Overview of Oil and Gas Accounting & PSC Accounting

Budi Hartono

Agenda
Overview of Overview of accounting principle in upstream oil and gas Overview of PSC Accounting Other PSC consideration PSC Accounting vs GAAP Recording PSC Accounting & GAAP Operator & NonOperator

Accounting Principles in Upstream Oil & Gas

Full Cost ethod Successful !ffort ethod

Full Cost Met od

All propert" ac#uisition$ e%ploration and development costs$ even dr" hole costs$ are capitali&ed as oil and gas properties' (hese costs are amorti&ed using a unit)of)production method *ased on volumes produced and remaining proved reserves' (he net unamorti&ed capitali&ed costs of oil and gas properties less related deferred income ta% A+ NO( e%ceed a ceiling consisting primaril" of a computed present value of pro,ected future cash flows$ after income ta%es$ from the proved reserves'

Successful !ffort Met od

Onl" the cost of successful efforts is capitali&ed' Cost of e%plorator" dr" holes$ geological and geoph"sical -G&G. costs in general$ dela" rentals$ and other propert" carr"ing costs are e%pensed' (he net unamorti&ed capitali&ed costs are amorti&ed on unit)of) production method$ where*" propert" ac#uisition costs are amorti&ed over proved reserves and propert" development costs are amorti&ed over proved development reserves'

Pre "icensing Cost

Costs incurred prior signing of agreement such as cash pa"s for data and information to participate in a new PSC *id'

"icense Cost
Costs incurred upon signing of agreement such as signature *onus'

Ac#uisition !$penditures
Costs incurred to purchase$ lease$ or otherwise ac#uire a propert" -whether unproved or proved.' (he" include the costs of lease *onuses and options to purchase or lease properties$ the portion of costs applica*le to minerals when land including mineral rights is purchased in fee$ *ro/ers0 fees$ recording fees$ legal costs$ and other costs incurred in ac#uiring properties

Geological & Geop %sical Seismic

1nformation that will help decide -2. whether contractors should *e o*tained in area of interest -3. whether and where e%plorator" areas should *e drilled'

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!$ploration !$penditures
Exploration involves: (a) identifying areas t at !ay "arrant exa!ination and (#) exa!ining spe$ifi$ areas t at are $onsidered to ave prospe$ts of $ontaining oil and gas reserves% in$l&ding drilling exploratory "ells and exploratory'type stratigrap i$ test (appraisal) "ells( Exploration $osts !ay #e in$&rred #ot #efore a$)&iring t e related property (so!eti!es referred to in part as prospe$ting $osts) and after a$)&iring t e property
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Appraisal drilling
4rilling carried out to determine the ph"sical e%tent$ reserves and li/el" production rate of a field' Accounting for appraisal wells under 1FRS tends to *e *ased on whether the field or the reservoir is ultimatel" determined to *e successful and developed$ ,ustif"ing the capitali&ation of dr" appraisal wells in the same field' 5nder 5S GAAP$ an appraisal well is treated e%actl" the same as an e%ploration well and should *e written)off if unsuccessful$ even the ver" same field or reservoir is determined to *e successful and developed'
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&evelopment !$penditures
4evelopment costs are incurred to 6 Gain access to and prepare well locations for drilling such as clearing ground$ draining$ road *uilding$ gas and power lines7 4rill and e#uip development wells including the costs of platforms and of well e#uipment such as casing$ tu*ing$ pumping e#uipment$ and the wellhead assem*l"7 Ac#uire$ construct and install production facilities such as lease flow lines$ separators$ production storage tan/s$ natural gas c"cling and processing plants$ and central utilit" and waste disposal s"stem'

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Production !$penditures
Costs incurred to operate and maintain wells and related e#uipment and facilities$ including depreciation$ and applica*le operating costs of support e#uipment and facilities and other costs of operating and maintaining those wells and related e#uipment and facilities'

