Oil & Gas class midterm

What does the "Treatment of Costs Under Successful Efforts Accounting" chart show?

How each category of cost is treated under Successful Efforts: either expensed as incurred, or capitalized (suspended in PP&E) and later reaching EXPENSE through depletion, depreciation, impairment, write-off, or accretion.

What are the seven yellow cost categories on the Successful Efforts chart?

Non-Drilling Exploration Costs; Proved Property Acquisition Costs; Unproved Property Acquisition Costs; Exploration Well; Development Costs (Wells/Facilities); Future Abandon. Cost; Production Costs.

What does the red EXPENSE column on the right side of the Successful Efforts chart represent?

The expense recognized: costs expensed as incurred plus capitalized costs that reach expense (UOP depletion, depreciation, portion impaired/surrendered/expired, amortization, unsuccessful exploration wells, accretion, impairment review excess).

What do Non-Drilling Exploration Costs include?

Studies, seismic programs and related costs, other G&G, exploration staff/overheads, etc.

How are Non-Drilling Exploration Costs treated on the chart?

They go straight to EXPENSE (expensed as incurred).

Where do Proved Property Acquisition Costs go?

Into Proved Properties (capitalized), then UOP Depletion by Common Geo. Unit using Total Proved Reserves.

What must you do with the purchase price of an acquisition that includes a mix of properties?

An acquisition could include a mix of Proved and Unproved Properties, Wells/Facilities and Abandonment Liabilities. The purchase price should be allocated accordingly.

What costs are included in Unproved Property Acquisition Costs?

Bonuses for New Leases; Acquired Lease Interests; Lease Options; Other Mineral Interests; Related Acq. Costs.

What is the first treatment of Unproved Property Acquisition Costs?

Temporarily Suspend in PP&E.

Into what two groups are suspended unproved properties divided?

Individually Significant Props. and Individually Insignificant Props.

What is the next step after unproved property costs are temporarily suspended in PP&E?

Periodically Review for Impairment.

How are individually significant and insignificant unproved properties reviewed for impairment?

Individually Significant Props. are reviewed Individually; Individually Insignificant Props. are reviewed Grouped.

What happens to the portion of unproved property costs that is impaired, surrendered or expired?

It goes to EXPENSE ("Portion Impaired/Surrendered/Expired").

How are grouped (individually insignificant) unproved properties expensed over time?

"Amortization or Other Method" goes to EXPENSE.

What happens to unproved property costs if proved reserves are determined?

Transfer to Proved Properties: transfer individually significant at net value; insignificant at gross value.

What are the two parts of the Proved Properties box on the chart?

Undeveloped (Spacing Requirement & 5 Year Rule) and Developed.

What limits classification of proved undeveloped properties on the chart?

Spacing Requirement & 5 Year Rule.

How are Proved Properties expensed on the chart?

UOP Depletion, Common Geo. Unit, Using Total Proved Reserves.

Which reserves does depletion of Proved Properties use versus depreciation of Wells and Facilities?

Proved Properties depletion uses Total Proved Reserves. Wells and Facilities depreciation uses Proved Developed Reserves.

What grouping is used for UOP depletion and for UOP depreciation on the chart?

Common Geo(logical) Unit for both.

What are Property Maintenance Costs on the chart, and how are they treated?

Delay Rentals, Property Taxes Etc. They go to EXPENSE.

What is the first step for an Exploration Well on the chart?

Suspend in PP&E While Drilling.

What is the second step for an Exploration Well on the chart?

Evaluation (Time Limits and Year-end Rules).

When does an Exploration Well go to EXPENSE on the chart?

If Unsuccessful (No Proved Reserves and/or no Planned Development).

What happens to an Exploration Well on the chart "If Successful"?

It moves to the Development Costs path: PP&E: Suspend in Work in Progress until ready to produce.

What is the first step for Development Costs (Wells/Facilities)?

PP&E: Suspend in Work in Progress until ready to produce.

What note appears on the chart about development dry holes?

Development Dry Holes Remain Capitalized.

What is the second step for Development Costs on the chart?

PP&E: Wells and Facilities (When Ready to Produce).

How are Wells and Facilities expensed on the chart?

Depreciate Cost Less Salvage Value on a Unit of Production Basis, Grouped by Common Geological Unit Using Proved Developed Reserves.

How is Future Abandon. Cost initially recorded on the chart?

Liab. Booked for Discounted Present Value of Est. Future Abandon. Obligation.

Where does the initial balance of the abandonment liability go on the chart?

Initial Balance Booked to PP&E (into Wells and Facilities).

What expense is recognized on the abandonment liability over time on the chart?

Accretion Expense (as PV of liability increases).

How are Production Costs defined and treated on the chart?

Costs incurred to operate/maintain wells and related equipment/facilities such as labor, supplies, repairs/maint., utilities, gathering/transport/processing, production taxes, etc. They go to EXPENSE.

What does the red box at the bottom of the chart say?

The combined book carrying amount of proved properties and wells/facilities for a common geological unit is subject to impairment review if a triggering event occurs.

What expense results from the proved property impairment review on the chart?

Excess of book carrying amount over value determination.

