country economy (Home & Host Country). Organizations actions have direct affects on the
economy. Organizations plan there action according to information they gather from
organizational members. Trade organizations relates from the demand of their customers that can
be international and local.
The project relates from Petroleum Accounting. Petroleum demand is increasing day by day.
Crude Oil is the major part which gives strength to the country economy. There demand is driven
by multiple factors including world supply, product markets, refinery capacity, technological
changers and the prevailing economy.
Accounting is used for organization to take decision because it records all the information which
relates from production till end user in which currency is involves. To understand the overall
accountants should be aware of nature and treatment of exploration, development and production
costs and the agreements on which joint venture formed and international best accounting
practices.
The word Petroleum is derived from the Latin terms Petra (rock) and oleum (oil). Petroleum
refers not only crude oil but also natural gas which found underground rock formation.
Petroleum refers to the hydrocarbon compound of the Crude Oil.
Crude Oil is measured in barrels (bbl) which equates to 42 U.S. gallons and natural gas is
measured in two ways, and both are important in petroleum accounting.
Amount of energy is expressed in million British thermal units (MMbtu).
By volume, this is expressed in:
Mcf
MMcf
Bcf
Tcf
Hydrocarbon is expressed in Barrels of Oil Equivalent (BOE) & gas volumes in Mcf are
converted to barrels on the basis of energy content or sales value. Approximately 5.6 Mcf of dry
gas has the same MMBtu energy (5.8 MMBtu) as an average U.S. barrel of Oil.
We have three types of petroleum industry.
1. Upstream
2. Midstream
3. Downstream
1. Upstream: A complex and capital intensive business including preliminary exploration
(2D & 3D seismic), drilling of wells, development and production of hydrocarbon.
Technical Capacity.
Operational Capacity
Legal and Compliance with Residential Requirement.
Financial Capacity.
This information are required by each partner to account for it share of cost in its books
of accounts.
To calculate accounting as well as taxable profit, different treatments are used for
exploration, appraisal (Extend Well Test), and Development and production expenditure.
Joint venture has no ability to submit tax return.
Accounting Procedure
a) Funds Management
Upon approval of work program and budget, the Operator has a right on a current basis
only, to make monthly advance cash calls to all WIOs for the period covered by such
work program and budget. The Operator shall restrict the funds held in the bank account
for Joint Operation to a level consistent with that required for the conduct of Joint
Operation.
b) Charges to the Joint Accounts
1) Allocable Charges
Should wells costs be treated as Assets or Expenses? Should the cost of a dry hole well be
capitalized as a cost of finding oil and gas reserves or expected?
Will the amount of oil and gas reflects assets in financial statements because there prices
fluctuates?
If production decline over time and productive life varies by property, how should
capitalized costs be amortize and depreciated?
Should the gain/ loss be recognized on the sale if the company forms a joint venture and
sells portions of the lease to its venture partners?
Upstream petroleum companies follow one of two financial accounting method for Petroleum
E&P activities.
1. Successful Efforts.
2. Full Cost.
The methods are different as how the costs are accounted for development and its impact on
profit & loss.
Cost of exploratory dry hole and other property carrying costs are charged to expenses in the
year incurred. Costs of successful exploratory well and all development costs are capitalized. Net
of unamortized capital costs are amortized using unit of production calculations.
Fixed Assets capitalized all property acquisition, exploration and development costs, even dry
hole costs.
Successful Effort Method: Costs are expensed out as incurred in the same
financial year.
Full Cost Method: Cost is capitalized. Only loss on impairment of long lived
assets is expensed out.
Exploration Costs
Nature
Costs incurred on areas that are considered to have prospects of containing oil and gas
reserves including costs of drilling exploratory and stratigraphic test wells.
Exploratory costs are of two types.
a. Geology and Geophysics
Geology is the science that studies the planet earth and geophysics studies the
earth by quantities the earth by quantitative physical methods, is used in
conjunction with geology in the exploration for oil and gas.
Treatment
I.
II.
Successful Effort Method: Except the cost of wells, all exploration cost
are correctly expense incurred.
Full Cost Method: Cost must be capitalized is capitalized.
b. Drilling Cost
When subsurface formations point to the presence of hydrocarbon, detailed
planning in conducted including decision on a drilling method and choice of
contractor to drill and exploratory well as per the committed work program.
Exploratory Well: An exploratory well is any well that is not a developed well.
Developed Well: A well drilled within the proved area of an oil or gas reservoir
to the depth of a stratigraphic horizon known to be productive.
Strategic Test Well: A drilling effort, geologically directed, to obtain information
pertaining to a specific geologic condition. Such wells customary are drilled
without the intention of being completed for hydrocarbon production. This
classification also includes tests identified as core tests and all types of
expendable holes related to hydrocarbon exploration. Stratigraphic tests wells are
classified as (a) exploratory type, if not drilled in a proved area or (b)
development type, if drilled in a proved area.
Treatment
a) Successful Effort Method: Exploratory drilling costs are deferred (kept in
CWIP) until the outcome of the well is known. If an exploratory well finds
proved reserves, the deferred costs are capitalized. Absent proved reserve, the
deferred costs of the well are expensed out.
b) Full Cost Method: All drilling and equipment costs that are incurred are
capitalized.
Disclosure for each annual period and Income Statement is presented, as follows:
Drilling sites, clearing ground, drilling road, building and relocating public roads, gas
lines and power lines.
Including casing, tubing, pumping equipment and wellhead assembly.
Acquire, construct and install production such as lease flow lines, separator, treaters,
manifolds, measuring devices and production storage tanks.
Provide improved recovery system.
Treatment
Development costs are capitalized and depreciation, depletion and amortization (DD&A)
charged as follows. Basic unit of production computation.
Production Costs
Costs incurred to operate and maintain wells and related equipment and facilities, including
depreciation and applicable operating costs of support equipment and facilities and other costs of
operating and maintaining those wells and related equipment and facilities. They become part of
the cost of oil and gas produced.
I. Costs of labor to operate the wells and related equipment and facilities.
II. Repair and maintenance.
III. Materials, supplies, fuel consumed in operating the wells and related equipment and
facilities.
Treatment
Production costs are generally expensed as incurred under both methods.
I.
II.
III.
IV.
V.