OIL & GAS

ACCOUNTING
 INTRODUCTION
• Upstream Petroleum Industry (E&P industry) involves
acquisition of mineral interest properties, exploration,
development and production.

• Requires establishment of industry-specific accounting

principles in relation to expense recognition,
measurement and disclosure.
 INTRODUCTION
• Cost Centre- A unit to capture costs. It is based on
geographical or geological factors.

• Depreciation- A measure of wearing

out/consumption/loss of value of a depreciable asset
arising from use/effluxion of time/obsolescence due to
changes in market & technology.
 DEFINITIONS
• Development Well- A well
drilled/deepened/completed /re-completed within the
proved area of an hydrocarbon reservoir to the depth
of a producing zone.

• Exploratory Well- A well drilled for the purpose of

searching for undiscovered oil and gas accumulations
on any geological prospect.
 DEFINITIONS
• Field- An area consisting of a single or multiple
reservoirs all grouped on or related to the same
individual geological structural feature and/or
stratigraphic condition.

• Oil and Gas Reserves- Oil and gas reserves are those
quantities of oil and gas, which are anticipated to be
commercially recoverable from known accumulations
from a given date forward.
 DEFINITIONS
• Proved Oil and Gas Reserves- Those quantities of
hydrocarbon entities which, upon analysis
demonstrate with reasonable certainty to be
commercially recoverable in future under existing
economic and operating conditions.

Proved Developed Oil Proved Undeveloped Oil

and Gas Reserves and Gas Reserves
 DEFINITIONS
• Reservoir- A porous & permeable underground
formation containing a natural accumulation of
producible oil or gas confined by impermeable barriers
separate from other reservoirs.

• Service Well- A service well is a well drilled or

completed for the purpose of supporting production in
an existing field. E.g. Injection wells using water, steam
etc.
 DEFINITIONS
• Stratigraphic Test Well- A drilling effort, geologically
directed, to obtain information pertaining to a specific
geologic condition.

Exploratory-type Development-type
stratigraphic test well stratigraphic test well

• Unit of Production (UOP) method- The method under

which depreciation(depletion) is calculated on the basis
of the number of production or similar units expected to
be obtained from the asset by the enterprise.
 CLASSIFICATION OF E&P ACTIVITIES AND
RELATED COSTS

Acquisition Activities
Exploration and Survey activities
require:
• Petroleum Exploration (PEL) License
or Letter of Authority (LOA).
Development and Production activities
require:
•Mining Lease (ML)
Acquisition costs
 Exploration Activities
The activities associated to exploration are:

Exploration Activities
Analysis & Interpretation related to
Aerial Surveys
Geological Surveys Subsurface geology

Geophysical Surveys Structural test drilling

Geochemical Surveys Stratigraphic test drilling
Palaeontological Surveys Exploration/Appraisal well drilling
Palynological Surveys
Surveying
Topographical Surveys
Drill-site preparation
Seismic Surveys
Exploration Costs
Development Activities
Development Costs
Production Activities
 Production cost
Production cost is broadly classified in to
• Direct Cost &
• Indirect Cost
Pre-wellhead costs: Costs of
labour, repairs and
maintenance, materials,
supplies, fuel etc. in respect of
lifting the oil and gas to the
surface, operation and
maintenance including servicing
and work-over of wells.
Post-wellhead costs: Costs of
labour, repairs and maintenance,
materials, supplies, fuel etc., in
respect of gathering, treating,
field transportation, field
processing, including cess up to
the outlet valve on the lease or
field production storage tank,
etc.
 Oil & Gas Accounting
• Accounting for acquisition, exploration and
development costs
• Accounting for production costs
• Accounting for cost of support equipment and facilities
• Accounting for abandonment costs
• Capitalisation of borrowing costs
• Impairment of assets
• Accounting for interests in joint venture
 ACCOUNTING FOR ACQUISITION, EXPLORATION
AND DEVELOPMENT COSTS

• There are two alternative methods for accounting for

acquisition, exploration and development costs.

