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Oil and Gas Accounting Midterm > O&G ACC Midterm > Flashcards

O&G ACC Midterm Flashcards

1
Q

What is a Renewable Energy?

A

Renewable: energy source that is replenished by nature at about the same rate as consumption

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2
Q

What is the difference between a fossil fuel and renewable?

A

Fossil fuels take more years to replenish - consumption outpaces replacements

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3
Q

What is the future demand for Oil & Gas vs Renewables?

A

Projected oil and gas will remain strong

Why: Total energy demand will outpace renewables growth

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4
Q

Oil and Gas Uses

A

It is used in almost every part of modern life.

Examples: Bedding, Heating, Carpet, Personal Care, Pharmaceuticals, Clothing, Decor

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5
Q

Shortcomings of Renewable Energy

A

Renewable energy is not able to substitute all existing uses of oil and gas

  • Example: oil is used to produce plastics, no RE alternative
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6
Q

4 Hydrocarbon Gases

A

Methane - 1 carbon
Ethane - 2 carbon
Propane - 3 carbon
Butane - 4 carbon
- Mice Eat Peanut Butter
- More carbons the lower you go

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7
Q

Characteristics of Hydrocarbon Gases
(heavier, energy content, market value)

A

Butane is the heaviest and has the highest energy content. Therefore, higher market value

The more carbons the heavier Mice Eat Peanut Butter

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8
Q

What does a higher energy content mean?

A

One mcf of Butane will generate more heat when burned

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9
Q

What does a Produced Gas Stream Contain?

A
  • Methane (wet 70%, dry 90%)
  • Heavier gases
  • Suspended hydrocarbon liquids (NGLs)
  • Contaminants
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10
Q

What is Condensate?

A

Portion of any suspended liquids that condenses out of the gas steam at the production site

Why: As gas cools and expands as it passes through processing equipment

Condense –> Condensate (gas to liquid)

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11
Q

What are Natural Gas Liquids?

A

Suspended liquids molecules and liquefied gas molecules removed from the gas stream

Not Liquified Natural Gas

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12
Q

What Must Happen before gas enters Long Haul Pipeline?

A

Wet/rich and/or contaminated gas must be processed before entering this pipe line

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13
Q

What is Pipeline Gas?

A

Pipeline Gas is almost pure methane w/ small amounts of heavier hydrocarbons and some contaminants

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14
Q

What is Liquefied Natural Gas?

A

Almost pure methane cooled down to liquification temp to shrink volume (1/600th) so it can be economically shipped by ocean carriers

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15
Q

Advantages and Disadvantages of Liquified Natural Gas

A

Advantages:
- Overcomes pipeline limitations
Disadvantages:
- Expensive Process
- High shipping costs

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16
Q

US Position with Liquified Natural Gas

A
  • Several new export facilities
  • goal to make profit selling cheap us gas in LNG markets
  • Biggest Markets: Asia and Europe
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17
Q

What is Crude Oil Composition?

A

Divers mix of liquid and solid molecules, liquid characteristics in general

Average comp: light and thin (less carbons) to heavy and vicious (more carbons)
- some entrapped gas molecules

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18
Q

How is Crude Oil Gravity measured?

A

API Gravity scale - Thermohydrometer

Adjust gravity reading to standard 60f temp

Counter intuitive: Heavier crudes have a LOWER value

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19
Q

How does weight of oil Affect Price?

A

Lighter crude oil sells for a higher price

  • Contain more light liquid molecules that make high-value products

Examples: Gasoline, jet fuel, diesel

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20
Q

Effects of Sulfur in Crude Oil

A

High sulfur content lowers the value of crude oil

  • sulfur levels tightly restricted in the refined product, extra removal = refining costs
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21
Q

Sweet vs. Sour Crude

A

Sweet = Low Sulfur
– More than .5%

Sour = High Sulfur
– Less than .5%

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22
Q

How does the separation of Hydrocarbon Molecules happen? (Gas Plants - NG)

A

Chilling - Gas plants primarily use chilling to separate heavier gas components out of methane

Fractionation - Boiling off different hydrocarbons one by one

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23
Q

How does the separation of Hydrocarbon Molecules happen? (Refineries- Crude Oil)

A

Heat Driven - Refineries use a heat-driven distillation to sort through a range of molecules

heat and catalyst to boil out lighter molecules and break heavier molecules

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24
Q

Refineries: What is the Cracking Process?

