Overview Of Oil & Gas Accounting
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  • 1. Overview of Oil and Gas Accounting & PSC Accounting Budi Hartono
  • 2. Agenda
    • Overview of Overview of accounting principle in upstream oil and gas
    • Overview of PSC Accounting
    • Other PSC consideration
    • PSC Accounting vs GAAP
    • Recording PSC Accounting & GAAP – Operator & NonOperator
  • 3. Accounting Principles in Upstream Oil & Gas
    • Full Cost Method
    • Successful Effort Method
  • 4. Full Cost Method
    • 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.
  • 5.  
  • 6. 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.
  • 7.  
  • 8. 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.
  • 9. Acquisition Expenditures
    • 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
  • 10. 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.
  • 11. Exploration Expenditures
    • Exploration involves:
    • 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
  • 12. Appraisal drilling
      • 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.
  • 13. Development Expenditures
    • 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 .
  • 14. Production Expenditures
    • 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.
  • 15. Impairment
    • Impairment Triggers:
    • Obsolescence
    • Physical damage: accidents, fire, natural disasters
    • 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 .
  • 16. Impairment
    • 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).
  • 17. Decommissioning
    • 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
  • 18. Decommissioning recognition
    • Decommissioning provisions are recognized when there is
    • Legal obligation
    • Constructive obligation:
      • Establishing a pattern of past practice
      • Publishing policies
      • Making statement to other parties that the company will accept responsibilities
      • Creating a reasonable expectation that the company will act in a certain way.
  • 19. Decommissioning Obligation
    • 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.
  • 20. 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
  • 21. 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
  • 22. Overview of PSC Accounting:
    • Acquisition cost
    • Operating costs
    • Capital expenditures
    • Non-capital expenditures
    • Exploration expenditures
    • Development expenditures
    • Supporting equipment and facilities
    • Depreciation, depletion and amortization
    • Inventory
  • 23. PSC Accounting
    • Acquisition cost
    • 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.
  • 24. PSC Accounting
    • Operating costs (cost recovery)
    • For any year in which commercial production occurs, operating costs consist of:
    • Current year non-capital costs
    • Current year’s depreciation for capital costs
    • Current year allowed recovery of prior year’s unrecovered operating costs.
  • 25. PSC Accounting
    • Capital cost
    • Expenditures made for items which normally have a useful life beyond the year incurred
    • Non-capital cost
    • Expenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.
  • 26. PSC Accounting
    • Exploration expenditures
    • All non-capital and Intangible Drilling Costs (IDC) exploration expenditures are expensed as operating expenditures as incurred, without considering whether they relate to a successful or unsuccessful exploration. Whilst for Tangible Drilling Costs (TDC) exploration, is capitalised for successful exploration and is classified as non-capital for unsuccessful expenditures.
  • 27. PSC Accounting
    • Development expenditures
    • Upon dry-hole, all expenditures, the IDC and TDC development expenditures, are classified as non-capital and therefore expensed.
    • Upon successful, the IDC development expenditures are still classified as non-capital and therefore expensed, whilst the TDC development are capitalised.
  • 28. PSC Accounting
    • Supporting equipment and facilities
    • The treatment is the same as the development costs
  • 29. PSC Accounting
    • Depreciation, depletion and amortization (DD&A)
    • DD&A will be calculated beginning the year in which the assets is placed into service. The method used to calculated the DD&A is double declining balance method, whereby in the last year, the residual value is recovered in full and therefore does not consider the amount of reserves
  • 30. PSC Accounting
    • Inventory
    • The costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.
  • 31. Other PSC Considerations
    • First Tranche Petroleum
    • Domestic Market Obligation
    • Investment Credit
    • Cost recovery
    • Flow of PSC
  • 32. First Tranche Petroleum
    • 20 Percent of current year production or certain amount refers to contract
    • Split between government and contractor
      • Based on PSC’s sharing percentage
    • FTP is taxable income
  • 33. DMO (Domestic Market Obligation)
    • A contractor has to surrender a part (25%) of its production for domestic market
    • DMO fees received by a contractor:
    • - The first 5 years production, fee is
    • average ICP
    • - After 5 years, fee is USD .20/bbls or 10%
    • of average ICP (pack II), 15% of average
    • ICP (pack III)
  • 34. Investment Credit
    • Investment credit is an additional allowance when a contractor invests in a new field
    • Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pre-tertiary)
    • Rate investment credit is:
    • - 20% of direct investment amount (if tax rate
    • is 56%)
    • - 17% of direct investment amount (if tax rate
    • is 48 %)
    • - 127%, 142% (oil); 55%, 110% and 125% (gas)
    • in deep sea and pre tertiary areas.
