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Oil and Gas Accounting: Upstream Operations (Portfolio 5206)

Product Code: TPOR45
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Oil and Gas Accounting: Upstream Operations, written by Linda M. Nichols, Ph.D., CPA and Professor and Director of Accounting Programs at Texas Tech University, covers a full scope of accounting and financial reporting standards and practices for upstream oil and gas activities both in the United States and internationally. 

Accounting and reporting for exploration and production activities has well established guidelines that are followed in the United States. While international standards for the industry are not as comprehensive, many established norms tend to be followed on a worldwide basis. This Portfolio covers accounting and reporting standards and practices both in the United States as well as internationally dealing with upstream operations. 

This Portfolio discusses all aspects of upstream financial reporting, from initial testing and investigation of potential prospects, acquisition of interests, exploration, development, production, and eventual abandonment. The differences between full-cost and successful-efforts accounting are detailed and the reasons that companies might choose one method over another are discussed.  

Production activities are defined and their reporting discussed along with common methods of allocating indirect production costs. Revenue accounting is thoroughly examined including issues of balancing wherein joint interest owners take more or less production in-kind than their actual share. How unitizations are affected is illustrated. A unitization occurs when adjacent properties with different working interest owners are joined and operated as one unit with a new agreement issued between all parties. Joint interest operations are covered, including the responsibilities of both the operator and the non-operators, overhead allocation, and the handling of wells drilled when one non-operating party decides not to participate in a well on the field. The recording of sales and exchanges of interests are illustrated, and the required supplemental disclosures are illustrated and discussed. In addition, the basics of well economics are covered including a discussion of how completion decisions are made as well as determining well and field profitability. 

For each topic covered, reporting under U.S. standards and international standards is presented on a comparative basis. Supplemental disclosure requirements for oil and gas activities are discussed as well as topics of importance to financial professionals in the field of oil and gas accounting, including the computation of unitizations and equalizations, well economics, and common industry ratios used in analysis and benchmarking. Examples are disbursed throughout the Portfolio to aid in the understanding of the application of both U.S. and international reporting standards.

Worksheets provide more comprehensive examples related to financial reporting by exploration and production companies as well as illustrations of the supplemental disclosures, and a glossary of common industry terms. 

Oil and Gas Accounting: Upstream Operations allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