A

Breaking heavier molecules into lighter, higher-value molecules

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25
Q

Refineries: What is Coking?

A

Sophisticated method to break up the heaviest molecules and remove some of the carbons, which forms coke

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26
Q

How is Oil and Gas measured and priced?

A
  • Oil Measured and priced in 42-gallon barrel units
  • Gas measured in cubic feet multiple
  • Pipeline gas is priced at million British Thermal units (BTU’s)
  • 6 MCF (million cubic ft) = 1 Barrel of Oil equiv
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27
Q

Define Upstream, midstream, and downstream

A
  1. Upstream: Exploration and production
    – Ex: identify areas, acquire rights, acquire data, drill and explore, develop, operate, and produce
  2. Midstream: Begins when production leaves the Production site
    – Ex: Gather and Further Process, Trade, Transport, and Storage
  3. Downstream: Begins with crude Oil Refining. All crude oil must be refined
    – Ex: Refining/Petro-Chemicals, Distribution & Retail Marketing
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28
Q

What is the difference between integrated vs. independent producers?

A

Integrated Companies: Companies that produce oil and gas AND refine crude oil
– Ex: Exxon, Chevron, Shell, BP

Independent Producers: Companies that produce Oil but DO NOT refine crude Oil

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29
Q

Midstream Services Specialization

A

Some companies specialize in midstream services
- Gas processor, Pipeline Operator, Storage Operator, Marketers, Tanker Operators

Ex: TransCanada

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30
Q

What role do Contractors and Suppliers play in the industry?

A

A wide variety serve the industry and play a leading role in several key activities such as seismic, drilling, construction, and operations

Ex: Schlumberger and Halliburton

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31
Q

Role of National Oil Companies

A

Most Producing nations claim government ownership of oil and gas resources (not the US)

Mostly or entirely owned by the gov

Varying degrees of capability: non-operators, in-country operators, international operators (operating beyond country borders)

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32
Q

What are Oil Ministries?

A

Control any minerals contracts with international oil and gas companies

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33
Q

OPEC (Org of Petroleum Exporting Countries)

A

Most oil exporting nations are members of OPEC - NOT the US, China, or Russia

Russia not a member, but cooperates under OPEC Plus

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34
Q

US Role in Oil Importation over time

A

Early US: used to be a large importer of oil but is now self-sufficient due to unconventional oil production ( horizontal and hydraulic fracturing)

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35
Q

Largest Oil importers and Exporters

A

Importers: China, India, and Japan
Exporters: Saudi Arabia, Russia, Iraq

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36
Q

What rules must Oil and Gas companies follow?

A

Rules established by both FASB and the SEC

Some apply to all companies while some are oil and gas-producing (upstream) activities

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37
Q

Similarities and Diff of FASB Successful Efforts and SEC Full Cost

A

Similarities:
- Both GAAP compliant but SE preferred

Differences
- SE expenses exploration cost except for successful exploration wells
- Full Cost Capitalizes and amortizes exploration costs as part of development effort (used by smaller companies)

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38
Q

SEC Authority Over Accounting

A
  • Involved in public comp reporting because Sec Acts 1933 and 1934, due to stock market crash 1929

Ultimate authority over public company accounting and reporting

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39
Q

What does the SEC rely on FASB for?

A

Lead GAAP matters with oversight

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40
Q

Securities Act of 1933 & 1934

A

1933: Regulates new public offerings of Secs

1934: extends federal regs to the secondary market, prescribing the required info, presentation format and accounting methods to be followed

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41
Q

Sources of Oil and Gas Disclosure Requirements

A

Disparity btw SE and FC methods brought to attention in the Energy Policy and Conservation Acts of 1975 & 1976

Passed after the Arab Oil Embargo of 1973-74

Solidified use of full cost as acceptable
SEC collected data leading to a disclosure on reserves

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42
Q

What is SEC Regulation S-K?

