Types of Costs

1
Types of Costs

• Acquisition costs Costs incurred in acquiring
  the rights to drill for oil and gas
• Exploration costs Costs incurred in exploring
  the property, including drilling exploratory
  wells
• Development costs Costs incurred to obtain
  access to proven reserves, and to provide
  facilities for extracting, treating, gathering
  and storing oil and gas
• Production costs Costs incurred in lifting the
  oil and gas to the surface and in gathering,
  treating, and storing the oil and gas

2
Proved Reserves

• Reasonably certain to be recovered in the future
• From known reservoirs under existing economic
  conditions such as current prices and costs,
  current technology, economic producibility
  supported by actual production or conclusive
  formation test

3
Proved Developed Reserves

• Expected to be recovered through
• Existing wells with existing equipment and
  operating methods
• Improved recovery techniques if successful pilot
  project or successfully installed program

4
Proved Undeveloped Reserves

• Expected to be recovered from
• New wells drilled on undrilled property (must
  offset productive units)
• Existing wells where a relatively major
  expenditure is required for completion
• Improved recovery techniques, only if effective
  actual tests in the same area and in same
  reservoir

5
Unproved Reserves

• Reserves not meeting the requirements of proved
  reserves

6
Some Useful Definitions

• Reservoir A porous and permeable underground
  formation containing oil or gas and confined by
  impermeable rock or water barriers
• Field An area consisting of a single reservoir
  or multiple reservoirs related to the same
  geological structural feature
• Development well A well drilled within a proved
  area of an oil or gas reservoir to the depth of a
  horizon known to be productive
• Service well A well drilled to support
  production, such as a gas injection well, a water
  injection well, or a salt-water disposal well

7
More Useful Definitions

• Stratigraphic test well A well drilled for
  information (only) about subsurface geologic
  layers and the depths of those layers (common
  offshore). May be exploratory or developmental.
• Exploratory well A well drilled to find and
  produce oil and gas in an unproved area, to find
  new reservoir in a field with another reservoir
  that is productive, or to extend a known
  reservoir.

8
Example of Exploratory Well and Development Well

• See Fig. 2-2 on page 42
• Well 1 is exploratory because it is drilled in
  an unproved area
• Additional wells prove areas
• Note the order wells are drilled may affect
  their designation as exploratory or developmental

9
Classifying Wells

• The designation of a well as exploratory or
  developmental is generally made by geologists or
  engineers, not accountants. However, for
  financial accounting they use rules in
• SFAS 25
• SEC Regulation SX 4-10

10
Accounting for Costs

• Costs incurred are either
• Expensed charged (debited) to an expense
  account, or
• Capitalized charged (debited) to an asset
  account
• Amounts capitalized will be expensed as period
  costs through depletion (DDA)

11
Successful Efforts Method

• Per FAS 19, an asset is an economic resource that
  is expected to provide future benefits. Thus,
• Exploratory dry holes are expensed
• Exploratory successful wells are capitalized
• The cost center for amortization is the property,
  field, or reservoir
• Capitalized costs are transferred to expense
  through depletion

12
Full Cost Method

• Exploratory dry holes are capitalized
• Exploratory successful wells are capitalized
• The cost center for amortization is the country
• Capitalized costs are transferred to expense
  through depletion

13
Comparison of SE to FC

• Item SE FC
• Acquisition costs C C
• GG costs E C
• Exploratory dry hole E C
• Exploratory well, successful C C
• Developmental dry hole C C
• Developmental well, successful C C
• Production costs E E
• Depletion cost center Prop, field,
  reservoir Country

14
Historical Development of Oil Gas Accounting

• Prior to 1969 SE and FC methods used
• 1969 ARS Study No. 11. AICPA favored
  successful efforts
• 1975 Federal Energy Conservation Act required
  the SEC to prescribe oil gas accounting rules
  or to approve FASBs rules
• 1977 FASB issued SFAS No. 19 which prescribed
  SE method
• 1978 SEC said that until further rules were
  issued, companies could used either SE or FC
• 1978 SEC studied RRA, an alternative to SE and
  FC
• 1981 SEC withdrew the RRA argument and FASB
  issued SFAS No. 69 requiring publicly-traded oil
  gas companies to disclose certain information

15
FAS No. 69 - Disclosures

• Historical based
• Proved reserve quantity information
• Capitalized costs relating to oil gas producing
  activities
• Costs incurred for acquisition, exploration,
  development
• Results of operations for oil gas producing
  activities
• Value Based
• Use of a standardized discount measure
• Changes in the standardized measure for
  discounted cash flows
• Additional information (public non-public)
• Accounting method used for OG activities
• Manner of disposing of capitalized costs

16
COPAS

• Issues pronouncements as
• Procedures usually attached to a joint
  operating agreement. Examples include overhead
  rates, material transfers, and the conduct of
  joint interest audits.
• Bulletins provide guidance in implementing
  accounting procedures in the oil gas industry.
• Interpretations clarify or further address
  procedures.

17
Intro to Successful Efforts Accounting

• Acquisition costs Generally capitalize as
  unproved LHC until it is known whether reserves
  exist.
• Exploration costs nondrilling costs are
  expensed. Drilling costs are capitalized until
  it is known if reserves exist.
• Development costs are capitalized regardless of
  whether they are successful.
• Production costs Expensed as incurred.

18
SE Chart of Accounts (pp. 55-63)

• Trace some of the entries from pp. 53-54 to the
  chart of accounts
• Note the level of detail provided for accounts,
  particularly LOE 60000
• Note that there will also be a code for the
  property (field)

19
Intro to Full Cost Accounting

• Acquisition costs Generally capitalize as
  unproved LHC until it is known whether reserves
  exist. If unproductive, move to separate account.
• Exploration costs All exploration costs are
  capitalized.
• Development costs are capitalized regardless of
  whether they are successful.
• Production costs Expensed as incurred

20
FC Chart of Accounts (pp. 66-69)

• Trace some of the entries from pp. 65-66 to the
  chart of accounts
• Note the level of detail provided for accounts,
  particularly LOE 60000
• Note that there will also be a code for the
  property (field)