculate the factors that make up the reserve life, reserve replacement, and net wells
to gross wells ratios

Extensions∧discovers+ Improved recovery+ ¿ Revisions ∈prev . estimates + Purchase

Reserve replacement ratio=
Production+ Sales of reserves
Total proved res er ves at BOP
Reserveslife ratio=
Production
Net wells
Net ¿ gross wells=
Gross wells
Reserves ratio should ideally >1

High net-to-gross ratio – company owns relatively large WI in wells; low ratio – company owns many
small WI.

• Calculate the reserve cost ratios and their application in the financial analyses of oil and gas
companies

- Successful efforts methods

o Geographical and geophysical (G&G) exploration costs are written off as incurred
o Dry exploratory drilling costs are written off as incurred
o Cost of successful exploration wells, successful and unsuccessful development wells
are capitalized and amortized over production
- Full cost method
o All costs incurred in exploratory, drilling and development are capitalized and amortized
- Finding cost ratio:
 G∧¿ G exploration costs+ All exploratory drilling costs
Finding costs + Proved property acquisition cost s
=
BOE R eserve extension∧discoveries+ purchased reserves
+ revisions∈ prev estimates
- Finding and development cost ratio / reserves replacement cost ratio:

G∧¿ G exploration costs+ All exploratory∧developm

Finding∧development costs + Proved[¿ unproved] property acquisition
=Reservesreplacement ratio=
BOE R eserve extension∧discoveries+ purchased
+revisions∈ prev estimates
- Purpose of development well is not to find reserves but to produce previously discovered proved
resources

• Explain why lifting costs per BOE is a popular performance indicator and how it is applied to
depreciation, depletion, and amortization calculations

Liftingcosts Total amount lifting costs

=
BOE Annual production( BOE)

- Production costs per SEC:

o Costs incurred to operate and maintain wells
o Costs of labour
o Repairs and maintenance
o Materials, supplies and fuel
o Property tax and insurance
o Severance taxes
o Transportation, refining and marketing

- Lifting costs excludes DD&A, property taxes and severance taxes, generally only includes costs at
the well level
- DD&A reflects historical cost of finding and developing reserves, and not helpful in assessing
current period efficiencies. Affects profitability
- Value of proved reserves addition ratio provides information about ‘quality’ of reserve added

Valueof proved reserve additions Changes due

= extensions ,discoveries∧EOR+ ¿Changes due ¿ purchases of rese
BOE ¿

Value of proved reserv e s additions per BOE

Value added ratio=
Finding costs per BOE
Chapter 18. Accounting for International Petroleum Operations

• Differentiate among the characteristics of various fiscal systems used in global petroleum contracts
including concessionary, contractual, and production sharing/service agreements

- Concessionary systems
o Primarily collect payment for O&G produced in the form of royalties and taxes
o USA, UK, Norway
o Contract: Concessionary agreement
- Contractual system
o Company must contract with government for right to share revenue from oil and gas
development and production
o Contracts: PSCs and service contracts
o Contractor acts as operator on behalf of group
 Submits annual WP&B to joint mgmt. group
- Production Sharing Model
o Upfront signing and/or signature bonus – lump-sum
o Production bonuses – subsequent payments if production reaches a certain level

• Calculate the economic revenue generated from various global petroleum contracts, given a set of
inputs

Refer to book for examples

• Explain how profit oil is derived and how it impacts project economics

- Cost recovery – oil that goes to WI to allow them to recover their costs is referred to as cost oil /
cost petroleum
- If sufficient production occurs, contractor may recover 100% of exploration expenditure,
proportionate share of development and proportionate share of production expenditures
- Cost oil cap – maximum amount of production available for cost recovery (could be an annual
cap or total cap)
- Interest cost recovery on costs during development but not during exploration- compensated in
a form of interest-type payment
- Funding provision / environmental fund / sinking fund for abandonment, decommissioning, site
reclamation
o Sinking funds / abandonment provisions are cost recoverable
- If costs are recoverable, then government is actually paying for it from its overall share of the
reserves
- Common order of cost recovery
o Current year of opex
o Unrecovered exploration expenditure
o Uncovered development expenditure
 o Investment credit or capital uplift
o Funds paid into abandonment funds
- Profit oil = Gross – royalties – taxes – cost oil
- Capital uplifts / investment credits – incentive offered by government. If 10% capital uplift,
then company entitled to 110% of cost recovery on CAPEX.
- Ringfencing – incentive that a government may provide is to remove ringfencing requirement
and allow cross-fence recovery  effective when government seeking to increase exploration in
a frontier area by allowing company to offset agst another producing area

• Illustrate the application of a joint operating agreement and describe the circumstances when it is
used

- When two or more international parties are involved in a join operation

- Accounting procedure should exist
- Sometimes inside the PSC or concession agreement
- How cost should be shared between parties
- Material transfers and pricing
- Inventories
- Determination of overheads
- Determine recoverable and unrecoverable costs

IASB ops to use successful efforts account practices

International Chamber of Commerce. (2019). Incoterms 2020.*
• Describe the risk profile associated with various Incoterms, including CIF, DDP, DAP, DES, EXW, FAS,
and FOB

• Understand how a buyer or seller’s responsibility may increase or decrease, depending on the type
of Incoterm used in a shipping contract
Group C: Seller

Group D (Arrival): Seller required to deliver goods to a specific place. Needs to pay export duties. Most responsibilities for
seller

Group E (Departure): Seller just required to make the goods available at a delivery point. Least responsibilities for seller

Group F (Main Carriage): Seller to pay exports duties; does not need to pay transport for full delivery. Just need to bring goods
to loading port / vessel.

Seller Buyer
CIF (Cost Insurance and Seller bears cost of delivery to port of loading Risk is transferred to buyer once goods have
Freight) and port of destination/ freight. been loaded onto the vessel (i.e. at port of
loading)
Seller pays for export fees and insurance.
DDP (Delivered Duty Seller delivers goods and transfers risk to buyer -
Paid) at destination

Seller pays for cost of transport and insurance

Seller pays for export and import fees

DAP (Delivered at Place Seller delivers goods and transfers risk to buyer Buyer pays for import fees
of Destination) at destination

Seller pays for cost of transport and insurance

Seller pays for export fees.

DES (Delivered ex-ship) Same as DAP
EXW (Ex Works) Seller just has to make the goods available to Buyer pays for everything
buyer at the delivery point indicated by the
seller.
FAS (Free alongside Seller delivers goods to buyer at nominated Buyer assumes risk and cost once goods are
Ship) port. alongside the ship.

Cost and risks are transferred when goods are Buyer pays for import fees
alongside the ship.

Seller pays for export fees.

FOB (Free on Board) Seller delivers goods to buyer at nominated Buyer assumes risk and cost once goods are
port. alongside the ship.

Cost and risks are transferred when goods are Buyer pays for import fees
on board the ship.

Seller pays for export fees.