Crude oil production: royalty rates, profit-sharing, and accounting arrangements

(Part II)

In last week’s article, we referred to the two recognized methods of accounting for costs relating to the exploration, development and production of crude oil and natural gas: the “successful efforts” (SE) method and the “full cost” (FC) method. The SE method allows a company to capitalize only those costs associated with successfully locating new oil and natural gas reserves. Such costs are recorded in the company’s balance sheet as long-term assets. Using a predetermined rate, usually based on units of production, these costs, otherwise known as depreciation, depletion and amortization (DD&A) expenses, are transferred to expenditure and charged against revenue over the life of the investment. For unsuccessful (or “dry hole”) results, the associated costs are immediately charged against revenues for the accounting period in question. This is because there is no change in productive assets with unsuccessful results, and therefore the related costs should be expensed.

The alternative FC method allows all costs relating to locating new oil and gas reserves to …to continue reading this article, please subscribe.  Already a subscriber ? Sign In

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