AFE

1
AFE

• Serves as the drilling budget
• Must be approved by nonoperators
• Should include estimate of tangibles and
  intangibles for dry hole, completion costs if
  successful, and plugging and abandoning costs if
  unsuccessful
• If overruns exceed percentage stated in JOA,
  nonoperators have to approve

2
Types of Drilling Contracts

• Day rate contract Fee based on a daily rate
• Drilling contractor provides rig and crew
• Operator provides materials, supplies, etc.
• Footage contract Fee based on each foot
  drilled, often contingent on reaching a target
  depth
• Contactor provides rig, crew, and some of
  materials and supplies
• Operator provides mud and certain tests
• Turnkey contract Fee is set up front for
  drilling to a certain depth
• Contractor provides all materials and supplies

3
Workovers

• Use of special rig to restore production from a
  given well
• Sand has clogged the tubing
• Rock or sand has clogged the openings in
  perforated casing
• Accounting treatment
• if only to restore production, treat as operating
  costs
• If objective is to add new reserves, treat as
  exploratory or developmental (example plugging
  back and completing at a shallower depth)

4
Damaged or Lost Equipment and Materials

• Equipment or tools may be lost during the
  drilling process
• Drill pipe, tools, drill bits
• Accounting treatment treat as drilling costs
  (capitalize or expense depending on type of well)

5
Fishing or Sidetracking

• Fishing try to recover lost equipment
• Sidetracking drill around obstruction
• Accounting treat as drilling costs
• In practice, dont allocate to abandoned part of
  well

6
Abandonment of a Portion of a Well see page 159

• A. Exploratory well that was abandoned Charge
  the abandoned well to dry hole expense since it
  does not add to the assets
• B. Exploratory well with sidetracking Expense
  the portion of the well that had to be plugged
  back and sidetracked due to lost equipment. Adds
  no value to assets. (Note, in practice all
  capitalized if well is successful.)

7
Abandonment of a Portion of a Well (Contd)

• C. Exploratory well dry at target depth but
  successful deeper capitalize since you had to
  drill the first 10,000 feet to get to the oil at
  21,000 feet
• D. Exploratory well dry at 12,000 feet but
  plugged back and producer at 8,000 feet
  Additional cost of drilling between 8,000 and
  12,000 feet should be expensed as dry hole.

8
Abandonment of a Portion of a Well (Contd)

• E. Developmental/Exploratory well target depth
  8,000 feet the cost of first 8,000 feet is
  capitalized while the additional 3,000 feet is
  dry hole cost
• F. Producing well re-entered Costs of drilling
  beyond the producing zone are dry hole costs

9
Additional Development Costs

• Capitalize all costs to obtain access to proved
  reserves and to provide facilities for
  extracting, treating, gathering, and storing oil
  and gas
• Depreciation costs and operating costs of support
  equipment and facilities (drilling foremans car)
  
• Road building, clearing costs
• Drill development wells, development- type
  stratigraphic test wells
• Production facilities

10
Post-Balance Sheet Events

• Events that (1) existed at balance sheet date and
  (2) became known before the financial statements
  were issued, must be taken into account when
  preparing the financial statements.

11
Accounting for Suspended Well Costs

• The capitalized costs of an exploratory well may
  continue to be capitalized if two conditions are
  met
• The well has found reserves sufficient to justify
  its completion and
• Sufficient progress is being made in assessing
  the reserves and the economic and operating
  viability of the project
• Text lists 9 indicators of sufficient progress

12
Interest Capitalization

• Per SFAS 34, capitalize construction period
  interest
• Formula
• Average
• Accumulated
• Expenditures X Interest X Construction
• During Rate Period
• Construction

13
Interest Capitalization Example (p. 166)

• Unproved costs on Lease A 1/1/14 60,000
• Drilling costs on lease A in 2014 300,000
• A 400,000 note in 2014 _at_10 for drilling Lease A
• (60,000 360,000)/2 x 10 x 12/12 21,000
• Entry
• W/P IDC 21,000
• Interest expense 21,000

14
Offshore and International Operations

• Lots of additional costs to drill
• Crews must be housed, fed, and transported to
  drill sites
• Support equipment such as warehouse, supply
  facilities, helicopters