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Detailed Analysis

I. Introduction and Scope of Portfolio

Introductory Material

A. Nature of Upstream Operations

B. Oil and Gas Reserves

C. Pertinent Accounting Pronouncements

D. Primary Methods of Accounting: Historical Perspective

E. Scope of Portfolio

II. Successful-Efforts Method of Accounting for Exploration and Development Activities

Introductory Material

A. Pre-Drilling Exploration Costs

1. Geological and Geophysical Costs

2. Shooting Rights

3. Test Well Contributions

B. Acquisition Costs

C. Exploratory Drilling

D. Development Costs

1. Construction Period Interest

2. Workovers

3. Appraisal Wells

E. DD& A (Depletion, Depreciation & Amortization)

F. Depreciation of Support Equipment

III. Full-Cost Method of Accounting for Exploration and Development Activities

Introductory Material

A. Pre-Drilling Exploration Costs

1. Geological and Geophysical Costs

2. Shooting Rights

3. Test Well Contributions

B. Acquisition Cost

1. Signing Bonuses

2. Options Without Shooting Rights

3. Options With Shooting Rights

4. Reclassification of Costs to Proved Property

C. Exploratory Drilling

D. Development Costs

1. Construction Period Interest

2. Workovers

3. Appraisal Wells

E. DD& A (Depletion, Depreciation & Amortization)

1. Joint Oil and Gas Wells

2. Costs Excluded From DD& A Calculation

F. Depreciation of Support Equipment

G. Comparison of Full-Cost and Successful-Efforts Accounting

IV. Impairment

Introductory Material

A. Impairment of Unproved Property

1. Example: Unproved Significant Properties, Successful-Efforts

2. Example: Unproved Significant Properties, Full-Cost

3. Example: Unproved Insignificant Properties, Successful-Efforts

4. Example: Unproved Insignificant Properties, Full-Cost

5. Impairment Reversal

B. Impairment of Proved Property

1. Example: Proved Property, Successful-Efforts

2. Example: Proved Property, U.S. Full-Cost Ceiling Test

3. Example: Proved Property, International GAAP for Full-Cost

V. Asset Retirement Obligations

Introductory Material

A. Example: Initial Recording of the Asset Retirement Obligation

B. Example: Accretion of Interest

C. Example: Change of Cost Estimate

D. Example: Change in Timing of Retirement

VI. Accounting for Production Activities

Introductory Material

A. Accounting Guidance

B. Indirect Versus Direct Costs

1. Example: Direct Costs

2. Example: Indirect Costs

VII. Revenue Accounting

Introductory Material

A. Basic Recording of Revenue

1. Journal Entries

a. Example: Basic Revenue-U.S. GAAP

b. Example: Basic Revenue-International GAAP

2. Production Allocation

3. Production Taxes

4. Oil or Gas Used Off Property

5. Minimum Royalty Provisions

6. Take-or-Pay Provisions

B. Producer Imbalances

1. The Sales Method

2. Entitlement Method

3. Price Changes in Balancing Situations

C. Pipeline Imbalances

VIII. Accounting for Joint Interest Operations

Introductory Material

A. Contracts

B. Recording of Costs

1. Accumulation in Regular Accounts

2. Distribution of Costs as Incurred

3. Cash Calls

4. Cash Calls Not Allowed

C. Transfers of Equipment

1. New Material Transfers

2. Material Transfers From or To the Warehouse

3. Material Transfers Between Properties

D. Overhead

1. In General

2. Methods of Allocating Overhead

a. Fixed Rate Method

b. Percentage Basis Method

E. Nonconsent

F. Joint Interest Audits

IX. Unitizations

Introductory Material

A. Computation of New Interests

B. Equalization

C. Redetermination of Interests

X. Conveyances

Introductory Material

A. Sales of Mineral Interests

1. Unproved Property

a. Sale of Entire Interest

b. Sale of Partial Interest

2. Proved Property

a. Sale of Entire Interest

b. Sale of Partial Interest

B. Carve-Outs or Retentions of Nonworking Interests

1. Carve-Outs

2. Retentions

3. Farm Outs and Farm Ins

4. Free Wells

5. Carried Interests

XI. Disclosures

Introductory Material

A. Current Practice

1. Reserves Quantity Information

2. Capitalized Costs

3. Costs Incurred

4. Results of Operations

5. Standardized Measure of Discounted Future Cash Flows

a. Future Cash Inflows

b. Future Development and Production Costs

c. Future Income Tax Expense

d. Future Net Cash Flows

e. Discount

f. Standardized Measure of Discounted Future Net Cash Flows

6. Change in the Standardized Measure of Discounted Future Cash Flows

B. Special Additional Disclosures for Full-Cost Companies

1. Amortization per Unit of Production

2. Unevaluated Costs

3. Ceiling Test Results

C. Other Disclosure Requirements

D. Use of Disclosure Information

1. Reserves Replacement

2. Average Reserves Per Well

3. Average Daily Production Per Well

4. Finding Cost Ratio

5. Lifting Costs per BOE

6. DD& A per BOE

7. Reserve Life

E. Reconsideration of Disclosures by the SEC

XII. Basic Well Economics

Introductory Material

A. Completion Decisions

B. Well Profitability

C. Field Profitability

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Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Glossary of Significant Terms and Acronyms

Worksheet 2 Example: Joint Interest Agreements With Cash Calls

Worksheet 3 Example: Joint Interest Agreements Without Cash Calls

Worksheet 4 Comprehensive Example of Successful-Efforts and Full-Cost Accounting

Worksheet 5 Integrated Oil Company Supplemental Disclosures Illustration-ExxonMobil Corporation 2007

Worksheet 6 Independent Oil Company Supplemental Disclosures Illustration-Anadarko Petroleum 2007

Bibliography

OFFICIAL

Internal Revenue Code

U.S. Treasury Regulations

Securities and Exchange Commission

Financial Accounting Standards Board

UNOFFICIAL

International Accounting Standards Board

U.K. Accounting Standards Board

Association of International Petroleum Negotiators

Council of Petroleum Accounting Societies

Oil Industry Accounting Committee

Periodicals

BNA Tax and Accounting Porfolios

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Linda Nichols
Linda Nichols, Ph.D., Louisiana State University (Accounting). Dr. Nichols worked for an international accounting firm in Houston as part of the oil and gas industry audit division and later joined Columbia Gas Development, an exploration and production company. She is heavily involved with the oil industry through consulting and training for oil companies worldwide. She has led industry training in Angola, Nigeria, Cameroon, Ecuador, Malaysia, Indonesia, China, Thailand, Hungary, the United Kingdom, Australia, and the United States, and has spoken at several national conferences including the North American Petroleum Accounting Conference and the AICPA Oil and Gas Industry Conference. Dr. Nichols has also worked as Professor and Director of Accounting Programs at Texas Tech University. She is currently the Associate Dean and Director of Graduate Business Programs in Collins College of Business at the University of Tulsa. She also is Associate Editor of Oil, Gas and Energy Quarterly and on the Editorial Board of Petroleum Accounting and Financial Management Journal, and she has published numerous articles dealing with accounting issues in the oil industry. Dr. Nichols also received the 2007 Texas Society of CPAs' Outstanding Accounting Educator Award, was named Outstanding Educator of the Year by the American Woman's Society of CPAs, served as President of the South Plains Chapter of the Texas Society of Certified Public Accountants (TSCPA), and serves as a trustee of the Educational Foundation of the TSCPA. Dr. Nichols is a licensed Certified Public Accountant in Texas.