A

Requirements for Information that must be included in a 10k - standard instructions for filing

  • Part 1200: disclosure requirements that apply to companies with O&G-producing activities
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43
Q

What is SEC Regulation S-X?

A

Requirements for the Preparation and presentation of Financial Statements and Footnotes in the 10k

  • Part 4-10: Rules that apply to O&G producing activities - full cost method rules too
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44
Q

What is the Accounting Standard Codification?

A

FASB GAAP rules - consistent and overlaps with Reg S-X

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45
Q

What is ASC 932?

A

Requirements that apply to Entities Engaged in Oil and Gas Producing Activities

Primarily pertains:
- Treatment of O&G-related costs under the Successful Efforts Method
- Supplemental Disclosures: specify the format of data in S-X and some in S-K

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46
Q

Conventional v. Unconventional Develop

A
  1. Conventional Exploration: uses vertical wells to search for trapped oil accumulations of migrating oil/gas
  • substantial dry hole risk
  1. Unconventional: Uses horizontal wells and hydraulic fracturing to produce from low permeability shale or tight rock formations
  • wells cost more but produce at a higher rate
    -very little dry hole risk because cover wide areas
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47
Q

What is the dominant drilling method in the US?

A

Unconventional on shore activity in the lower 48

  • conventional vertical well drilling popular elsewhere
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48
Q

Scope of ASC 932

A

Oil and Gas Producing Activities: Upstream

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49
Q

What are Exploration Costs?

A
  1. Geological and Geophysical: Cost of area Analysis
    - Ex: Seismic costs (reprocessing or new), permitting
  2. Exploration Overhead: Costs of Exploration Staff and Related Expenses
  3. Undeveloped Property Maintenance: Costs of maintaining leases such as delay rentals, costs of carrying
  4. Exploration Wells: Wells drilled on acreage w/ no proved reserves - dryhole if no proved reserves discovered
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50
Q

Exploration Costs that Are Expensed as Incurred (SE: regardless if proved reserves found)

A

Geological and Geophysical, Exploration overhead, and Undeveloped property maintenance

Also Dry hole wells

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51
Q

Exploratory Costs Capitalized (Successful Efforts)

A

Capitalize pending Determination whether proved reserves were discovered

  • Costs of drilling and equipping exploratory wells
  • Costs of drilling exploratory-type test wells
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52
Q

Mineral Rights in the US Vs Other countries

A

Other Countries:
- Governments claim ownership of oil and gas rights

US
- the majority of mineral rights are privately owned
- small amount of private ownership in Canada
- US gov and state gov have substantial ownership of onshore mineral rights and all offshore mineral rights

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53
Q

What is the Bundle of Sticks Analogy?

A
  • a reference to the various rights of land ownership
  • Can be separated/severed and owned by diff parties
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54
Q

What is Fee Simple Absolute?

A

Land that has all of its rights intact

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55
Q

Difference between Conveyance and Reservation ( In terms of mineral rights)

A

Conveyance: Transfer or sale of Mineral rights to another

Reservation: Retaining mineral rights while conveying surface rights

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56
Q

What is the Dominant Estate and why?

A

Mineral estate is the dominant estate.

Because they have the right to use the surface as reasonably necessary to explore for, extract, and transport minerals

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57
Q

What types of rights do oil companies want and how do they usually obtain them?