  • 35. Cost Recovery
    • Current year – non capital costs
      • Inventories will be recoverable at the time when landed in Indonesia
    • Current year’s depreciation for capital cost
      • Declining balance method, yearly, grouping per PSC
    • Current year’s allowed recovery of prior year’s un-recovered operating costs
  • 36. Cost Recovery (continued)
    • Operating cash directly associated with production of natural gas will be directly chargeable against natural gas revenues
    • Other costs:
    • - Overhead allocation, should be consistent
    • and approved by BP Migas (generally max
    • 2% of operating costs)
    • - Interest recovery, has to be approved by BP Migas
  • 37. Compensation and Production Bonus
    • Signature bonus, when getting the PSC
    • Production bonus, after reaching certain production volume
    • Unrecovered cost but tax deductible
  • 38. FLOW OF PSC
  • 39. PSC Accounting vs GAAP
    • (*)
    • it is probable that future economic benefits associated with the item will flow to the entity; and
    • the cost of the item can be measured reliably.
    Expense Capitalize Capitalize Expense Capitalize Capitalize Expense Expense Capitalize Exploration expenditures: Dry hole Successful: - IDC - TDC Capitalize as long as meet with IFRS assets recognition criteria* Capitalize Expense Acquisition cost IFRS US GAAP PSC
  • 40. PSC Accounting vs GAAP A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Unsuccessful exploratory wells drilled to delineate a potential reservoir are expensed A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Appraisal drilling IFRS US GAAP PSC
  • 41. PSC Accounting vs GAAP Not specified. Capitalized as long as meet with IFRS assets recognition criteria Not specified. Capitalized as long as meet with IFRS assets recognition criteria Capitalize Capitalize Capitalize Expense Expense Capitalize Development expenditures Dry hole Successful: - IDC - TDC Capitalize Capitalize Capitalize Supporting equipment and facilities IFRS US GAAP PSC
  • 42. PSC Accounting vs GAAP Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Cash basis (pay as you go) Big table liabilities / severance Expensed/impaired upon identified Expensed/impaired upon identified Write off upon approved by BPMIGAS Obsolete inventory or assets Expensed as consumed Expensed as consumed Expensed upon receipt Non-capital inventory Not specified, to be allocated over useful life, reflecting consumption of assets’ benefits Unit of production Double decline DD&A of capital costs IFRS US GAAP PSC
  • 43. PSC Accounting vs GAAP Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided as soon as the decommissioning obligation is created, which is normally when the facility is constructed and the damage that needs to be restored is done. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided in the period in which it is incurred if a reasonable estimate of fair value can be made, or as soon as a reasonable estimate of fair value can be made. Cash basis. New recent PSC contract – accrual basis, but no further guidance issued yet by BPMIGAS. Abandonment / decommissioning liabilities IFRS US GAAP PSC
  • 44. PSC Accounting vs GAAP The same as US GAAP, except that an impairment loss (downward revaluation) may be offset against revaluation surpluses to the extent that it relates to the same asset; any uncovered deficit is recorded to the income statement. All impairments are recognised in the income statement. Written off assets upon agreement from BPMIGAS Impairment IFRS US GAAP PSC
  • 45. Recording PSC Accounting & GAAP (Operator)
    • General industry practice use the JV book and Corporate book
    • JV Book
    • represent the recording of the transaction in the level of joint venture transaction (such as cash call request, cash call receipt, joint venture expenditures).
    • Corporate Book
    • represents the recording of transaction in the level of corporate as a separate entity. Consist of:
    • joint venture transaction (multiplied by its shares)
    • transaction which only incurred in corporate level (corporate adjustment) such as revenue, DD&A, deferred tax and other GAAP adjustment.
  • 46. Recording Joint Interest Transactions (Nonoperator)
    • General industry practice use the proportionate consolidation method of accounting.
    • Under proportionate consolidation, each owner picks up its proportionate share of each assets, liability, revenue and expense item in accordance with its own account classification.
    • The principal source document is the monthly Joint Interest Billing (JIB) from the operator.
    • The JIB do not coincide with GAAP or income tax accounting.
    The recording of Joint Interest Transactions of NonOperator will be detailed in Cash Call section
  • 47.
    • Question & Answer Session