DISCLOSURES ABOUT OIL AND

GAS PRODUCING ACTIVITIES

 In India, disclosure requirements for enterprises
engaged in the oil and gas producing activities are
generally governed by the requirements of the
Schedule VI to the Companies Act, 1956 and
Accounting Standards published by the Institute of
Chartered Accountants of India
 Following disclosures can be considered under the
framework of Indian disclosures requirement
 Para 2 of AS-l "The view presented in the financial
statements of an enterprise of its state of affairs and
of the profit and loss can be significantly affected by
the accounting policies followed in the preparation
and presentation of the financial statements. The
accounting policies followed vary from enterprise to
enterprise. Disclosure of significant accounting
policies followed is necessary if the view presented is
to be properly appreciated".
DISCLOSURES
 In view of above, all enterprise engaged in oil and
gas producing activities should disclose in their
financial statements the method of accounting for
costs incurred in those activities and the manner of
depreciating of capitalized costs relating to those
activities.
 The above disclosure is also required by FAS 69.
 Under Successful Efforts Method, company should
additionally also disclose accounting policies relating
to the following:
 . Treatment of survey cost
DISCLOSURES
 Treatment of exploratory wells in progress
after its completion.
 . Type of costs included in producing
properties
 . Method of depletion
 . Category of reserves used for depletion
base
 . Cost center adopted for basis of depletion
e.g. reservoir, field or license area etc. . Basis
for impairment followed in carrying cost of
producing properties.
 . Treatment of abandonment costs viz. costs
relating to dismantling, abandoning and
restoring well sites
DISCLOSURES
 It is suggested that all oil and gas producing
enterprises in India should disclose the following
additional information with the objective of increasing
transparency and making financial statement more
meaningful and informative in line with the
international practice (as required in F AS 69).
 All enterprises engaged in oil and gas producing
activities should disclose in their financial statements
the method of accounting for costs incurred in those
activities (example full cost, successful efforts
method) and the manner of depreciating capitalized
costs relating to those activities
DISCLOSURES
 All enterprises engaged in oil and gas producing
activities should disclose in their financial.statements
the following as additional information so that the
financial position and operations of the company can
be fully appreciated .
 (I)Proved oil and gas reserve quantities
 Net quantities of an enterprise's interests in
proved reserves and
 proved developed reserves of (a) crude oil
(including condensate and natural gas liquids) and
(b) natural gas as of the beginning and the end of
the year. If enterprise's proves reserves of oil and
of gas are located entirely within its home country,
that fact shall be disclosed. If some or all of its
reserves are located in foreign countries, the
disclosures of net quantities of reserves of oil and
gas should be separately disclosed.
 Changes in the net quantities of an enterprise's
DISCLOSURES

proved reserves of oil and gas during the year for
enterprise's home country and each foreign
geographic area in which significant reserves are
located along with changes resulting from each of
the following with appropriate explanation of
significant changes.
 Revision of previous estimates: Revisions
represent changes in previous estimates of proved
reserves, either upward or downward, resulting
from new information (except for an increase in
proved acreage) normally obtained from
development drilling and production history or
resulting from a change in economic factors.
DISCLOSURES
 Improved recovery: Changes in reserve estimates
resulting from application of improved recovery
techniques separately, if significant. If not
significant, such changes may be included in
revisions of previous estimates.
 Extensions and discoveries: Additions to proved
reserves that result from (1) extension of the
proved acreage of previously discovered (old)
reservoirs through additional drilling in periods
subsequent to discovery and (2) discovery of new
fields with proved reserves or of new reservoirs of
proved reserves in old fields.
 Production
DISCLOSURES
 (II)Capitalized costs relating to oil and gas producing
activities
 The aggregate capitalized costs relating to an
enterprise's oil and gas producing activities
 the aggregate related accumulated depreciation,
depletion, amortization, and valuation allowances
as at the end of the year.
 In case of full cost companies, for each cost
centre for each year the profit and loss account is
presented alongwith the total amount of
depreciation, depletion and amortization
expenses.
 Capitalized costs of support equipment and
facilities
 Capitalized costs of proved and unproved
properties if significant
DISCLOSURES
 (III)Cost incurred in oil and gas property acquisition,
exploration, and development activities
 Each of the following types of costs for the year
separately (whether those costs are capitalized or
charged to expense at the time they are incurred).
 Property acquisition costs, Exploration costs
Development costs & Production costs .
 (IV)Results of operations for oil and gas producing
activities
 This information should be disclosed in the
aggregate.For each geographic area for which
reserve quantities are significant for disclosures I III
IV & V. Disclosure I & III are same of FC and SE
companies.The following information relating to these
activities should be presented in the following
manner:
DISCLOSURES
 a) Revenues
 b) Production costs
 c) Exploration expenses
 d) Depreciation, depletion and amortization