A
  • Only want mineral rights

Most common method for acquiring mineral rights in the US is by leasing them

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58
Q

Key Elements of an Oil and Gas lease

A

Negotiated Provisions

  • Bonus amount: upfront % based on net mineral acres
  • Royalty %: Monthly payment of % of actual production revenue (free of production costs) usually 1/8th to 1/4th less production taxes
  • Delay Rentals: pmts during the primary term if drilling hasn’t occurred (not common) (if not paid up)
  • Length of Primary Term: time allowed to establish production 2-5 years (some extensions)
  • Secondary term: Time allowed to continue production - as long as economic quantity

Possibly surface use provisions

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59
Q

Production Taxes w/ Leases

A
  • states require payment of production taxes and the royalty owner’s share of taxes is deducted from the royalty payment and paid to the state
60
Q

Types of interest in a Mineral Right lease

A

Mineral estate owner (Lessor):
- Retains royalty interest in the production

Oil and Gas Company (Lessee):
- Working Interest - temp development rights

61
Q

What is an Undivided Interests?

A

A % of the whole tract

Net mineral Acres: % of the whole land

Net revenue interest: % of the royalty after considering net mineral acres

62
Q

What is the Role of the Bureau of Land Management?

A

Manages leasing of all onshore federal lands even if other agencies manage surface activities

  • Federal leasing done by auction based on bonus bid amounts

Federal policy sets royalty, primary term, and delay rentals

63
Q

3 Types of Royalty

A
  1. Lease Royalty Int - typical - temporary Interest (terminate when lease terminates)
  2. Overriding Royalty: Paid out of the working interests share of production (temporary int) - no ownership of minerals just, revenues, non operating - like a broker who buys WI and leases to comps
  3. Non Participating Royalty Interest: Carved out of the Mineral estate and never expire. Does not participate in bonus payment or leasing decisions.

Permanent Interest

64
Q

What is a farmout?

A

A way for a party to earn a share of the Working interest held by an existing working interest owner by doing work on a property, such as drilling a well

the company leases potential land - awaits for big company to acquire potential O&G land

65
Q

What is the Rule of Capture?

A

You own what you produce from your own property unless part of pooling or unitization

66
Q

What are Conservations Laws and what is there purpose?

A

Conservation laws are put in place to limit waste, protect the environment, and ensure fairness

Not Taxes issues

67
Q

What is the Texas regulatory agency for Oil and Gas?

A

Railroad Commission (name is deceiving)

68
Q

Examples of Conservation Laws

A
  1. Well spacing minimum for lease line (40 acres)
  2. Density Restriction: Min acreage for a permit
  3. Production rate limits
  4. Gas Flaring restrictions
  5. Health, safety and env
  6. Permitting, monitoring, and reporting
  7. Abandonment reqs
69
Q

What is Pooling?

A

Small individual tracts are combined into larger working areas with shared costs and production to meet statutory mins for drilling permit (40 acres)

70
Q

What is Unitization?

A

Used for kind of large working areas for horizontal drilling (1280 acres)

71
Q

Royalties when Pooled or Unitized

A

Production is allocated to individual tracts and each lessor is paid a royalty depending on % ownership in the tract and the royalty % agreed in their lease

72
Q

Process for calculating Net Revenue Interest of an individual

A

A. % unit allocable to tract ( tract acreage / unit acreage)
B. What is their % ownership in the tract?
C. What is the royalty rate in their lease?

Net Revenue Interests = A x B x C

73
Q

What is a Joint Operating agreement?

A

Used when there is more than one working interested owner in pooling or unitization

Signed to designate one party as operator and to define a method for sharing production and costs

74
Q

Role of an Operator (JOA)

A

The operator will conduct all work and bill the nonoperators for their share of the costs

  • each party markets their own share of production
75
Q

What are Property Acquisition Costs? (include examples)

A

Costs of acquiring mineral interests through the purchase of a lease

costs of acquisitions, brokers, landmen, attorneys, and recording fees

Lease bonuses and related costs to acquire working interests
- royalty interests and non operating interest

76
Q

Most common method of acquiring mineral interests in the US?

A

Leasing

77
Q

What is the treatment of Acquisition costs?

A

Initially capitalized when incurred whether proved or unproved

78
Q

What are proved reserves?

A

Quantities of oil and gas that can be estimated with reasonable certainty ( 90%) to be economically producible from known reservoirs

Future rev projected at fixed price based on prior year avg (12m)

79
Q

How do Unproved properties become Proved?