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'mpairment
1mpairment (riggers6 O*solescence Ph"sical damage6 accidents$ fire$ natural disasters (echnical performance pro*lems -lower production profile. !vidence from internal reporting6 worse profit -*igger loss. or cash flow$ anticipated loss on disposal$ change in long term view of sales prices 8ower estimates of ph"sical #uantities of petroleum reserves 8ower reserves in PSC due to higher prices is not an impairment trigger'
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'mpairment
5nder 1FRS impairment includes license ac#uisition costs and e%ploration and appraisal costs !%ploration licenses in unproved properties must *e assessed periodicall" -at least annuall".' 1f dr" hole has *een drilled and there are no firm plans for further drilling or appraisal activities$ the propert" would *e impaired' 5nder 5S GAAP$ FAS 232 are applica*le for proved properties and related e#uipment$ and facilities whereas unproved properties are su*,ect to t e impairment provision FAS 29 -Accounting for Suspended :ell Costs.'

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&ecommissioning
Process conducted in accordance with license re#uirements and relevant legislation and practice to6 Plug and a*andon wells 4ismantle wellhead$ production and transport facilities Remediate and restore producing areas

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&ecommissioning recognition
4ecommissioning provisions are recogni&ed when there is 8egal o*ligation Constructive o*ligation6
; !sta*lishing a pattern of past practice ; Pu*lishing policies ; a/ing statement to other parties that the compan" will accept responsi*ilities

; Creating a reasona*le e%pectation that the compan" will act in a certain wa"'
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&ecommissioning O(ligation
4ecommissioning costs are t"picall" cost recovera*le *ased on actual cash funding' ost PSCs have decommissioning o*ligations for the contractor$ despite ownership of assets *" government' 5suall" cash funding is re#uired to ma/e sure there will *e enough fund to carr" out decommissioning activities' <oth contractor and government have control over the cash fund'

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Full Cost vs Successful !fforts Accounting

Costs General costs prior to ac#uisition of licence Specific pre)licence$ licence ac#uisition$ e%ploration and appraisal costs 4evelopment costs Production costs F588 COS( S5CC!SSF58 !FFOR(S

Full Cost vs Successful !fforts Accounting

Costs General costs prior to ac#uisition of licence Specific pre)licence$ licence ac#uisition$ e%ploration and appraisal costs 4evelopment costs Production costs F588 COS( !%pensed Capitalised S5CC!SSF58 !FFOR(S !%pensed Capitalise initiall" then write off$ unless commercial reserves esta*lished Capitalised !%pensed

Capitalised !%pensed
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Overview of PSC Accounting:

Ac#uisition cost

Operating costs Capital e%penditures Non)capital e%penditures !%ploration e%penditures 4evelopment e%penditures Supporting e#uipment and facilities 4epreciation$ depletion and amorti&ation 1nventor"
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PSC Accounting Ac#uisition cost

Ac#uisition cost is not classified as part of the operating costs as *ased on the constitution$ the ownership of the natural resources sta"s with the state and is not transferred to the contractors' Signature <onus 1S NO( classified as part of the operating costs -cost recover". *ut classified as deducti*le e%pense for ta% purposes'
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PSC Accounting Operating costs )cost recover%* For an" "ear in which commercial production occurs$ operating costs consist of6
Current "ear non)capital costs

Current "ear=s depreciation for capital costs Current "ear allowed recover" of prior "ear=s unrecovered operating costs'
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PSC Accounting Capital cost

!%penditures made for items which normall" have a useful life *e"ond the "ear incurred +on,capital cost !%penditures relating onl" to current operation$ including costs of surve"s and the intangi*le drilling costs of e%plorator" and development wells'
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PSC Accounting
!$ploration e$penditures All non)capital and 1ntangi*le 4rilling Costs -14C. e%ploration e%penditures are e%pensed as operating e%penditures as incurred$ without considering whether the" relate to a successful or unsuccessful e%ploration' :hilst for (angi*le 4rilling Costs -(4C. e%ploration$ is capitalised for successful e%ploration and is classified as non)capital for unsuccessful e%penditures'
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PSC Accounting
&evelopment e$penditures 5pon dr")hole$ all e%penditures$ the 14C and (4C development e%penditures$ are classified as non)capital and therefore e%pensed' 5pon successful$ the 14C development e%penditures are still classified as non)capital and therefore e%pensed$ whilst the (4C development are capitalised'

