Exclusion of Costs Avoid Mismatching Ex 1

1
Exclusion of Costs- Avoid Mismatching Ex 1

• General rule amortize costs of wells and
  related equipment over proved developed reserves
• Exception Major costs have been incurred and
  all proved reserves have not been developed
• Example offshore platform constructed at a cost
  of 5,000,000. Only 2 of the 10 wells have been
  completed. Exclude a portion (8/10) of the cost
  of the platform when computing DDA

2
Exclusion of Reserves- Avoid Mismatching Ex 2

• General rule amortize costs of wells and
  related equipment over proved developed reserves
• Exception Major costs (improved recovery
  system) will be needed before reserves can be
  produced. (See p. 38 for proved developed
  reserves definition).
• Example successful pilot project, but
  significant costs still to be incurred. Exclude
  the proved developed reserves that will be
  produced only after the additional costs are
  incurred to avoid mismatching.

3
Depreciation of Support Equipment

• What activities will the equipment support?
• Property acquisition, exploration, drilling,
  production
• Allocate depreciation on some reasonable method.
• Amount allocated to drilling may be depreciated
  using units-of-production
• Otherwise, straight line or some other method may
  be appropriate

4
Depreciation of Support Equipment Example on p.
198

• Automobile purchased for 30,000 with estimated
  life of 100,000 miles
• Allocate to functions based on miles for each
  function at .30 per mile
• Property acquisition 5,000 miles 1,500
  (capitalize or expense based on acquired or not).
• Production 10,000 miles - 3,000 expense to
  leases
• Drilling 5,000 miles 1,500. Allocate to wells
  being drilled and expense or capitalize as
  appropriate.

5
Depletion of Nonworking interests

• Often little cost involved
• May be aggregated
• When reserve information is often not available,
  it is often written off using SL over 8 to 10
  years

6
Revision of DDA Rates

• SFAS 19 requires reserve estimates that affect
  DDA to be reviewed at least annually.
• Changes are to be accounted for prospectively.
• If company reports annually, take into account
  the new estimate for the year in which the
  revision occurs
• If company reports quarterly, take into account
  the revision in the quarter in which it occurs
  using one of two methods
• Just change the 4th quarter
• Change the year all in the 4th quarter

7
Change in Reserve Estimate Page 203

• As of 12/31/2011, estimate was 400,000 bbls with
  1,000,000 remaining to deplete
• On 11/30/2012, new reserve estimate of 450,000
  bbls
• Qtr Prod Amortization
• 1 20,000 50,000
• 2 16,000 40,000
• 3 22,000 55,000
• Oct Nov prod 10,000
• Dec prod 13,000
• 4th qtr 23,000

8
Change in Reserve Estimate Page 203 (Contd)

• Reserve estimate Nov 30 450,000
• 1st qtr 20,000
• 2nd qtr 16,000
• 3rd qtr 22,000
• Oct Nov 10,000
• Revised Reserve est 1/1/12 518,000
• 4th qtr 1,000,000/518,000 x 23,000 44,402

9
Change in Reserve Estimate Page 203 (Contd) -
Alternative

• Production for year 81,000
• Beginning reserves 518,000
• 1,000,000/518,000 x 81,000 156,371
• DDA for full year 156,371
• Less previous quarters 145,000
• DDA for 4th quarter 11,371

10
Abandonment of Proved Property (Well) p. 207

• If a well is abandoned, and other wells remain,
  charge the amount of lease and well equipment to
  accumulated DDA. Loss not recognized.
• Accumulated DDA 500,000
• Wells and related EF 500,000

11
Abandonment of Lease p. 207

• If lease is abandoned and is part of a field (the
  cost center) charge the proved property to
  Accumulated DDA proved property. Loss not
  recognized.
• Materials supplies (salvage) 30,000
• Accum DDA proved property 70,000
• Accum DDA wells 170,000
• Proved property 70,000
• Wells related EF 200,000

12
Abandonment of Lease

• If lease is last in the field, loss is recognized
  through charge to surrendered lease expense.
• Materials supplies 30,000
• Accum DDA proved property 65,000
• Accum DDA wells 155,000
• Surrendered lease expense 20,000
• Proved property 70,000
• Wells related EF 200,000

13
Abandonment of Equipment Because of Catastrophe
Loss Recognized

• If flood, fire or other catastrophe occurs, loss
  must be recognized.
• Apportion accumulated DDA between lost equipment
  and remaining equipment.
• Example LWE 200,000
• Accumulated DDA 60,000
• Assume 20 of equipment is lost in a hurricane
• Accumulated DDA 12,000
• Loss 28,000
• LWE 40,000