A

Through successful exploration and development

  • limited to drilling units immediately adjacent to developed areas ( one drilling unit away)
80
Q

What level can proved reserves not be assigned?

A

Proved reserves cant be assigned below the lowest level confirmed by wells

81
Q

Required treatment of Unproved Property

A

High risk of becoming value less, so must be regularly monitored for impairment

82
Q

Unproved properties Valueless if:

A
  1. Lease expires because production not established by end of the primary term
  2. Unsuccessful wells on the property or nearby properties indicate that sufficient quantities of O&G not present
83
Q

Individually Significant Properties Impairment

A

Individually reviewed for impairment

Usually properties whose acquisitions costs are relatively significant (unproved Properties)

84
Q

Individually Insignificant Properties

A

Can be reviewed and impaired in groups - geographical units

  • Unproved properties whose acquisition costs are not individually significant (<500k)
85
Q

How are individually insignificant properties impaired?

A

Typically over the primary term with a valuation allowance. leases acquired at different times will be depreciated separately

86
Q

Treatment of Lease Options

A

The cost of a lease option is capitalized - only a portion for the lease option take out any seismic

  • If option exercised: option costs reclassified as property acquisition costs
87
Q

When to Expense lease option cost:

A

Earlier of

  • A determination that it will not be exercised or
  • Its Expiration
88
Q

Treatment of Exploration Seismic Costs

A

For Evaluation of unproved properties:
– Cost of seismic programs are expensed whether it is determined proven or not

For aiding the development program of proved Prop:
– Seismic program may be fully or partially capitalized

89
Q

Difference between Proved Developed and Undeveloped

A

Proved Developed: Can be expected to be recovered through existing wells and equip in which cost of equip is relatively minor compared to price of a new well

Proved Undeveloped: Expected to be recovered from new wells on undrilled acreage or from existing where major expenditure is required for recompletion

90
Q

Why are there Limitations on Proved Undeveloped Reserves and what are they?

A

High risk of performing below expectation and value will diminish if not developed in a timely manner

Must be planned for development within next 5 yrs

May not be more than one spacing unit away from an established well unless significant geological and other data to support greater distances

91
Q

Difference between an Exploration well and development well

A

Exploration well: Drilled on Unproved acreage

Development well: Drilled on Proved Acreage

92
Q

Treatment of Exploration Well Costs (SE)

A

CAPITALIZED during drilling pending determination whether proved reserved have been discovered

Successful: Reclassified to wells and equipment
Dryhole: EXPENSED

93
Q

Treatment if well is undergoing evaluation for commercial potential? (SE)

A

Remain CAPITALIZED for a reasonable period after drilling if still undergoing evaluation to justify the assignment of proved reserves

94
Q

Treatment of Wells in Progress at Year-end (SE)

A

If the exploratory well is in progress at the end of the period and the well is determined to not have found proven reserves before financial statements are issued, costs incurred for the period are EXPENSED

no retroactive restatements for previously issued FS

95
Q

What happens when unproved properties become Proved? (SE)

A

Unproved Property acquisition costs –> Initially temporarily suspended in PPE now transferred to proved properties (undeveloped and developed)

96
Q

How are unproved properties transferred when proved? (SE)

A

If individually significant:
- Transferred at cost - accumulated impairment

If Individually insignificant:
- Transferred at cost unless the transfer would cause the net balance of unproven properties (cost-impairment) to go negative

97
Q

What if an individually insignificant property moved to proved and left with a Valuation allowance exceeding the value of the properties?

A

Valuation Allowance must be offset against proved properties acquisition costs

Decrease(debit) in Valuation Allowance
Decrease (credit) in Prop acquisition costs

98
Q

Purpose of Casing

A

Casing: Steep pipe used to line the well ore

99
Q

Purpose of tubing

A

Production flows to the surface through tubing placed inside casing

100
Q

What is a Christmas Tree?