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PSC Accounting
Supporting e#uipment and facilities (he treatment is the same as the development costs

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PSC Accounting
&epreciation- depletion and amorti.ation )&&&A* 44&A will *e calculated *eginning the "ear in which the assets is placed into service' (he method used to calculated the 44&A is dou*le declining *alance method$ where*" in the last "ear$ the residual value is recovered in full and therefore does not consider the amount of reserves

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PSC Accounting
'nventor%
(he costs of non)capital items purchased for inventor" will *e recovera*le at such time the items have landed in 1ndonesia'

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Ot er PSC Considerations
First (ranche Petroleum 4omestic ar/et O*ligation 1nvestment Credit Cost recover" Flow of PSC

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First /ranc e Petroleum

3> Percent of current "ear production or certain amount refers to contract Split *etween government and contractor * <ased on PSC=s sharing percentage F(P is ta%a*le income

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&MO )&omestic Mar0et O(ligation*

A contractor has to surrender a part -3?@. of its production for domestic mar/et 4 O fees received *" a contractor6 ) (he first ? "ears production$ fee is average 1CP ) After ? "ears$ fee is 5S4 '3>A**ls or 2>@ of average 1CP -pac/ 11.$ 2?@ of average 1CP -pac/ 111.

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'nvestment Credit
1nvestment credit is an additional allowance when a contractor invests in a new field Applica*le mainl" for oil investment$ gas is on pac/ 11 -deep sea. and pac/ 111 -pre) tertiar". Rate investment credit is6 ) 3>@ of direct investment amount -if ta% rate is ?B@. ) 2C@ of direct investment amount -if ta% rate is DE @. ) 23C@$ 2D3@ -oil.7 ??@$ 22>@ and 23?@ -gas. in deep sea and pre tertiar" areas'

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Cost 1ecover%
Current "ear non capital costs

* 1nventories will *e recovera*le at the time when landed in 1ndonesia

Current "ear=s depreciation for capital cost

* 4eclining *alance method$ "earl"$ grouping per PSC

Current "ear=s allowed recover" of prior "ear=s un)recovered operating costs

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Cost 1ecover% )continued*

Operating cash directl" associated with production of natural gas will *e directl" chargea*le against natural gas revenues Other costs6 ) Overhead allocation$ should *e consistent and approved *" <P igas -generall" ma% 3@ of operating costs. ) 1nterest recover"$ has to *e approved *" <P igas

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Compensation and Production Bonus

Signature *onus$ when getting the PSC Production *onus$ after reaching certain production volume 5nrecovered cost *ut ta% deducti*le

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F"O2 OF PSC
GROSS REVENUE FTP

INV.CREDIT

COST RECOVERY

UITY TO !E SP"IT

Gov. In#one$i%

CONTRACTOR

D&O D&O FEE

TA' NET CONT.S(ARE

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TOTA" INDONESIA S(ARE TOTA" CONTR. S(ARE

PSC Accounting vs GAAP

PSC
Ac#uisition cost !%pense

US GAAP
Capitali&e

'F1S
Capitali&e as long as meet with 1FRS assets recognition criteriaF !%pense Capitali&e Capitali&e

!%ploration e%penditures6 4r" hole Successful6 ) 14C ) (4C

!%pense !%pense Capitali&e

!%pense Capitali&e Capitali&e

-F. ; it is pro*a*le that future economic *enefits associated with the item will flow to the entit"7 and ; the cost of the item can *e measured relia*l"'
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PSC Accounting vs GAAP

PSC
Appraisal drilling

US GAAP

'F1S

A dr" appraisal could 5nsuccessful A dr" appraisal could still *e carried forward e%plorator" wells still *e carried forward in the <alance Sheet$ drilled to delineate a in the <alance Sheet$ provided that the potential reservoir are provided that the intend to drill more e%pensed intend to drill more wells or to develop the wells or to develop the field still e%ists' field still e%ists'

