Oil and Gas Accounting, Financial Reporting, and Tax Update Deloitte US

The quantity of oil reserves that have a high degree of probability of being recovered is called proved reserves. Companies list their proved reserves in the supplemental section of their financial statements. Proved reserves are typically broken down into two categories called developed and undeveloped. The CAQ has developed a resource page to help auditors, management, and audit committees understand the impact of the COVID-19 on financial reporting and oversight. We discuss some of the publications in the second quarter below and encourage companies to monitor the CAQ website for current resources.

Advantages and Disadvantages of the Full Cost (FC) Method

The remaining production, termed “profit oil,” is then split between the state and the contractor according to a pre-agreed formula. This split can vary significantly depending on the terms negotiated and the level of production achieved. PwC serves some of the world’s largest national and international oil and gas companies. We provide a full range of assurance, tax and advisory team members who understand the industry and the issues that oil and gas companies face. We perform state reporting for Texas, Oklahoma, Kansas and other states and subcontract complex state reporting needs, as required.

Risk Management

You might assume a modest increase over that number, especially if the company is spending a lot on finding new resources. For purposes of this tutorial, we’re going to focus on Upstream, or E&P (Exploration & Production) companies because those are the most “different” from normal companies – and they’re the most common topic in interviews. Developed reserves are the reserves that are in the pipeline and can be reasonably expected to be recovered from existing wells.

What Is the Full Cost (FC) Method?

Energy companies’ income statements do not have the usual Cost of Goods Sold / Gross Profit and Operating Expense distinction that you see for normal companies. So let’s say that a company has 12,000 billion cubic feet (12,000 Bcf) of natural gas in its reserves and produces 500 billion cubic feet (500 Bcf) annually. You measure the company’s reserves (how much they have on their balance sheet, ready to extract, produce, and sell) and production (how much they produce and sell each day, month, quarter, year, etc.) in these units.

Data Methodology:

The theory behind the FC method holds that, in general, the dominant activity of an oil and gas company is simply the exploration and development of oil and gas reserves. Therefore, companies should capitalize all costs they incur in pursuit of that activity and then write them off over the course of a full operating cycle. The reason that two different methods exist for recording oil and gas exploration and development expenses is that people are divided on which method they believe best achieves transparency of a company’s earnings and cash flows. When a company’s exploration efforts come up short, any costs incurred are usually recorded as an expense on the income statement. The full cost (FC) method takes a different approach, recording all successful and unsuccessful explorations as a cost on the balance sheet.

When it comes to oil and gas companies, everything revolves around how they treat capitalized costs. At EAG Inc., we think of “best practices” as the set of techniques and procedures that allow you to produce the most efficient results with the least number of resources. For accounting in the oil and gas industry, oil and gas accounting best practices are ever-evolving due to technological advancements, macroeconomic conditions, and the continual need to reduce general and administrative (G&A) costs. The accounting for AROs begins with the initial recognition of the obligation at the time the asset is installed or when the obligation is incurred.

For instance, a contract might stipulate that revenue is recognized when the oil is delivered to a storage facility, rather than when it is extracted from the ground. This distinction is crucial for accurate financial reporting and compliance with accounting standards. Production costs, also known as lifting costs, are the expenses related to extracting oil and gas from the ground and bringing it to the surface. These costs include labor, maintenance, utilities, and materials used in the production process. Production costs are typically expensed as incurred, directly impacting the income statement. Effective management of production costs is vital for maintaining profitability, especially in a market characterized by volatile commodity prices.

• Under the equity method, an investor recognizes its share of the joint venture’s net income or loss in its financial statements, reflecting its investment in the venture.
• CFO is basically net income with non-cash charges like DD&A added back, so, despite a relatively lower charge for DD&A, CFO for an SE company will reflect the net income impact from expenses relating to unsuccessful exploration efforts.
• If your company is on the lookout for high-quality oil and gas accountants, talk to EAG Inc..
• Another important aspect is the treatment of variable consideration, which is common in oil and gas contracts.
• One of the unique aspects of PSCs is the concept of “cost recovery.” The contractor is allowed to recoup its exploration and development expenditures from a portion of the produced oil or gas.

The company also agreed to release air and water quality data around its own well sites publicly, and agreed to voluntarily increase setbacks for its gas wells from buildings and schools. Further, it would provide more information about which chemicals it injects underground during the fracking process, which breaks up tight rock formations thousands of feet underground to send methane gas to the surface. The scientists said that while it’s good to have the data CNX is producing from this limited number of sites, there are several things it needs to do to use the data to determine the relative safety of oil and gas drilling.

Expense Recognition (Matching Principle)

• “Until we are no longer dependent on oil and gas, we will fight to maintain these jobs at California’s refineries.”
• As a result of the COVID-19 pandemic and the resulting economic uncertainty, several companies may face challenges that could impact their ability to continue operating as a going concern.
• Probable and possible reserves, on the other hand, carry higher levels of uncertainty but offer potential upside.
• For instance, in a wellhead sale, revenue is typically recognized when the oil or gas is extracted and sold directly at the site.
• In addition to these factors, companies must also consider the impact of joint ventures and partnerships on revenue recognition.

Under a PSC, the state grants an oil company the right to explore and produce hydrocarbons in a specific area, with the understanding that the company will recover its costs and share the remaining production with the state. Accounting in the oil and gas industry is a specialized field that requires a deep understanding of both financial principles and sector-specific practices. The complexity arises from the unique nature of exploration, extraction, and production activities, which involve significant capital investment and long-term project timelines. However, without the subsequent discovery of new reserves, the resulting decline in periodic production rates will later begin to negatively impact revenues and the calculation of DD&A for both a SE and FC company. We offer custom trial balance, income statements and balance sheet reports, all of which can be created as drill down reports that run at a detailed or summary level. We have the ability to trend financials over time (annual, quarterly and monthly), provide all reports in Excel and consolidate many companies into a single reporting entity.