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Classroom Notes & Test Prep ACCT 7A97
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This 10 page Bundle was uploaded by Angela Speight on Tuesday February 3, 2015. The Bundle belongs to ACCT 7A97 at University of Houston taught by John B. Teare in Fall2014. Since its upload, it has received 202 views. For similar materials see Oil & Gas Accounting in Accounting at University of Houston.
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Date Created: 02/03/15
Oil amp Gas Accounting 2115 129 PM Professor Barry Treare Class Overview 1 Successful Efforts v Full cost accounting as it impacts balance sheet amp income statement 2 Discuss Midstream MLPs KinderMorgan Enterprise Products 3 Accounting Issues Chapter 1 Upstream Oil amp Gas Operations Overview of Petroleum Value Chain West Texas Intermediate Cushing OK is standard oil contract Henry Hub South Louisiana is standard natural gas Mcf a thousand cubic feet natural gas measurement MMBtu a million of British Thermal Units energy measurement is roughly equivalent to 1 Mcf Fossil fuels will still be 80 of the market in 2030 Publicly traded EampP companies must report their proved reserves must report to SEC the economic reserves so they grow amp shrink with price when it becomes uneconomic it no longer is a proved reserve WTI West Texas Intermediate US oil pricing Brent Original North Sea field European oil pricing 0 Both Brent amp WTI used for hedging contracts Chapter 2 Introduction to Oil amp Gas Accounting Upstream Oil Field Life Cycle 0 Acquisition phase everything is capitalized 0 Exploration amp Appraisal 2 accounting methods for how to account for exploration costs drilling exploratory well costs as well as nondrilling costs include seismic amp test well contributions Successful efforts nondrilling costs are expensed in the period they occur successful efforts is the norm in the industry today exploratory dry well is expensed in the period in which I deem it dry this goes against revenues Full cost exploratory dry well is capitalized against the well amortized over life of well as if it were wet well n Proved Reserves goes with leasehold DDampA n Proved Developed Reserves Appraisal stage is the definition of the reservoir Exploration expenditures are expensed when occurred in successful efforts rather than capitalizing over life of well in full cost amortization is based on cost centers field reservoir etc must have geological conformity in successful efforts while full cost is amortized over country Successful efforts is a more conservative approach than full cost in an accounting view 0 Public companies must have reserves audited by a third party 0 Acquisition all expenditures including leasehold title work legal work landmen etc are all in unproved property 0 Exploration seismic drilling exploratory wells etc o Appraisal infrastructure some drilling Abandonment ARO Asset Retirement Obligationsquot is how you manage that on the balance sheet Reserve Categories o Proved Reserves reasonably certain to be recovered in the future Proved Developed Reserves existing wells with existing equipment and operating methods behind wellbore and producible with existing infrastructure Proved Undeveloped Reserves development wells new wells drilled on undrilled acreage require stepout wells to drain the acreage o Unproved Reserves All reserves not qualifying for proved reserves exploratory wells Mineral Interests definition CEILING TEST Proved Reserves with decline curve plus costs expenses and capex assume a price and discount the cash flow at 10 results in your projected Revenue Stream if that number is less than your Assets you write down your Assets bigger impact for FC versus SE because FC has a buildup on the balance sheet because dry holes are capitalized Exploratory v Development Wells o Exploratory wells in SE if it s dry it s expensed in FC if it s dry it s capitalized Impairment Expense annually you evaluate your unproved properties if you don t have enough time to drill before the lease runs out then it s impaired if you drill a dry hole then it s impaired o Individually significant properties have their own impairment individually set up allowance or impairment for each property with specific evaluation for that particular property 0 Smaller insignificant properties are grouped together then assume a certain impairment each year on the cost recorded for those properties Chapter 3 Nondrilling Exploration Costs Successful Efforts 0 Exploration Costs Comprehensive Example Chapter 4 Acquisition Costs of Unproved Property all costs in unproved property general ledger account and also on Fin Statement lease bonus legal fees broker s fees title work it s all capitalized 0 Must periodically assess less than annually if something occurs this helps you not to overstate your balance sheet resulting in greater income 0 Accum DDampA goes against Lease and Well Equipment on Balance Sheet 0 Comprehensive Example 0 Shooting rights Comprehensive Example Chapter 5 Drilling and Development Costs 0 Classification of drilling costs are 2 categories o Intangible drilling costs IDC no salvage value ie labor costs up to and including the cost of installing the Christmas tree for tax purposes almost all IDC must be expensed Mob amp DeMob are IDC Seismic shoots to set the drill site are IDC Definition to know Expenditures for drilling that in themselves do not have a salvage value and are incident to and necessary for the drilling of wells and the preparation of wells for the production of oil and gas Costs of drilling up to and including the cost of installing the Christmas tree For tax purposes almost all IDC must be expensed 0 Equipment Costs Lease and Well Equipment 0 IDC v Equipment example Well Classification definitions