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PSC Accounting vs GAAP

PSC
4evelopment e%penditures

US GAAP
Capitali&e

'F1S
Not specified' Capitali&ed as long as meet with 1FRS assets recognition criteria Not specified' Capitali&ed as long as meet with 1FRS assets recognition criteria Capitali&e

4r" hole

!%pense

Successful6 ) 14C ) (4C !%pense Capitali&e Capitali&e Capitali&e

Supporting e#uipment and facilities

Capitali&e

Capitali&e

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PSC Accounting vs GAAP

PSC
44&A of capital costs 4ou*le decline

US GAAP
5nit of production

'F1S
Not specified$ to *e allocated over useful life$ reflecting consumption of assets= *enefits !%pensed as consumed !%pensedAimpaired upon identified
Accrual *asis *ased on the discounted present value of the e%pected e%penditures re#uired to settle the o*ligation

Non)capital inventor" O*solete inventor" or assets <ig ta*le lia*ilities A severance

!%pensed upon receipt :rite off upon approved *" <P 1GAS Cash *asis -pa" as "ou go.

!%pensed as consumed !%pensedAimpaired upon identified

Accrual *asis *ased on the discounted present value of the e%pected e%penditures re#uired to settle the o*ligation

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PSC Accounting vs GAAP

PSC
A*andonment A decommissioning lia*ilities Cash *asis' New recent PSC contract accrual *asis$ *ut no further guidance issued "et *" <P 1GAS'

US GAAP
Accrual *asis ) *ased on the discounted present value of the e%pected e%penditures re#uired to settle the o*ligation' (he provision should *e provided in the period in which it is incurred if a reasona*le estimate of fair value can *e made$ or as soon as a reasona*le estimate of fair value can *e made'

'F1S
Accrual *asis ) *ased on the discounted present value of the e%pected e%penditures re#uired to settle the o*ligation' (he provision should *e provided as soon as the decommissioning o*ligation is created$ which is normall" when the facilit" is constructed and the damage that needs to *e restored is done'

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PSC Accounting vs GAAP

PSC
1mpairment
:ritten off assets upon agreement from <P 1GAS

US GAAP
All impairments are recognised in the income statement'

'F1S
(he same as 5S GAAP$ e%cept that an impairment loss -downward revaluation. ma" *e offset against revaluation surpluses to the e%tent that it relates to the same asset7 an" uncovered deficit is recorded to the income statement'

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1ecording PSC Accounting & GAAP )Operator*

General industr" practice use the GH *oo/ and Corporate *oo/ 34 Boo0 represent the recording of the transaction in the level of ,oint venture transaction -such as cash call re#uest$ cash call receipt$ ,oint venture e%penditures.' Corporate Boo0 represents the recording of transaction in the level of corporate as a separate entit"' Consist of6 ; ,oint venture transaction -multiplied *" its shares. ; transaction which onl" incurred in corporate level -corporate ad,ustment. such as revenue$ 44&A$ deferred ta% and other GAAP ad,ustment'
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1ecording 3oint 'nterest /ransactions )+onoperator*

+ ,eneral ind&stry pra$ti$e &se t e proportionate $onsolidation !et od of a$$o&nting( + -nder proportionate $onsolidation% ea$ o"ner pi$.s &p its proportionate s are of ea$ assets% lia#ility% reven&e and expense ite! in a$$ordan$e "it its o"n a$$o&nt $lassifi$ation( + / e prin$ipal so&r$e do$&!ent is t e !ont ly 0oint 1nterest 2illing (012) fro! t e operator( + / e 012 do not $oin$ide "it ,334 or in$o!e tax a$$o&nting(

/ e re$ording of 0oint 1nterest /ransa$tions of 5on6perator "ill #e detailed in 7as 7all se$tion

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5uestion & Answer Session

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