Full Cost Capitalize as Assets

1
Full Cost Capitalize as Assets

• Property Acquisition
• Exploration
• Development
• GG
• Delay rentals
• GA allocated to acquisition, exploration, or
  development

2
Compare FC to SE

• Most costs are treated the same
• FC capitalizes and SE expenses
• GG costs
• Exploratory dry holes
• Delay rentals
• Cost center - for FC costs center is the country,
  including offshore area under the countrys
  jurisdiction

3
Additional Anomalies for FC

• Impairment expenses are capitalized for FC
• Abandonments continue as capitalized costs for FC
• GA allocable to acquisition, exploration, or
  development is capitalized

4
Cost Center - Accounts

• While a country is a single cost center, the
  books and records of the company may be similar
  in detail as a SE company
• Example, management will want costs and revenues
  by lease, well, field, etc.
• IRS will want information by property unit for
  percentage depletion computation.

5
Acquisition Costs

• Similar to a SE company, acquisition costs will
  be charged to unproved property
• Drilling costs are initially charged to wells in
  progress
• If the well is successful, the costs are
  transferred to wells and related equipment and
  facilities
• Unsuccessful wells are transferred to dry hole
  costs -- an asset account for FC companies

6
DDA for FC Companies

• Use all costs for the cost center and one of the
  two following methods
• Allowable Methods
• Unit of production same as for SE
• Unit of revenue
• Capitalized costs at year end/ X Production at
• Proved reserves BOY valued actual selling
• at year end prices price

7
Example Problem 7-3

• Common unit of measure basis
•  
• Oil Gas BOE
• Proved reserves EOY 100,000 300,000 150,000
• Production during year 20,000 50,00 28,333
• Proved reserves BOY 120,000 350,000 178,333
• 940,000 X 28,333 149,344
• 150,000 28,333

8
Problem 7-3 (Contd)

• Revenue basis
•  
• Production Proved Reserves
• Oil 20,000 X 60 1,200,000 100,000 X 70
  7,000,000
• Gas 50,000 X 5 250,000 300,000 X
  7.50 2,250,000
• 1,450,000 9,250,000
•  
• 940,000 X 1,450,000 .
  127,383
• 9,250,000 1,450,000

9
DDA for FC

• Amortize costs over proved reserves (developed
  and undeveloped)
• Costs include
• Proved property costs
• Lease well equipment and IDC
• If some proved undeveloped reserves exist,
  estimate future development costs (at current
  prices)
• Also, estimate future dismantlement and
  abandonment costs (net of salvage).
• May also include unproved property costs

10
Exclusion of Costs - FC

• DDA is based on proved reserves (both developed
  and undeveloped)
• Costs associated with acquisition and evaluation
  of unproved property may be excluded from the
  DDA base.
• However, exploratory dry holes on unproved
  properties must be added to the amortization base.

11
Exclusion of Costs - FC

• All costs for unproved properties may be excluded
  except for
• dry holes
• impairment costs
• abandonment costs
• costs if proved
• any GG not related to specific properties
• All costs for proved properties must be included
  except for major development projects where
  reserves have not yet been determined
• Future dismantlement costs, net of salvage, must
  be included
• Future development costs must be included

12
Example Page 240

• Proved property costs 40,000
• Unproved property costs 70,000
• Nondrilling exploration proved 80,000
• Nondrilling exploration Unproved 100,000
• Drilling cost Proved 400,000
• Wells in progress Unproved 600,000
• Dry holes Unproved 900,000
• Total accumulated DDA (490,000)
• Net capitalized 1,700,000
• Future development costs 300,000
• Future decommissioning costs 400,000

13
Example Page 240 (Contd)

• Net capitalized 1,700,000
• Future development costs 300,000
• Future decommissioning costs 400,000
• Net costs to amortize 2,400,000
• Compute DDA
• 2,400,000 X 100,000 bbls 400,000
• 500,000 bbls 100,000 bbls

14
Example Page 240 (Contd)

• What if Tyler Company elects to exclude all
  possible costs?
• Net costs 2,400,000
• Less excludable costs
• Unproved property costs (70,000)
• Nondrilling exploration Unproved (100,000)
• Wells in progress Unproved (600,000)
• Amortizable costs 1,630,000
• Compute DDA
• 1,630,000 X 100,000 bbls 271,667
• 500,000 bbls 100,000 bbls