Deck : 2 Introduction to Oil and Gas Accounting

Question 1

When is a delineation well classified as an exploratory well versus a development
well?

Answer 1

Exploration and development well
Oil and gas well are classified into two that is development well or exploration well. Thus development wells are those well that undertake existing reservoir for drilling purpose pertaining to the production of oil and gas in proved area.
Exploration well on the other hand refers to those well that undertake new reservoir for drilling purpose pertaining to the production of oil and gas in the area which was previously found to be productive
In this case, delineation well is classified as exploration wells in order to delineate extent of a find or to determine the productive formation boundaries by undertaking the drilling process.
However it is classified as development well when it results in penetration pertaining to accumulation of petroleum in relation to other well. Therefore it is considered as a well in which purpose of disposal, observation, injection and production from the accumulation in the development well is undertaken.

Question 2

Lease A has a known productive horizon at 15,000 feet. A well is drilled to 10,000 feet.
Would the well be classified as an exploratory or development well?

Answer 2

Exploratory well:
Normally, an exploratory well means those any well that is not a development well. A well drilled to locate and create oil or gas in an unproved area, to locate a new tank in a field previously found to be productive of oil or gas in other tank.
Development well:
Development wells are those well drilled within the proved area of oil or gas tank to depth of horizon known to be productive.
Lease A is reservoir well. Lease B is producing well. Lease A has productive horizon at 15,000 feet and well already drilled up to 10,000 feet hence lease A would be classified as Development well as it is already drilled within the proved area. Therefore, lease A is not a exploratory well because this is a development well.

Question 3

Lease B has a producing formation at 8,000 feet. A well is drilled to 11,000 feet and is
classified as a development well. Comment.

Answer 3

Development well:
Development wells are those well drilled within the proved area of gas or oil tank to depth of horizon known to be productive.
Lease B is drilled within the proved reserve area from where the estimated quantities of crude oil, natural gas and gas liquid can be extracted.
Lease B's productive formation is 8,000 feet and well is already drilled to 11,000 feet Now development cost should be incurred for production purpose. Hence Lease B is classified as Development Well. Afterwards existing field will be developed for production facility and then oil and gas will be produced. Then it will be converted to service well when gas, water, steam, air and salt-water will be injected to produce oil and gas.

Question 4

Sauer Petroleum, a successful efforts company, drilled an exploratory well offshore at
a cost of $1 million. The well was dry, but Sauer Petroleum felt that the G&G data
obtained from the well was promising and drilled another well close to the first one.
Should the first well be expensed or capitalized?

Question 5

Prepare journal entries for the above transactions using the successful efforts method of accounting.

Question 6

Given the following costs for Lease A, all incurred during 2018, prepare income
statements and unclassified partial balance sheets for a successful efforts (SE) company
and a full cost (FC) company.

Question 7

Reida Oil Corporation incurred the following costs during the fiscal year ending
May 31, 2015. Prepare journal entries for the above transaction, assuming that Reida Oil Corporation
uses the full cost method of accounting.

Question 8

Revenue and costs for Optimistic Company for the year 2015 are presented below: Prepare income statements and unclassified balance sheets for a successful efforts (SE)
company and a full cost (FC) company and explain the difference in net income.

Question 9

Indicate whether the following costs should be expensed (E) or capitalized (C)
depending on whether the company uses successful efforts or the full cost method of
accounting.

Question 10

Elizabeth Corporation incurred the following costs during 2015: Elizabeth uses the successful efforts method of accounting. Prepare the journal entries
for the year-end December 31, 2015.

Question 11

List the costs that are treated the same (i.e., capitalized or expensed) under successful efforts and full cost accounting. List the costs that are treated differently.

Question 12

What accounting treatment is given to the following costs under successful efforts:
acquisition costs, exploration costs, development costs, and production costs?

Question 13

The successful efforts method of accounting for oil and gas operations is considered to
follow generally accepted accounting principles as pronounced by the FASB. Explain.

Question 14

Define the following:
reserves
proved reserves
proved developed reserves
proved undeveloped reserves
proved area
field

Question 15

Define the following:
exploratory well
development well
delineation well
new field wildcat well
extension well
service well
stratigraphic test well (exploratory and development)