A

Wellhead equipment/valves at the surgace

101
Q

What’s an AFE?

A

An Authorization for Expenditure

used when operator has working interest partners, use formto disclose costs and obtain approval from partners

102
Q

What are Intangible Drilling Costs?

A

Costs for items that aren’t physically present after a well is drilled - no salvage value

Examples: pmts to rig contractor, drilling mud, directional drilling services, fuel

tracked separately because accelerated tax deduction

103
Q

Costs of a horizontal well

A

costs of hydraulically fracturing a horizontal well are higher than drilling costs

104
Q

What are Development costs?

A

Cost incurred to obtain access to proved reserves

Wells drilled on proved properties, completing and equipping the wells, installing flowlines, production facilities, tanks, meter

Not depreciated and related reserves not classified as developed until production starts

105
Q

Treatment of Development Costs

A

Capitalized including wells that are unsuccessful “ development dry holes”

106
Q

What is the treatment if exploration is successful but development costs pending to start production?

A
  • Recategorized from suspended exploration well to suspended development cost
107
Q

What is the categorization of any costs for the completion of a development well that is not up and running?

A

Suspended Development Costs

108
Q

What are production Costs?

A

Costs incurred to operate/maintain wells and related equipment/facilities

Ex: cost of labor to operate, repair and maintenance, materials, property taxes, production taxes

109
Q

Treatment of Production costs

A

EXPENSED as Incurred

110
Q

Purpose of Discounted Cash Flow Analysis

A

Used in exploration and development decision bc large expenditures upfront and cash flows generated over a long period of time

111
Q

Discounted Cash Flow Calculation

A

Use a low risk discount rate to cashflows to calculate the NPV

Project rate of return: Solving for disc rate that causes NPV to be 0

112
Q

Treatment of Abandonment Costs

A

Set up and abandonment liabilities and recognized abandonment costs over the life of the well

113
Q

Abandonment Steps

A
  1. determine how much abandonment would cost if done now
  2. Estimate what the cost would be at the abandonment date by inflating current costs to the abandonment date using reasonable inflations
    3 Determine the current FV of future oblig by discounting cost to current date using credit adjusted risk free rate as discount rate
  3. Book an asset retirement obligation (CR) for the current FV of oblig and book offsetting PPE (db)
  4. Depreciate/Amortize the PP&E over the life of the well on a unit of production basis using proved developed reserves (db dep exp cr.acc dep)
  5. Record accretion exp to reflect the FV of liability increase as abandonment approaches (db. accretion exp | cr. asset retirement oblig)
  6. At the end of x years, debit entire Asset retirement oblig and credit cash or AP
114
Q

Producing Well and Facilities Depletion (what is the numerator and denominator)

A

(EOY Producing PPE- accum prior depreciation + CY additions)
X

((CY Production/(EOY proved developed Reserves + CY Production)))

  • use proven developed reserved
115
Q

Proved Property Acquisition Costs Depletion (what is the numerator and denominator)

A

(Beg of year balance- accum depreciation + CY prop additions)

                                 X

(CY Production/(EOY Total Proved Reserves + CY Production))

  • use proven developed reserves
116
Q

When to Impair Proved Property?

A

Required with triggering event (CV > FMV)
- compares un-depreciated PPE with undiscounted pre-tax cash flows
- can include CF from the development of probable and possible reserves if associated costs included and actually planned
- flexible price forecast as long as reasonable
- write down to estimated MV if future cash flow exceeds carrying value

117
Q

Revenue Distribution when Great X markets 100% of production, receives 100% of proceeds from purchase, and makes tax payments and revenue distributions to all owners

A

Entry to record Oil Sales:
db. A/R (entire oil sale amount)
Cr. revenue ( Oil sales * WI %) *(1- Royalty %)
Royalties Payable ( Oil Sales * Royalty %)
Partner Proceed Pyble (remaining amnt)

Entry for Taxes:
Db: Prod Tax expense (Revenue* TR %)
Royalties pyble ( royalty pbl * TR%)
Partner pro pble ( pyable * TR%)
Cr. Prod taxes payable (sales * TR%)

118
Q

Revenue Dristribution when Great X only markets its 60% share and receives proceeds with no deductions makes tax payments and royalty payments to its 60% share

A

Entry to record Oil Sales:
Db. AR (Sales*WI %)
Cr. Revenue (AR * (1- Royalty %))
Royalty Payable ( AR * royalty %)

Entry for Taxes:
Db. Tax Expense (Revenue * TR%)
Royalty Payable ( R/P * TR %)
Cr. Tax Payable (A/R*TR%)

119
Q

Royalty Distribution when Oil purchaser Pays all taxes and makes the revenue distributions

A

Entry to record Oil and Sale Taxes:
Db. A/R (Sales* WI %)(1-Royalty %) (1-TR%)
Tax Exp ((Sales WI %)(1-Royalty %)(TR%)
Cr. Rev ((Sales WI %)*(1-Royalty %)

120
Q

Full Cost Accounting (seismic costs and unproved Property Acquisisition)

A

Costs and reserved grouped on a country-by-country basis

Seismic Costs and related overheads: Capitalized and suspended

Unproved property Acquisition costs:
Capitalized and reviewed for impairment once per year

Impaired portion of unproved property acquisition costs and related seismic in country amortization base and write off as form of DD&a

121
Q

Full Cost: Treatment of Exploration Well Costs

A

Exploration costs are CAPITALIZED and SUSPENDED pending the determination of proved reserves

If Dry hole –> costs included in country amortization base - can trigger G&G and prop acquisition impairment

If successful, the cost may be suspended until projects begin production if significant

122
Q

Full Cost: Treatment of Development Costs

A

CAPITALIZED and may be suspended until placed in service if significant

123
Q

Full Costs: Treatment of OH & Production Costs

A

Gen overhead and production costs are EXPENSED all accounting methods

124
Q

Full Costs: Treatment Abandonment Costs

A

Essentially the same as SE
- Set up discounted liab and capitalize the offset in PPE
- Amortize the PPE
- Continuously adjust liab for accretion with offset to expense

125
Q

Full Cost: DDA Calculation

A

Amortize over Total Proved Reserves on a countrywide basis

-Related develop cost and abandonment costs for proved must be added to amortization calculation

annual dd = unamortized Amortization base * (Current year production * (YE total Proved reserves + CYP))

126
Q

Key differences for Full Cost Impairment vs SE

A
  • CF are discounted at 10%
  • Must use fixed prices ( determined by prior year avg)
  • Production from proved reserves only
  • Excess must be written down to calc limit amount
127
Q

What is IFRS?

A

International Financial Reporting Standards
- Used by most non-US companies
- Fewer oil and gas related rule that are more flexible than GAAP

128
Q

What is the only O&G specific IFRS accounting standard?

A

IFRS 6

  • recognizes variety of accounting practices used by non US comps
  • Capitalization some types of exploration cost not consistent with definition of an asset bc prob of eco benefits
  • Allows companies adopting IFRS to continue their prior capitalization of exploration and evaluation expenditures
129
Q

What does IFRS 6 apply to?

A

Applies to exploration and evaluation expenditures related to mineral resources

E&E begins only after legal rights to explore have been obtained

130
Q

Under IFRS what is the treatment of Pre Licensing Costs.

A

Must be EXPENSED as incurred

131
Q

IFRS E&E expenditures

A

Acquisitions of rights to explore, geological, exploratory drilling, sampling, activities related to commercial viability of extracting a mineral resource

132
Q

Requirements for E&E IFRS 6 requires:

A

Impairment Review: E&E Assets must be tested for impairment when fact suggest CV> FV, impairment recog and asset adjusted to recoverable amount

Presentation and Disclosure: Entities and required present information about E&E assets separately in BS and disclose accounting policies for E&E

Changes in Accounting Practices: Any Changes in Accounting practices must move toward IFRS standards ( expensing more E&E) not further away

133
Q

Look back at slide 87

A
134
Q

Was IFRs meant to be a permanent measure?