 e) Income tax expenses

 f) Results of operations for oil and gas producing

activities
(excluding corporate overhead and interest costs)
 [ f= (a) - (b+c+d+e)]
 DISCLOSURES
 Additional disclosure requirements for full cost
companies
 Following additional disclosure for full cost companies
is required under Para 7(i) of Regulation SX 4 -10:
 For each cost center for each year for which profit
and loss account is presented the total amount of
amortization expense.
 The aggregate of the capitalized costs of unproved
properties and major development projects that are
excluded from the capitalized costs being amortized.
 In addition, the notes to financial statements must
also include a description of the current status of the
significant properties, including the anticipated timing
of inclusion of the costs in the amortization
computation
DISCLOSURES
 Future based disclosures
 V A standardized measure of discounted future net
cash flows relating to proved oil and gas reserves
quantities.
 VI Changes in standardized measure of discounted
future net cash flows relating to proved oil and gas
reserves quantities
 DISCLOSURES
 ICAI Guidance note
 (I)The method of accounting followed
 (II)Net quantities of an enterprise’s interests
in PR & PDR of (a) oil(including condensate
and natural gas liquid) and gas at the
beginning and additions,deductions
productions and closing balance for the year.
 (III) Net quantities of an enterprise’s interests
in PR & PDR of (a) oil (b) gas should also be
disclosed on the geographical basis.
 IV) The reporting quantity should be MT and
cubic metre
DISCLOSURES
 Disclosure V
 Future cash inflows(yrendprize*estfutprod)
 Future dev& prod costs(based on yr end prize)
 Future pretax cash inflows
 Future income tax(yrendstatrate leading
todeductions,credit and allwances)
 Future net cash inflows
 Discounted at 10 percent
 Standarized measure of discounted future net cash
inflows
 DISCLOSURES
Disclosure VI (to be reported if significant)
 Net changes in sale price,production costs relating to
future production.
 Changes in estimated future development costs.
 Sales and transfers of oil and gas produced during
the period.
 Net changes due to extension,discovery and IOR
 Net changes due to purchase and sales of minerals in
place.
 Net changes in discount
 Accretion of discount
 Others unspecified.
ACCOUNTING FOR OIL AND GAS
SALES
 Revenue recognition is mainly concerned with
timing of recognition of revenue in the profit
and loss statement.
 Accounting Standard 9 on Revenue
recognition issued by the Institute of
Chartered Accountants of India governs the
basis of revenue recognition.
 Accordingly, this standard needs to be applied
by the oil and gas producing company while
recording revenues.
ACCOUNTING FOR OIL AND GAS
SALES
 As per AS-9 the key criterion for determining
when to recognize revenue from a transaction
involving the sale of goods is that the seller
has transferred the property in the goods to
the buyer for a consideration.
 As per the standard in a transaction involving
the sale of goods, performance should be
regarded as being achieved when the
following conditions have been fulfilled.
ACCOUNTING FOR OIL AND GAS
SALES
 the seller of goods has transferred to the
buyer the property in the goods for a price or
all significant risks and rewards of ownership
have been transferred to the buyer and the
seller retains no effective control of goods
transferred to a degree usually associated
with ownership
 no significant uncertainty exists regarding the
amount of consideration that will be derived
from the sale of goods
ACCOUNTING FOR OIL AND GAS
SALES
 The timing for recognizing revenue needs to be
determined based on the achievement of the above
two conditions .
 In an E & P Company after an oil or gas well is
completed and it is determined that the well is
commercially viable, procedures are instituted to
place the well on production.
 Flow lines are used to gather production from the
individual wells to a central location for further
handling (may be called as Group Gathering Station
(GGS). Before transferring oil to oil storage tanks;
gas from liquids(crude oil) or liquids( condensate)
from gas are removed for further handling and
marketing. It is accepted practice to transfer the
custody of oil storage tanks to refinery
ACCOUNTING FOR OIL AND GAS
SALES
 It has been generally seen that in oil and gas
industry (upstream) revenue for sale of crude
is recognized when there is transfer of
custody of crude to the refinery.
 The quantum is based on quantity
acknowledged by the refinery. Similarly, the
sale of gas is recorded as per quantity
acknowledged by the buyer from customer
transfer meters.
Revenue
 LACT API gravity,BSW,Temperature
 Posted field price
