Petroleum Accounting: Cost classification and Chart of Accounts

1. to 400 level students of
DEPARTMENT OF ACCOUNTING, COVENANT UNIVESITY, OTA
to 400 level students of
Being paper presented by:
JANUARY 26, 2024
Mr. Kayode Adebiyi
Managing Director
HONEYROCK MULTICONSULT LTD
18B, Bayo Ajayi Street, Off Hakeem Balogun Street,
Marwa Brooks Estate,
Alausa, Ikeja,
Lagos.
08033181225,07064078211
Email: hmlconsultancy@outlook.com
PETROLEUM ACCOUNTING: COST CLASSIFICATION AND CHART OF ACCOUNTS
Mr. Kayode Adebiyi MBA, FCA, ACTI MIoD

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What is a cost?
■ A resource sacrificed or forgone to
achieve a specific objective
■ Include all the payments and contractual
obligations made by the company
together with the book cost of
depreciation on plant and equipment
■ The value of money that has been used
up to produce something.

3. 3
Cost Classification
In the oil and gas industry, costs are
classified either by nature and function of
the costs or by the physical characteristics
of the assets acquired. Classification of
costs by function and nature would
include such broad categories as:

4. Types of Costs (by nature)
• Acquisition Costs
• Exploration and appraisal costs
• Development costs
• Production costs
• Support facilities and equipment
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5. Types of Costs (by attributes)
• Tangible
• Intangible
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6. Acquisition Costs
● Acquisition costs are costs incurred to
purchase, lease or otherwise acquire a
property (whether proved or unproved). This
includes the costs of signature or lease
bonuses, options to purchase or lease
properties, the portion of cost applicable to
minerals when land including mineral rights
and concessions are purchased in fee,
brokers' fees, legal and other related costs.
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7. Some Acquisition Costs
• Signing bonus – upfront monies to governments
• Legal fees
• Filing/ Recording fees
• Title examination
• Options to purchase or lease
• Broker fee
• Option lapse (expense)
• Shooting rights
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8. Exploration and Appraisal Costs
Exploration and appraisal costs are costs
incurred to prospect for oil and examining
specific areas that may harbour
hydrocarbon reserves. They are costs
that are incurred before a reservoir is
developed, including depreciation,
amortization and allocated operating
costs of support equipment and facilities.
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9. Some Exploration Costs
A. Costs of topographical, geological, and
geophysical studies, rights of access to
properties to conduct these studies, and
salaries and other expenses of geologists,
geophysical crews, and others conducting
these studies. Collectively, geological and
geophysical (G&G) costs.
B. Costs of carrying and retaining undeveloped
properties such as delay rentals, ad valorem
taxes on the properties, legal costs for title
defense, and maintenance of land and lease
records.
C.
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10. Some Exploration and Appraisal Costs
C Dry hole contributions and bottom hole
contribution
D. Costs of drilling and equipping exploratory
wells.
E. Costs of drilling exploratory-type stratigraphic
test wells.
A., B., C. are non-drilling costs. , expense.
D., E., drilling costs. Possibly capitalized, .
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11. Test Well Contributions
• Bottom-hole contribution: Contribution paid to a
driller by adjoining property owners for
information from drilling in a particular property
regardless of the success or failure of the
drilling.
• Dry-hole contribution: This concept is the same
as “bottom-hole contribution” except that
payment is made only if the drilling results in a
dry-hole.

12. Development Costs
● Development costs are incurred to gain
access to proved reserves and to
provide facilities for extracting, treating,
gathering and storage of oil and gas.
They include the cost of production
facilities such as platforms, down-hole
and wellhead equipment, pipelines,
separators, treaters,…
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13. Development Costs
tank batteries, heaters, de-salters, de-
sanders, natural gas cycling processing
plants, improved recovery systems and
equipment. They also include
depreciation and applicable cost of
support equipment and facilities.
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14. Drilling and Development Costs
• Development wells
• Lease flow lines
• Separators
• Treaters
• Heaters
• Storage tanks
• Improved recovery system
• Nearby gas processing facilities
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15. Production Costs
Production costs relate to costs of lifting oil and
gas to the surface, treating and storing them.
They include the costs of personnel engaged in
operation of wells and related equipment
facilities, repair and maintenance of producing
facilities, materials, supplies, insurance and
fuel consumed and services utilized in such…
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16. Production Costs
operations. They also include
depreciation and applicable costs of
support equipment and facilities but do
not include depreciation, depletion and
amortization (DD&A) of licence
acquisition, exploration and development
costs and costs of decommissioning.
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17. Support Facilities and
Equipment
Support facilities and equipment include trucks,
drilling equipment, construction and grading
equipment, repair shops, warehouses, camps
division and district or field offices. Usually,
these facilities and equipment serve one or
more than one activity such as acquisition,
exploration, development or production. The
costs are therefore capitalized and allocated to
the different activities, ..
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18. Support Facilities and
Equipment
each activity bearing its own proportionate
share. Allocations are made, depending on
the nature of support costs, using mileage,
hours and other units of measurement
basis. Regardless of method of allocation
used, consistency of application should be
paramount.
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19. Tangible Costs and Intangible Costs
Tangible costs relate to costs of assets that
have physical properties. Tangible derived
from the Latin word "tangere" meaning to touch
implies that such assets can be touched or felt.
They include machinery, equipment vehicles
etc. Tangible costs also include labour to
install equipment etc. even though such costs
do not result in a physical asset.
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20. Tangible Costs and Intangible Costs
Intangible costs relate to costs that result
in an asset that has no physical
properties. Examples are contract costs
paid to a contract driller for drilling a well,
mud pits etc. In oil and gas operations
and accounting, a distinguishing feature
between classification as tangible and
intangible is salvageability.
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21. Tangible Costs and Intangible Costs
If the property can be salvaged at the end of
operations such properties are usually
classified as tangible whereas those properties
(the underlying costs) that cannot be salvaged
at the end of an operation are classified as
intangible.
The distinction between both types of costs is
usually important for tax purposes.
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22. Chart of Accounts
A chart of accounts (COA) is an index of
all of the financial accounts in a
company's general ledger. In short, it is
an organizational tool that lists by
category and line item all of the financial
transactions that a company conducted
during a specific accounting period.

23. COA - Key Points
● A chart of accounts is a financial
organizational tool that provides a complete
listing, by category, of every account in
the general ledger of a company.
● It is used to organize finances and give
interested parties, such as investors and
shareholders, a clearer view and
understanding of a company’s financial health.

24. COA - Key Points
● To ensure the quick location of specific
accounts, each COA typically contains an
identification code, name, and brief description.
● COAs can be modified by a company to fit its
size and type of business.
● It's important to use the same COA format over
time for the accuracy of period-to-period
comparisons.

25. Chart of Accounts
Broad Divisions in line with Accounting
Equation
● Assets, Liabilities, Owner’s equity
COA of an oil company is far more
lengthy and complex compared to those
of other industries. It also differs
depending on the method of accounting –
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