Nondrilling Exploration Costs Under Successful Efforts

1
Nondrilling Exploration Costs (Under Successful
Efforts)

• Costs of topographical, geological, and
  geophysical studies
• Costs of carrying and retaining undeveloped
  properties (delay rentals, ad valorem taxes,
  legal costs for title defense, maintenance of
  land and lease records)
• Dry hole contributions and bottom hole
  contributions

2
Geological and Geophysical Costs

• Purpose to locate or identify areas with
  potential for producing oil and/or gas in
  commercial quantities
• Reconnaissance survey covers broad area
• Detailed survey covers smaller area
• Shooting rights
• Rights for access to the property to conduct GG
• Often pays for an option to lease if GG
  successful
• May also have to pay damages to surface owner

3
Entries for GG

• Example 1 Tyler Company paid 1.00 /acre for
  shooting rights on 10,000 acres
• GG Expense shooting rights 10,000
• Cash 10,000
• Example 2 Tyler Company paid ABC Co 250,000
  for GG work
• GG Expense services 250,000
• Cash 250,000

4
GG Costs - Exceptions to General Rule of
Expensing

• In 2001, 66.7 of SE companies surveyed
  capitalized GG on existing producing reservoirs
  as development costs (PwC survey)
• GG performed before drilling the well to
  determine the specific drill site is often
  treated as drilling costs
• GG exchanged for an interest in the property,
  and reimburseable if proved reserves not found,
  is initially set up as a receivable. If reserves
  found, cost is transferred to proved property
  account (asset).

5
Problem 8 - GG Exchanged for an Interest in
Property

• Basic Oil conducted GG on leases owned by
  Artificial Oil and Universal Oil. Basic was to
  receive a ¼ WI if proved reserves were found.
  Otherwise, costs were to be reimbursed.
• Costs incurred by Basic
• Artificials lease 50,000
• Universals lease 40,000

6
Problem 8 (Contd)

• Acct Rec - Artificial 50,000
• Cash 50,000
• Acct Rec - Universal 40,000
• Cash 40,000
• Proved property 50,000
• Acct Rec Artificial 50,000
• Cash 40,000
• Acct Rec Universal 40,000

7
Carrying Retaining Costs

• Delay rentals cost to postpone drilling for a
  year
• Property taxes paid to city, county, ISD, etc.
  based on value of property
• Legal costs for title defense legal fee when
  title to property is in dispute.
• Clerical and record-keeping costs- Employee
  salaries, materials, supplies.

8
Carrying Retaining Costs - Examples

• Tyler paid 3,000 to delay drilling the lease
• Delay rental expense 3,000
• Cash 3,000
• Tyler paid 2,200 in ad valorem tax
• Ad valorem tax expense 2,200
• Cash 2,200
• The land department incurred allocable costs of
  5,000 in maintaining lease records and allocated
  750 to the property
• Records maintenance expense 750
• Cash 750

9
Test Well Contributions

• A (who has nearby acreage) pays part of the
  drilling costs for B to drill a well on Bs
  property. In exchange for this payment, A
  receives specified GG information
• Dry-hole contribution payment is made only if
  well is dry
• Bottom hole contribution Payment is made
  whether dry or not when an agreed upon depth is
  reached
• Accounting treatment of costs
• A expenses the costs as test well contribution
  expense on his nearby acreage (similar to GG)
• B treats the amount received as a reduction in
  drilling costs

10
Test Well Contribution Examples (p. 83)

• Well 1 Dry hole contribution of 30,000 (well
  dry)
• Test well contribution expense 30,000
• Well 2 Dry hole contribution of 50,000
  (completed as producer)
• No entry (no payment required)
• Well 3 Bottom hole contribution of 20,000 if
  well reaches 5,000 feet (well dry at agreed
  depth)
• Test well contribution expense 20,000
• Well 4 Bottom hole contribution of 40,000
  (well abandoned before agreed depth)
• No entry (no payment required)

11
Support Equipment Facilities

• Includes (1) seismic, drilling, grading, or other
  equipment, (2) warehouses or field offices, (3)
  repair shops, and (4) vehicles.
• Costs are capitalized and allocated to
  exploration, development, and production.
• Allocation should be on some reasonable basis,
  such as time used.

12
Offshore International Operations

• The U.S., State, or Foreign Government usually
  owns the mineral rights
• Although some costs may be different, nondrilling
  exploration costs are still expensed under SE