All property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties.
These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves.
The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.
Successful Effort Method
Only the cost of successful efforts is capitalized.
Cost of exploratory dry holes, geological and geophysical (G&G) costs in general, delay rentals, and other property carrying costs are expensed.
The net unamortized capitalized costs are amortized on unit-of-production method, whereby property acquisition costs are amortized over proved reserves and property development costs are amortized over proved development reserves.
Pre Licensing Cost
Costs incurred prior signing of agreement such as cash pays for data and information to participate in a new PSC bid.
License Cost Costs incurred upon signing of agreement such as signature bonus.
Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved). They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties
Geological & Geophysical Seismic
Information that will help decide (1) whether contractors should be obtained in area of interest (2) whether and where exploratory areas should be drilled.
identifying areas that may warrant examination and
examining specific areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test (appraisal) wells.
Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property
Drilling carried out to determine the physical extent, reserves and likely production rate of a field.
Accounting for appraisal wells under IFRS tends to be based on whether the field or the reservoir is ultimately determined to be successful and developed, justifying the capitalization of dry appraisal wells in the same field.
Under US GAAP, an appraisal well is treated exactly the same as an exploration well and should be written-off if unsuccessful, even the very same field or reservoir is determined to be successful and developed.
Development costs are incurred to :
Gain access to and prepare well locations for drilling such as clearing ground, draining, road building, gas and power lines;
Drill and equip development wells including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly;
Acquire, construct and install production facilities such as lease flow lines, separators, production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal system .
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.
Technical performance problems (lower production profile)
Evidence from internal reporting: worse profit (bigger loss) or cash flow, anticipated loss on disposal, change in long term view of sales prices
Lower estimates of physical quantities of petroleum reserves
Lower reserves in PSC due to higher prices is not an impairment trigger .
Under IFRS impairment includes license acquisition costs and exploration and appraisal costs
Exploration licenses in unproved properties must be assessed periodically (at least annually).
If dry hole has been drilled and there are no firm plans for further drilling or appraisal activities, the property would be impaired.
Under US GAAP, FAS 121 are applicable for proved properties and related equipment, and facilities whereas unproved properties are subject to the impairment provision FAS 19 (Accounting for Suspended Well Costs).
Process conducted in accordance with license requirements and relevant legislation and practice to:
Plug and abandon wells
Dismantle wellhead, production and transport facilities
Remediate and restore producing areas
Decommissioning provisions are recognized when there is
Establishing a pattern of past practice
Making statement to other parties that the company will accept responsibilities
Creating a reasonable expectation that the company will act in a certain way.
Decommissioning costs are typically cost recoverable based on actual cash funding.
Most PSCs have decommissioning obligations for the contractor, despite ownership of assets by government.
Usually cash funding is required to make sure there will be enough fund to carry out decommissioning activities. Both contractor and government have control over the cash fund.
Full Cost vs Successful Efforts Accounting Production costs Development costs Specific pre-licence, licence acquisition, exploration and appraisal costs General costs prior to acquisition of licence SUCCESSFUL EFFORTS FULL COST Costs
Full Cost vs Successful Efforts Accounting Expensed Expensed Capitalised Capitalised Capitalise initially then write off, unless commercial reserves established Capitalised Expensed Expensed SUCCESSFUL EFFORTS FULL COST Production costs Development costs Specific pre-licence, licence acquisition, exploration and appraisal costs General costs prior to acquisition of licence Costs
Overview of PSC Accounting:
Supporting equipment and facilities
Depreciation, depletion and amortization
Acquisition cost is not classified as part of the operating costs as based on the constitution, the ownership of the natural resources stays with the state and is not transferred to the contractors.
Signature Bonus IS NOT classified as part of the operating costs (cost recovery) but classified as deductible expense for tax purposes.
Operating costs (cost recovery)
For any year in which commercial production occurs, operating costs consist of: