Conveyances

1
Conveyances

• Leasing contracts with mineral owner with the
  separation of the mineral right into RI and WI
• Sales or exchange
• Sharing arrangements

2
Types of Nonoperating Interests - ORRI

• Created out of WI
• In effect only as long as the WI is in effect
• Methods of Creation
• Retained WI owner subleases the property to
  another party and retains the ORRI
• Carved out The WI owner keeps the WI and carves
  an ORRI out and transfers to another party

3
Types of Nonoperating Interests Production
Payment Interest

• Created out of WI
• In effect only as long as the WI is in effect
• Often stated in terms of dollars, time, or
  barrels
• Generally runs out before reservoir is fully
  depleted
• If stated in terms of dollars, generally out of a
  share of the WI (say 50)
• Owner not responsible for costs of exploring,
  developing, or producing
• Methods of Creation
• Retained WI retains
• Carved out The WI owner keeps the WI and carves
  an PPI and transfers to another party

4
Types of Nonoperating Interests Net Profits
Interest

• Created out of WI
• In effect only as long as the WI is in effect
• Receives a share of the WI owners net profit
  from the property
• The agreement must define how to compute net
  profits
• Methods of Creation
• Retained WI retains (most common)
• Carved out The WI owner keeps the WI and carves
  an PPI and transfers to another party

5
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• Generally, no gain or loss recognized where
• Exchange of Oil Gas assets for Oil Gas assets
• Pooling of assets in joint undertaking

6
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• Generally no gain recognized but loss is
  recognized where
• Part of interest is sold and substantial
  uncertainty exists about recovery of costs of
  retained interest
• Part of interest is sold and seller has
  substantial obligation for future performance
  without proportional reimbursement

7
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• For other transactions, if gain or loss
  appropriate under GAAP
• Sale of entire interest in proved or unproved
  property
• Certain production payments
• Treat as borrowing (and record interest) for some
  types of production payments that are essentially
  loans

8
Exchange of OG Assets for Other OG Assets

• Farm-ins/Farm-outs Owner of the WI assigns all
  or part of the WI to another party in return for
  exploration and development of the property
• WI to farmee and retain ORRI
• Farmor assigns all costs to retained (unproved)
  ORRI then to proved ORRI if reserves found
• Farmee accounts for drilling and development
  costs as per previous chapters

9
Problem 12-23(a)

• Unproved property ORI 80,000
• Unproved property WI 80,000
• Proved property ORI 80,000
• Unproved property ORI 80,000
• Accounts receivable Barrel 50,000
• Oil revenue ORI 50,000
• DDA expense 5,333
• Accumulated DDA 5,333

10
Problem 12-23(b)

• W/P IDC 200,000
• W/P Eqpt 100,000
• Cash 300,000
• Wells related EF 300,000
• W/P IDC 200,000
• W/P Eqpt 100,000

11
Problem 12-23(b) Contd

• Entries by Barrel Company
• Accounts receivable - Purchaser 400,000
• Accounts payable - RI 50,000
• Accounts payable - Flower 50,000
• Oil revenue 300,000
• DDA expense 60,000
• Accumulated DDA 60,000

12
Farm-ins/Farm-outs Retention of Reversionary WI

• Farmor may retain ORRI with reversion to a WI at
  payout (when farmee has recouped all costs to
  drill and operate through payout).
• The reversionary WI percentage must be agreed
  upon at the time of the farmout.
• Issues related to costs and DDA can get very
  involved.
• Costs for farmor in productive ORRI will be
  transferred to producing WI.

13
Retention of Reversionary WI Example p. 471

• Lucky Oil Company signed a lease with Mrs.
  Fielding for a 400 Acre lease in Oklahoma, paying
  a lease bonus of 20,000 and Mrs. Fielding
  retained a 1/8 RI.
• Lucky Oil Company farmed out the WI to Frisco Oil
  and retained a 1/7 ORI.
• Frisco will drill a well and have 100 WI until
  payout. Then Luckys ORI will revert to a 50 WI.

14
Example p.471 Luckys Journal Entries

• Unproved property - WI 20,000
• Cash 20,000
• Unproved property ORI 20,000
• Unproved property WI 20,000
• Proved property ORI 20,000
• Unproved property ORI 20,000

15
Computing Payout p. 472

• Frisco completed well 1 at a cost of 500,000
• Estimated gross reserves
• proved reserves - 400,000 bbls
• proved developed reserves - 200,000 bbls
• (7/8 x 6/7 x 20X) - 5X 500,000
• Payout 50,000 gross bbls, or 37,500 WI bbls

16
Computation of Luckys Proved Reserves p.472

• Prior to Payout
• 50,000 x 7/8 x 1/7 6,250
• After Payout
• 50 of 7/8 (400,000 50,000) 153,125
• Luckys total proved reserves 159,375
• Lucky has only leasehold costs, which are
  depleted based on proved reserves.

17
Computation of Luckys DDA

• 2003
• 3,125/159,375 x 20,000 392
• 2004
• 3,125/(159,375 3,125) X (20,000 - 392)
  392

18
Transfer Luckys ORI to WI

• Proved property WI 19,216
• Accumulated DDA ORI 784
• Proved property ORI 20,000