There are different factors CPAs look at for accounting in the oil and gas industry. Here are some of the things taken into consideration for companies involved in the exploration of new oil and gas reserves.
There are two primary approaches that can be used – the successful efforts method and the full cost method.
Successful efforts (SE) method: You may capitalize only expenses that resulted in successfully locating new oil and gas reserves. Expenses incurred that produced unsuccessful results are charged against revenue for that period.
Full cost (FC) method: All expenses incurred by locating new oil and gas reserves will be capitalized, regardless of the outcome and whether or not it was successful. The objective for this approach is to have the costs written off over the course of a full operating cycle.
Acquisition costs: these are costs incurred during the process of acquiring rights to explore, develop, and produce natural gas or oil. These would be things that relate to the purchase or lease of rights to extract oil and gas on property that is not owned by the company. In addition, legal expenses, title search, broker, and recording fees would also be considered acquisition costs.
Exploration costs: these expenses relate to the collection of data that will be used in the decision of whether or not to drill at a particular location. This includes seismic and geophysical information from the initial examination of a specific area.
Of these expenses, some will be considered tangible while others are intangible. What costs went into preparing the site prior to the installation of drilling equipment? Those will be intangible. Tangible costs are those related to installing and operating the equipment.
Development costs: development costs have to do with well completion, road construction, or other infrastructure improvements needed to access worksites, extract, gather, and store the oil or gas from the reserves.
Production costs: these expenses are usually incurred in extracting oil and natural gas from the reserves. Production costs include workers' wages, electricity, and other things required to keep the well pumps operating.
Your CPA will know the best methods of maximizing your company's profitability. If you have any questions regarding anything mentioned in this blog, be sure to contact us. You can read more in the full article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
