Oil and Gas Accounting Test 2 Review

Topics: Depreciation, Petroleum, Oil reserves Pages: 11 (3285 words) Published: July 28, 2014
Proved Reserves- estimated quantities or crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions Proved Developed Reserves- reserves that can be expected to be recovered through existing wells with existing equipment and operaiting methods. Proved undeveloped reserves- reserves expected to be recovered by new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion Phases Encountered in Upstream Operations

Pre-license prospecting
Geological evaluation of relatively large areas
Mineral right acquisition/contracting
Activities related to obtaining from the mineral rights owner the legal rights to explore, develop and produce oil in a particular area Production sharing contracts- arrangement by which companies obtain rights from the government to explore, develop and produce Exploration

Evaluation and appraisal
Drilling additional wells necessary to produce the commercial reserves, constructing platforms and gas treatment plants, constructing equipment and facilities necessary for getting the oil to the gas for processing and constructing pipelines. Production

Extraction and treatment.

Pre-license prospecting and nondrilling exploration
Identifying areas that may contain oil and gas reserves
US Successful efforts- G&G costs expensed as incurred
Entry: Db G&G Expense Cr Cash (before or after license acquisition) Overhead costs with G&G activities
Successful efforts- expensed as incurred.
Successful Efforts
Geological and Geophysical costs must be expensed as incurred. Doesn’t matter if costs are incurred before or after the license is acquired. G&G costs and contract accounting
If operation is conducted under Lease or concession agreement, it is unlikely that the contract would contain provisions that would permit cost recovery of these costs If the operation is conducted under a psc or risk service agreement, the contractor may be permitted to recover G&G related expenditures incurred after license acquisition and possibly G&G costs incurred before license acquisition Support equipment and facilities

Cost of acquiring support equipment and facilities should be capitalized Any related depreciation or operating costs become an exploration, development or production cost, as appropriate. Entries:

Db G&G expense –depreciation Cr Accumulated Depreciation
Db G&G expense-operating costs Cr Cash
Reprocessing Seismic
How to account for cost of re-evaluation or reprocessing of the data? If the reprocessing relates to the search for oil then it should be accounted for according to SE provisions regarding prospecting and nondrilling exploration costs. If the purpose is to determine how best to develop the reserves in the field, then they should be capitalized as development costs. License acquisition costs

Costs of evaluating business environment, signature bonus, negotiating, etc should be capitalized Entry: Db Intangible assets-unproved property Cr Cash
Development and production bonuses
If the payment is actually a deferred signing bonus, the appropriate accounting treatment is to capitalize the development bonus as a license acquisition cost. Accrue once the operations are apparently proceeding to the development phase. Entries: To record signature bonus: Db Intangible Assets – unproved property Cr Cash To transfer unproved property costs to proved due to commercial discovery: Db Proved property Cr unproved property To record accrual of production bonus: Proved property Cr production bonus payable To record payment of production bonus: Db Production bonus payable Cr Cash Internal costs relating to acquisition

Can allocate capitalized costs to individual licenses acquired, on an acreage basis or an a potential...
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