PETROLEUM

ACCOUNTING
ACCOUNTING METHODS IN THE
PETROLEUM INDUSTRY
 CLASSIFICATION OF COSTS INCURRED

 costs incurred in oil and gas producing

activities classify into four categories:
(1) Acquisition costs.
(2) Exploration costs.
(3) Development costs.
(4) Production costs.
 (1) ACQUISITION COSTS

Acquisition costs
 These costs are incurred by companies to
acquire rights to explore, drill and produce
undiscovered natural resource such as oil
and gas, or an already discovered
resource.
 Usually, property is leased and special
royalty payments paid to the owner.
 (1) ACQUISITION COSTS
 They Include:
(1) Lease bonuses.
(2) Options to purchase or lease properties.
(3) Brokers' fees.
(4) Recording fees.
(5) Legal costs.
(6) Other costs incurred in obtaining
mineral rights.
 (2) EXPLORATION COSTS

 As soon as (he company has the right to

use the property, exploration costs are
needed to find oil and gas.
 Exploration involves identifying areas
that might warrant examination, and
examining areas that may contain oil and
gas reserves.
 Exploration costs include:
(1) Costs of geological or geophysical
studies.
(2)The costs of the machines that used in
exploring oils.
(3) The cost of exploring drilling.
 (3) DEVELOPMENT COSTS
 These costs are incurred in preparing
proved reserves for production.
 Development involves drilling and
equipping development wells and service
wells.
 Also, the cost of acquiring, constructing
and installing production facilities for
extracting , treating, gathering, and
storing oil and gas
 (4) PRODUCTION COSTS
 These costs are incurred to operate and maintain
wells and related equipment and facilities.
 It includes costs of lifting the oil and gas to the
surface and in gathering, treating and storing the
oil and gas.
 Production costs include depreciation of
equipment and operating costs or support
equipment and facilities and other costs of
operating and maintaining wells and related
equipment and facilities
 PRELIMINARY EXPLORATION
COSTS.
 Preliminary exploration costs are the costs which
incurred before signing a contract (lease) with the
host country.
 The company has not the right to drill before signing
a contract (lease), but it can make a preliminary
exploration to know whether there is oil and gas
reservoirs or not.
 These costs include:

(1) The cost of acquiring the preliminary exploring

permission.
(2) The cost of the preliminary exploring jobs.
METHODS OF FINANCIAL ACCOUNTING
FOR PETROLEUM ACTIVITIES

(1) Successful Efforts

(2) Full cost

 THE BASIC DIFFERENCES
BETWEEN FULL COSTING AND
SUCCESSFUL EFFORTS COSTING
 THE BASIC DIFFERENCES

 The principle difference between full

costing and successful efforts costing is
whether costs that cannot be directly
related to the discovery of specific oil
and gas reserves should be carried
forward to future periods as costs of oil
and gas reserves generally.
 FULL COST
 Under the full cost method most of the
costs are capitalized.
 Full costing regards the costs of
unsuccessful acquisition and exploration
activities as necessary for the
discovery of reserves.
 All of those costs are incurred with the
knowledge that many of company's
prospects will not result directly in the
discovery of reserves.
 FULL COST
 However, the company expects that the
benefits obtained from chose prospects that
do prove successful together with the
benefits from past discoveries will be
adequate to recover the costs
of all activities, both successful and
unsuccessful, and will result in an ultimate
profit.
 FULL COST

 Thus all costs incurred in oil and gas

producing activities are regarded as integral
to the acquisition, discovery, and
development of whatever reserves
ultimately result from the efforts as a
whole, and are thus associated with the
company's reserves.
 FULL COST
 Establishing a direct cause - and - effect
relationship between costs incurred and
specific reserves discovered is not relevant
to full costing.
 SUCCESSFUL EFFORTS
 Under successful efforts costing, however,
except for acquisition costs of properties,
a direct relationship between costs incurred
and specific reserves discovered is required
before costs are identified with assets;
costs of acquisition and exploration
activities that are known not to have
resulted in the discovery of reserves are
charged to expense.
 SUCCESSFUL EFFORTS
 Although many variations exist within the successful

efforts method, two principal approaches can be

identified.
 One approach relies on a relatively “narrow " area of
interest" as a cost center.
 Cost center might be a lease, field, or reservoir. All
costs incurred within that cost center are capitalized;
if the area of interest is abandoned, the costs are
charged to expense: if the area of interest proves
successful, the capitalized costs are amortized as the
reserves are produced.
 SUCCESSFUL EFFORTS
 The second approach does not rely on a
cost center for capitalization purposes; the
accounting treatment is determined by the
nature of the costs at the time they are
incurred.
 For ex ample , all exploration costs except
the cost of exploratory wells are charged to
expense when incurred:
the costs of exploratory wells are
capitalized as "construction - in - progress
" or “wells - in - progress ".
 SUCCESSFUL EFFORTS
 The successful efforts method has only the
cost of successful efforts capitalized as oil
and gas properties.
 Amortization is computed by lease (or
property) or certain aggregations of
properties.
 The cost centre is either the lease or the well.
 This method distinguishes between the costs
of possibility areas and abandonment areas,
as the costs of the abandonment areas are
expensed.
 The distinguishing features of the
successful efforts and the full cost
methods centre around which costs are to
be capitalized and the method by which
these costs should subsequently be
amortized.
 In the following table, we summarize the
accounting
treatment of the four basic types of costs
incurred by oil and gas companies
 Cost items SE FC
Geological and Geophysical Costs (G&G) E C
Acquisition costs C C
Exploratory dry hole E C
Exploratory well, successful C C
Development dry hole C C
Development well, successful C C
Production costs E E