A

No originally seen as a temporary measure

Foresaw a future w/ required practice similar to SE

Ultimately, gave up on the idea of uniformity
- divergence not problematic
- Cost would exceed benefits

135
Q

International Contracts Traits

A
  • Each country has own laws and regs
  • each country has multiple contracts with diff terms
    Common approaches:
  • Licensing or concession
  • Production Sharing Agreement
  • Risk Service agreement
136
Q

Common Elements of International Contracts

A

Similar to US:
- Bonus, Royalty, Oil company pays all costs, limited exploration period

Common differences:
- multiple bonus stages
- min work commit
- work plan approval
- relinquish non producing
- govt higher share
- limited duration
- national oil comp as carried partner
- modification prone

137
Q

Who has control over different Systems?
- concessionary and production sharing

A

Concessionary System
- Primarily Oil Company

Production Sharing System
- Shared with the state
- Limits contractor profit and control
- multiple bonuses at diff stage
- Allows a portion of post-royalty production as cost oil for the contractor to recover and the balance is split as profit oil

138
Q

What is a Joint Operating Agreement?

A

used by working interest partners to govern the operation of share interests

Traits:
- defines work area and parties
- rights and obligations ( share of production and costs)
- operator responsibilities
- approves initial work plan
- procedures for approving additional work proposed

139
Q

What is an Approval of Expenditure? (JOA term)

A

Used by the operator to obtain approvals for expenditures that require approval

  • description and purpose of costs
  • share of the cost of each party

30 days to approve or decline, 48 hrs if rig on site

for new wells, approved parties can proceed without non consenting - non consenting regain int after carrying parties recover cost plus premium

Other expenditure require approval of X % of interests to proceed

140
Q

What is an Accounting Procedure (JOA Term)?

A

Exhibit that governs the charging of costs by the operator to the nonoperators

based on COPAS:
- what costs charged
- what info to be provided
- schedule for billings and pmts
- payments to cover operator overhead
- aduit rights

141
Q

What is a Joint interest Bill? (JOA terms)

A

The operator bills each non operator monthly for share of joint interest charges

  • must be issued last day of month following month costs incurred
  • Pmt due in 15 days of JIB receipt
  • Op may req cash advance - no earlier than 1st day of month money is spent
  • electronically sent
142
Q

Income Statement Important Info (required FS #1)

A

Revenue can be split up by product
- reported net of royalties
- no royalty expense
- multiple interests types: lease WI, royalties
- Operated v non op

Lease and well expense
- operated properties: gross cost inc - portion billed to non-operators by JIB
- Non-operated Properties: amount billed by Partners for net share of lease and well costs
- Plus/minus OH fees paid or received (G&A)

Oil and Gas PP&E
- Prop acqu Costs (unproved less impairments. proved developed, proved undeveloped)
- suspended exploration well costs pending determination
- development costs (primarily wells and facilities) WIP and Producing
- Capitalized abandonment obligations

143
Q

ASC 932: Supplemental Disclosures Required

A
  1. Proved Oil and Gas Reserve Quantities
  2. Capitalized costs related to O&G-producing activities
  3. Cost incurred for Prop Acq, explo, and Development
    4: Results of Operations for O&G Producing Activities
  4. Standardized measure of discounted future net CF Related to Proved O&G Reserve Quantities
144
Q

Major Reserve Tables

A

Proved Oil and Gas Reserve quantities
- Oil Reserves MM Barrel
- NGL Reserves MM Barrel
- Gas Reserves BCF
- Total Reserves MM BOE
- Proved Developed
- Proved Undeveloped
- Explanations of Changes in Proved undeveloped

145
Q

Annual Changes in Reserve Quantities

A

Depreciation is calculated by taking YE reserves and adding back CY production to get beginning of year number

  • Revisions
  • Purchases in place
  • Extensions/discoveries
  • Sales in Place
146
Q
A

Oil and Gas Accounting Midterm (1 decks)

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