1. Successful Efforts Method (SEM)

2. Full Cost Method (FCM)

 Successful Efforts Method (SEM)

• Costs that lead directly to the discovery, acquisition,

or development of specific, discrete oil and gas
reserves are capitalised and become part of the
capitalised costs of the cost centre.
 Successful Efforts Method (SEM)

Advantages of SEM

1. Successful efforts costing reflects the normal concept of

an asset.

2. The successful efforts method reflects the volatility that

is inherent in exploring for oil and gas reserves.
 Successful Efforts Method (SEM)

• The successful efforts method is consistent with the

concept of matching

• Successful efforts accounting comes closer than

other cost-based accounting methods to reflecting
management's successes or failures in its efforts to
find new oil and gas reserves.
 Successful Efforts Method (SEM)

Disadvantages of SEM

• Under the successful efforts method, the statement

of profit and loss can give a false impression of
performance in terms of success in finding new oil
and gas reserves because of the effect of decisions to
expand or curtail exploration expenditure.
 Successful Efforts Method (SEM)

• Because of the charge-off of unsuccessful pre-

production costs, successful efforts accounting often
results in an understatement of assets and net income
of a growing enterprise that has a successful and
increasing exploration programme.

• The successful efforts method assesses success or

failure too early in a project.
 Successful Efforts Method (SEM)

• The successful efforts method fails to recognise that

in an E&P enterprise, management makes its plans
and allocates resources to its search for new
reserves on an enterprise-wide basis.
 Full Cost Method (FCM)

• All costs incurred in prospecting, acquiring mineral

interests, exploration, and development, are
accumulated in large cost centres that may not be
related to geological factors.
 Full Cost Method (FCM)

Advantages of FCM

1. The full cost method reflects the way in which

enterprises search for, acquire, and develop mineral
resources.

2. The full cost method provides better matching of

income and expenses.
 Full Cost Method (FCM)

• The full cost method is like absorption costing for

manufactured inventories.

• The full cost method avoids distortions of reported

earnings.
 Full Cost Method (FCM)

Disadvantages of FCM

1. Under the full cost method, many costs that are

capitalised fail to meet the definition of 'asset' under
the ‘Framework for the Preparation and Presentation of
Financial Statements’.

2. The full cost method delays loss recognition.

 Full Cost Method (FCM)

• The full cost method impedes measurement of the

efficiency and effectiveness of the enterprise's
exploration and development activities.
 Application of Successful Efforts Method

• Capital work-in-progress costs include:

1. All acquisition costs;
2. Exploration costs; and
3. All development costs.

• Depreciation (Depletion)- Unit of production method is

used.
• UOP charge for the period = UOP rate x Production for
the period
 Application of Successful Efforts Method

• UOP rate = Acquisition cost of the cost centre / Proved

Oil and Gas Reserves
• UOP rate = Depreciation base of the cost centre /Proved
Developed Oil and Gas Reserves
• Depreciation base includes:
1. Gross block of the cost centre, and
2. Estimated dismantlement and abandonment costs
 Application of Full Cost Method

• Capital work-in-progress include:

1. All acquisition costs;
2. All exploration costs; and
3. All development costs.

• Depreciation (Depletion)- Unit of production method is

used.
• UOP charge for the period = UOP rate x Production for
the period
 Application of Full Cost Method

• UOP rate = Depreciation base of the cost centre /Proved

Oil and Gas Reserves

• The depreciation base includes:

1. Gross block of the cost centre;
2. The estimated future expenditure
3. Estimated dismantlement and abandonment costs net.
 Final Disclosure
• An E&P enterprise should disclose the following in its
financial statements:
1. The method of accounting followed.
2. Net quantities of an enterprise's interests in proved
reserves and proved developed reserves
3. Net quantities of an enterprise's interest in proved
reserves and proved developed reserves
4. The reporting of reserve quantities should be stated in
metric tonnes for oil reserves and cubic meters for gas
reserves.