Proved Property Costs

1
Proved Property Costs

• Proved property account
• Lease bonus
• Other costs of obtaining the mineral rights,
  including legal fees and land department fees
• Wells related equipment and facilities
• Completed successful exploratory costs
• Completed development costs
• Lease equipment and facilities

2
DDA Calculations

• Acquisition Costs - Amortize over proved reserves
• LW - IDC - Amortize over proved developed
  reserves
• LW - Eqpt. - Amortize over proved developed
  reserves

3
Units of Production Method of Calculating DDA

• BV End of Year X Production for year
• Estimated Reserves
• beginning of year
• OR
• Production for year X BV End of Year
• Estimated Reserves
• beginning of year

4
Some Observations on DDA

• The best estimate for reserves at the beginning
  of the year is to add current production to
  estimated reserves at the end of the year
• Book value at the end of the year is net of any
  accumulated DDA
• It is best to record depreciation and depletion
  separately

5
Units of Production When Oil and Gas both Produced

• Common Unit of Measure - Convert to oil in bbls
  or gas in mcf at a conversion rate of
• 1 bbl of oil 6 mcf of gas
• Same relative proportion - Use either oil or gas
  (uncommon) Dominant mineral - use the dominant
  one (say oil) if there is much more oil than gas

6
DDA On A Field-wide Basis

• For example, three leases (A, B, and C) are in a
  common field or reservoir.
• If all leases are proved, aggregate acquisition
  costs to compute depletion (also, aggregate
  equipment for depreciation).
• If a lease does not have proved reserves, dont
  add its acquisition costs to compute depletion

7
Estimated Future Dismantlement, Site Restoration,
Abandonment Costs, and Salvage

• These costs must be matched against production.
  This is similar to warranty costs in Acct 2113
• SFAS 19 states that these costs must be taken
  into account to compute DDA rates so that they
  may be matched against production (matching
  principle).

8
Two Ways to Account For These Costs Method 1

• Capitalize the estimated future costs and record
  this as an asset (Wells and related Eqpt) and
  also the expected future liability
• Wells and related Eqpt 85,000,000
• Cash 70,000,000
• Liability 15,000,000

9
Two Ways to Account For These Costs Method 2

• Accrue the liability over the period of
  production. Debit DDA at gross, record the
  Accumulated DDA and the liability
• Wells related Eqpt 70,000,000
• Cash 70,000,000