o Exploratory well drilled to find and produce 0 or gas in an unproved area 0 Development well must be drilled within the proved area of a reservoir to a zone known to be productive 0 Service we drilled to support production in an existing field 0 Stratigraphic test well drilled to get info to a specific geological condition 0 Delineation wes to find the boundaries of a reservoir Reserves Definitions o Proved developed 0 Proved undeveloped Exploratory Drilling Costs 0 See example on Development Driing Costs 0 See example on Chapter 6 Proved Property Cost Disposition Successful Efforts see flowchart from acquisition impairment surrendered or proved then NET to amortization calculation Cost disposition through amortization Acquisition costs are amortized over proved reserves Wells and equipment are amortized over proved developed reserves The reserves used are the ones which the working interest owner owns or is entitled to o For 0ampG accounting the term used is Depreciation Depletion and Amortization DDampA of proved property and wells and equipment 0 Oil and gas property costs are amortized using a unit of production methodquot whereby Unamortized costs at the end of the period X production for the period beginning of period reserves amortization expense Example 200000 net book value X 10000 bbs 100000 bbs 20000 amortization See Accumulate DDampA in a contra asset account normal credit balance against normal debit balance of the asset For purposes of DDampA calculation we use proved reserves and proved developed reserves Equivalent Formula Production for Period Beginning of Period Proved Reserves X Net Book Value of Proved Property at end of period 3 main assets on balance sheet unproved property proved property amp Lease and Well Equipment cost of drilling successful wells undeveloped acreage is not amortized Cost of Lease and Well Equipment including flowlines tanks etc are capitalized and amortized using proved developed reserves as denominator numerator is production Costs grouped by field common geological structure 0 Field s property acquisition costs amortized over total proved reserves PDP and PUD o Field s well equipment and development costs including IDC amortized over proved developed reserves excluding undeveloped reserves See examples for Wellsinprogress to Dry Hole amp DDampA calculations Asset v Expense see example Chapter 9 Accounting For Asset Retirement Obligations and Asset Impairments Record costfuture liability legal obligations associated with retiring and decommissioning linglived assets shortly after spud date ie commencement of drilling operations Includes future dismantlement and removal of production equipment and facilities and the restoration and reclamation of the field s surface lands to an ecological condition similar to that existing before 0ampG extraction began Costs are usually required by government regulations lease or contracts also per production sharing arrangements Typically paid at the time 0ampG reserves are depleted and no longer economically feasible to continue operations The fair value of a liability for an ARO should be recognized in the period incurred when 0 The entity has an exiting obligation associated with the retirement of a tangible long lived asset 0 And the amount of the liability can be reasonably estimated Initial Recognition When the initial ARO is recorded a corresponding increase is made to the related asset included as part of the cost of the related wells equipment and facilities 0 The asset cost is expensed over its useful life on a unit production basis as part of the DDampA calculation Accretion ARO liabilities must be accreted over time such that the balance initially recognized at present value is adjusted to reflect the passage of time o The creditadjusted risk free rate existing when the liability was initially measured us used notes and bonds 0 The accretion expense is recognized as an increase in the ARO liability and is reported as an operating expense item Settlement If you do not match liability to ARO then you must recognize either a gain or loss on the settlement See example Production Terminology Chapter 10 Meter device used to measure gas flow from a well through a pipeline to a delivery point Run Ticket shows beg and end tank levels used by purchaser to calculate the amount of oil on which to the pay the operator SCADA Supervisory Control and Data Acquisition Strapping Table Volume measurements of an oil tank on a lease LACT meter Lease Automated Custody Transfer meters oil from a well into a pipeline Pressure Base the standard pressure at which a thousand cubic feet of gas is sold Pumper an employee of an EampP company who works out of a field office and is responsible for visiting a well on a regular 90r daily basis to ensure the well is producing Division Order legal document to show all interests in a well or lease To Study for the FINAL Distinguish between FC and SE exploratory dry holes GampG cost centers are smaller in SE Reserves proved v proved undeveloped study definitions and what they re used for they re denominators in fraction for calculating DDampA on proved property numerator is always production all costs on balance sheet are ultimately moved to income statement either through impairment DDampA or abandonment Page 52 We evaluate unproved properties on an annual basis per GAAP and if impaired you must take a debit to the income statement as an impairment expense and correspondingly take a credit to the contra asset account of Impairment Allowance Different Types of Costs page 37 Acquisition Exploration Development amp Production SE v FC and how to distinguish When to use proved reserves v proved developed reserves No lecture just final exam 2115 129 PM 2115 129 PM
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