Conveyances Free Well

1
Conveyances Free Well

• The WI owner assigns a percentage of the WI (for
  example 25) in exchange for a well to be
  drilled.
• Differs from farm-out/farm-in in that no payout
  involved
• Agreement may require the well to be a producer
  to earn the WI
• Assignor generally has leasehold cost
• Assignee records the IDC and equipment costs

2
Conveyances Carried Interest

• Carried interest situations
• Non consent
• Farm-out/farm-in
• Carrying party has 100 of WI until payout is
  achieved
• Carrying party bears all costs until payout (or
  including penalty for nonconsent)
• Be careful in DDA computation
• Carrying party allocated all reserves during
  payout
• Carried party allocates leasehold cost over
  Proved reserves while carrying party over proved
  developed reserves (Why??)

3
Conveyance Exchange of WI

• Owner of WI in Lease A exchanges a portion of the
  WI for a WI in Lease B
• No gain or loss recognized and cost allocated
  between the leases
• Example Lucky acquires WI in Lease A for
  80,000. Lucky assigns 50 WI in lease A for 30
  WI in Lease B.
• Oil gas properties Lease B 40,000
• Oil gas properties Lease A 40,000

4
Conveyances Poolings

• Pooling is the combining of unproved properties
  to form a larger unit
• Often required due to spacing requirements
• Generally, no accounting entries required
• Database records need to be updated

5
Conveyances Unitizations

• Usually refer to combining of producing
  properties for secondary or tertiary project
• Participation factors may include share of
  contributed reserves
• The numbers often get messy because participants
  are treated as paying or receiving cash to
  proportionalize the IDC and equipment.
• Receipts of cash are treated as reductions in IDC
  equipment

6
Unitizations Problem 13-18

• Partici- Factor x
• pation Total Agreed Individual Receive Pay
• Co Factor Value Agreed Value Cash Cash
• A 10 96,000 330,000 234,000
• B 40 384,000 190,000 194,000
• C 20 192,000 440,000 248,000
• D 30 288,000 0
  ______ 288,000
• 100 960,000 960,000 482,000 482,000
• Entries
• Company A
• Cash 234,000
• Wells and related EF 234,000
• Company B
• Wells and related EF 194,000
• Cash 194,000
• Company C
• Cash 248,000
• Wells and related EF. 248,000
• Company D

7
Sale of Oil Gas Property

• Partial or Complete
• Unproved Complete Partial
• Proved Complete Partial
• See also Figure 13-1
• (Note, I will give you Figures 13-1 and 13-2 for
  final exam)

8
Sale of Unproved Property Complete Interest

• If individually impaired, recognize gain or loss
• Example Cost 80,000, 30,000 impairment, SP
  60,000
• Cash 60,000
• Allowance for impairment 30,000
• Unproved property 80,000
• Gain 10,000
• If impaired on a group basis, recognize gain only
  if SP gt Cost, and dont recognize loss
• Example Cost 80,000, SP 60,000
• Cash 60,000
• Allowance for impairment 20,000
• Unproved property 80,000

9
Sale of Unproved Property Partial Interest,
Individually Impaired

• Special treatment because substantial uncertainty
  exists about recoverability of costs and SP
  should be treated as recovery of cost
• If individually impaired and SP exceeds entire
  cost less impairment, recognize a gain
• Example Cost 100,000, 20,000 impairment, SP
  10,000 for 25
• Cash 10,000
• Unproved property 10,000
• What if SP is 110,000 for 25
• Cash 110,000
• Allowance for impairment 20,000
• Unproved property 99,990
• Gain 30,010
• Leave 10 in cost

10
Sale of Unproved Property Partial Interest,
Group Impaired

• Special treatment because substantial uncertainty
  exists about recoverability of costs and SP
  should be treated as recovery of cost
• If impaired on a group basis, recognize gain only
  if exceeds original cost of entire interest
• Example Cost 100,000, SP 40,000 for 25
• Cash 40,000
• Unproved property 40,000
• What if SP is 110,000 for 25
• Cash 110,000
• Unproved property 99,990
• Gain 10,010
• Leave 10 in cost

11
Sale of Unproved Property Retention of ORI

• No gain or loss recognized unless SPgt original
  cost, then record a gain
• Remaining cost transferred to retained ORI
• Example Cost 100,000, allowance for impairment
  20,000, SP 30,000 and retain a 1/7 ORI
• Cash 30,000
• Allowance for impairment 20,000
• Unproved ORI 50,000
• Unproved property 100,000

12
Sale of Proved Property Complete Interest

• This sale results in gain or loss being reported
• Credit the asset accounts and debit the
  accumulated DDA account. The difference is gain
  or loss.
• Example Sale 100 WI for 300,000
• LHC 60,000
• IDC 200,000
• Eqpt 75,000
• Accumulated DDA (50,000)
• Net 285,000
• If sold for 300,000, gain of 15,000

13
Sale of Proved Property Partial Interest

• This sale results in gain or loss being reported
• Credit the asset accounts and debit the
  accumulated DDA account. The difference is gain
  or loss.
• Example Sale 75 WI for 300,000
• 100 75
• LHC 60,000 45,000
• IDC 200,000 150,000
• Eqpt 75,000 56,250
• Accumulated DDA (50,000) (37,500)
• Net 285,000 213,750
• Gain 86,250