What is the difference between fossil fuels and renewables?

Fossil fuels are energy sources like coal, oil, and natural gas that formed from ancient organic matter over millions of years. Renewables are energy sources that nature replenishes at about the same rate we consume them.

What does renewable energy mean?

The energy source is replenished by nature at about the same rate as consumption.

Why do the slides project continued strong oil and gas demand?

Total energy demand will outpace renewables growth.

Why can renewable energy not replace every use of oil and gas?

Oil and gas products are extensively and intricately woven into modern life, and sources of renewable energy can't substitute for all existing uses of oil and gas.

What are the four hydrocarbon gases, from lighter to heavier?

Methane, Ethane, Propane, Butane (Mice Eat Peanut Butter).

How does gas molecular weight affect energy content and value?

Heavier gases have a higher energy content (i.e., an Mcf of butane will generate more heat when burned than an Mcf of methane) and generally have a higher market value if sold as a purity product.

What can a produced gas stream contain?

Methane, heavier gases, suspended hydrocarbon liquids, and contaminants.

What is condensate?

A portion of any suspended liquids may condense out of the gas stream at the production site as the gas cools and expands as it passes through processing equipment. This liquid is called "condensate."

What are natural gas liquids (NGLs)?

The suspended liquid molecules and liquefied gas molecules removed from the gas stream are called Natural Gas Liquids, or NGL. Do not confuse with Liquefied Natural Gas, or LNG.

Why must wet, rich, or contaminated gas be processed?

Wet/rich and/or contaminated gas must be processed prior to entering a long-haul pipeline.

What is pipeline-quality gas mostly made of?

Pipeline gas is almost pure methane, with small amounts of heavier hydrocarbons and some contaminants.

What is liquefied natural gas (LNG)?

Almost pure methane that has been cooled to its liquefaction temp to shrink its volume (1/600th) so that it can be economically shipped by ocean carriers.

How do NGL and LNG differ?

NGL = the suspended liquid molecules and liquefied gas molecules removed from the gas stream. LNG = almost pure methane cooled to its liquefaction temp to shrink its volume (1/600th) for shipping by ocean carriers.

What are the benefit and main costs of LNG transport?

Overcomes pipeline limitations. However, liquefaction is an expensive process and shipping costs can also be substantial.

Which regions are identified as the biggest LNG markets in the slides?

Asia and Europe.

What is crude oil made of?

A diverse mix of liquid and solid molecules (with some entrapped gas molecules) that has liquid characteristics overall. The average composition can range from light and thin to heavy and viscous.

What does a higher API gravity indicate?

Lighter crude. Crude oil gravity is expressed in degrees using an "API Gravity" scale, and the scale is counter-intuitive with heavier crudes having a lower value.

Why does light crude generally sell for more than heavy crude?

Light crudes tend to sell for a higher price because they contain more of the light-liquid molecules that make high-value products like gasoline, jet fuel and diesel.

What do sweet and sour mean for crude oil?

Low sulfur = "Sweet." High sulfur = "Sour."

Why does sulfur lower crude oil value?

High sulfur content lowers the value of crude oil because sulfur levels are tightly restricted in refined products and removal adds to refining costs.

What additional hazard is associated with hydrogen sulfide in gas?

Hydrogen sulfide (H₂S) gas is highly toxic (similar situation with natural gas: sulfur lowers value).

How do gas plants separate gas components?

Gas plants primarily use chilling to separate gas components.

What does distillation do in an oil refinery?

Refineries use a heat-driven distillation process to sort ranges of molecules.

What does cracking do in an oil refinery?

Refineries use a "cracking" process to break some of the heavier molecules into lighter, higher-value molecules.

What does coking do in a sophisticated refinery?

The most-sophisticated refineries also have "coking" equipment to break up the heaviest molecules and remove some of the carbon, which forms "coke."

How many U.S. gallons are in one barrel of oil?

Oil is measured and priced in 42-gallon "barrel" units.

How are U.S. gas volumes measured and pipeline gas priced?

Gas volumes are measured in cubic-foot multiples. Pipeline-quality gas is priced in million British Thermal Units (BTUs).

What is the gas-to-oil-equivalent conversion used in the course?

6 Mcf of gas is one "Barrel of Oil Equivalent" (Boe).

How do you convert combined oil and gas volumes into BOE?

Oil barrels + (gas Mcf / 6).

What is the upstream sector?

Upstream is exploration and production.

What is the midstream sector?

Midstream begins when production leaves the production site.

Where does the downstream sector begin?

Downstream begins with crude oil refining. All crude oil must be refined.

How do integrated companies differ from independent producers?

Integrated = companies that produce oil and gas AND refine crude oil. Independent producers ("independents") = companies that produce oil and gas but do NOT refine crude oil.

What roles do Schlumberger and Halliburton play?

The industry is supported by a wide range of contractors and suppliers. Schlumberger and Halliburton are contractors/suppliers.

What is a national oil company (NOC)?

Most producing nations have National Oil Companies (NOCs) that are mostly or entirely owned by the government. NOCs have varying degrees of capability, ranging from non-operators, to in-country operators, to exclusive in-country operators, to international operators (operating beyond their country borders).

Does the United States have a national oil company?

No. The U.S. does not have a National Oil Company.

Who commonly controls mineral contracts with international companies in producing countries?

Most producing nations claim government ownership of oil and gas resources. Any minerals contracts with international oil and gas companies are commonly controlled by oil ministries.

Are all oil-exporting nations members of OPEC?

No. Many (but not all) oil-exporting nations are members of the OPEC cartel.

What technologies do the slides credit with greatly reducing U.S. oil import dependence?

The U.S. used to be a large oil importer but is almost self-sufficient now because of unconventional oil production (horizontal drilling and hydraulic fracturing).

Which two bodies establish rules for U.S. publicly listed oil and gas companies?

U.S.-based, publicly-listed oil and gas companies must follow rules established by both FASB and the SEC.

What are the two U.S. oil and gas accounting methods in the course?

FASB Successful Efforts Method and SEC Full Cost Method. Both methods are considered to be "GAAP" compliant although the Successful Efforts method is preferred by FASB.

What is the main difference between Successful Efforts and Full Cost?

The primary difference is the treatment of exploration costs. Successful Efforts expenses exploration costs except for successful exploration wells. Full Cost capitalizes and amortizes exploration costs as part of an overall development effort.

Who has ultimate authority over U.S. public-company accounting and reporting?

The SEC has ultimate authority over public company accounting and reporting but relies on FASB to lead on GAAP matters, with their oversight.

Which laws explain the SEC's involvement in public-company reporting?

The Securities Acts of 1933 and 1934, passed after financial failures following the stock market crash of 1929.

What prompted expanded SEC involvement in oil and gas disclosures?

The Energy Policy and Conservation Acts of 1975 and 1976, passed following the Arab Oil Embargo of 1973-74.

What does Regulation S-K address, and which part covers oil and gas?

Regulation S-K includes requirements for information that must be included in a 10-K. S-K Part 1200 has disclosure requirements that apply specifically to companies with oil and gas producing activities.

What does Regulation S-X address, and which part covers oil and gas?

Regulation S-X addresses requirements for the preparation and presentation of financial statements and footnotes in the financial section of the 10-K. S-X Part 4-10 has rules that apply specifically to oil and gas producing activities and also includes rules for the Full Cost method.

Where are FASB's GAAP rules organized?

The Accounting Standards Codification, which is consistent with and substantially overlaps with the financial statement requirements in SEC Regulation S-X.

What is the scope of ASC 932?

ASC 932 only applies to oil and gas producing activities, generally referred to as the "upstream" sector ("Entities Engaged in Oil and Gas Producing Activities").

What are the main subjects of ASC 932 in this course?

Treatment of oil-and-gas-related costs under the Successful Efforts method, and "Supplemental Disclosures" that specify the presentation format for oil and gas data required in Regulation S-X as well as some information required by S-K.

What is a sedimentary basin?

A large accumulation of sediments and resulting sedimentary rock is called a "sedimentary basin."

Does every sedimentary basin contain oil and gas?

No. Oil and gas can be found in sedimentary basins, but not all sedimentary basins have oil and gas.

Why are former offshore sedimentary basins common locations for oil and gas?

Oil and gas is most commonly found in sedimentary basins that were originally formed in an offshore environment because organic debris from plankton can mix with sediments and provides a carbon and hydrogen rich organic source for oil and gas.

Why is shale a common oil and gas source rock?

"Shale" is the most common type of source rock because it is made from fine sediments like silt and clay that are best at preserving organic debris. Heat and pressure from deep burial over millions of years can turn the organic debris in shale into oil and gas.

What is porosity?

The amount of void space in rock capable of holding fluid. Rock with high porosity is capable of holding more oil and gas within a given volume of rock than rock with low porosity.

What is permeability?

The ability for fluid to flow through rock by moving from pore space to pore space. Oil and gas will flow more easily from high-permeability formations into wellbores drilled into the formations.

Can a rock contain oil and gas but still be difficult to produce?

Yes. Shale and other types of "tight rock" may have pore spaces containing oil and gas, but they have extremely low permeability so it is difficult to extract oil and gas from the rock.

How do conventional reservoirs form?

A portion of the oil and gas formed in shale escapes and migrates into other porous and permeable formations such as sandstone and limestone. Trap-like structures in those formations may create accumulations of migrating oil and gas.

Why can conventional reservoirs often be produced with vertical wells?

Oil and gas can be produced from those "conventional" reservoirs with vertical wells (whereas shale source rock has low permeability, so oil and gas will not flow adequately to conventional vertical wells).

What technologies make production from tight rock possible?

The development of "unconventional" horizontal drilling and hydraulic fracturing techniques.

Where do the slides say unconventional development dominates?

Unconventional development currently dominates onshore activity in the U.S. lower 48. Conventional vertical-well drilling is dominant elsewhere.

What are proved oil and gas reserves?

Quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty (~90%) to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain.

What degree of certainty do the slides associate with proved reserves?

Reasonable certainty (~90%).

What does economically producible mean?

A resource that generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation.

What price convention do the slides use for proved-reserve economic conditions?

The average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.