 Spot sales
 Tank strapping .25 inch apart
 Thief
 Barrel 42 us gallons at 60 F.Convert
gravity to actual temperature before
and after the run and corrected for BSW
ie .008.
 Standard Division order
Revenue
 Mr K owns mineral rights in land at Texas.He leases
the land to good oil company against 1/6 royalty and
production during the year ending 31march 2008 is
60,000BBL.For the year 09 production is 80000BBL
and Good oil has assigned overriding royalty interest
to Mr M at ratio1:8 and for the year 2010 production
is same as that of 2009 but Good company assigned
PPI of 1/5 to Mr Z and for the year 2011 production
was 90000 BBL but GOOD oil has assigned rights to
a joint company retaining 75 percent
interest.Calculate production share of all the partners
in the 4 years
 Unitization: combination of properties to ease out
production .Interests are re determined on the basis
of acreage contributed, net recoverable barrels of oil
in place, pay sand contributed etc.
 Payment of royalty and cess: Responsibility of
operators, operator as also that of PI holders.
 Similarly share of revenue proceeds also could be the
responsibility of the operator.
 If the produce in a nearby lease where the operators
are the same, it would be taken to be revenue in the
producing field and expenses in the using field
Revenue
 Gas :turbine meters,orifice meters,positive
displacement meters
 Measured at 60 F at 14.73 psia at onshore and
15.025psia at offshore
 When oil or gas is used in the field it is produced the
entry is revenue neutral otherwise revenue/operating
expense is recognized at the selling rate.
 Gas contracts are written in MMBTU and accounting
records in MCF
 Condensate return clause
Revenue
 Flared gas
 Processing of gas and storage of gas
 Take or pay provision accounting of cash and
deferred credit till such time make up quantity is
lifted.Obverse make up or pay clause
 Gas price discovery,replacement cost factor foreign
exchange and interest clauses.
 Impurities in gas vapors,liquid and sulphur etc.
 Nomination,condition precedent and force maejure
Revenue
 Good oil company sold 1500 MCF of gas at
the rate of 2.5 USD per MMBTU and the heat
content is 1.04 MMBTU per MCF. Determine
revenue and unit rate in quantity.
 Also compute revenue if the contract
provided for heat content of 1.05 MMBTU and
negative variations deductible prorata
 Also determine revenue if the gas was sold at
a pressure of 14.9 psia.
 Gas is usually not stored, measurement is more
complex and distribution of proceeds is usually the
responsibility of the operator.
 The distribution of revenue and payment of statutory
taxes in cases where there are more than one PIs are
usually resting with the operator.
 Producer gas imbalance occurs when
 Under NELP Company A, B and C with PI of 50, 40
and 10 formed a J V and signed a PSC (March 2001)
with GOI for exploration in an on shore block.
 Under Phase I of exploration an amount of Rs.50
crore was incurred by the contractor up to March
2005.
 Under Phase II an amount of Rs.75 crore was
incurred up to March 2008.
 Fields were discovered and production commenced
from April 2008.
 On the development of the fields an expenditure of
Rs.100 crore was incurred as of March 2008 and
another Rs.125 crore in the year 2008-09.An
expenditure Of Rs.115 crore was incurred on fines
and damages solely on account of negligence and
misconduct on part of officials of the J V in 08-09.
 Production in 2008-09: April to Aug 50,000 BBL in
each month; Sept to Jan 65,000 BBL in each month
and Feb and March 2009 55,000 BBL in each month.
The PLATT prices are assumed to be Rs.32000 per
MT during each month of first quarter of 2008-09
and Rs.34000 per MT in each month of 2nd and 3rd
quarter and Rs.35000 per MT in each month of last
quarter.
 Production in 2009-10: April to Aug 80,000 BBL in
each month; Sept to Jan 85,000 BBL in each month
and Feb and March 2010 95,000 BBL in each month.
The PLATT prices are assumed to be Rs.36000 per
MT during each month of first quarter of 2009-10
and Rs.37000 per MT in each month of 2nd and 3rd
quarter and Rs.37500 per MT in each month of last
quarter.
 Assume no ANG and royalty at the rate of 12.5% on
well head production.
 Cost petroleum was 40% and share of GOI in profit
petroleum was IM up to 2.49 65% and I M from 2.5
to less than 3 70% and 3.0 to less than 3.5 75%
 Assume production costs were 8% in 2008-09 and
shot up to 10 % in 2009-10 of the cost petroleum. JV
earned incidental income of Rs.50 crore on account
of insurance claim in 2008-09.
 Delivery period was monthly and prices so to be
determined on monthly basis.
 For I M preceding year cost + profit petroleum +
Incidental Income/(EXPL + Development costs -
costs disallowed)
 GOI opted for kind so compute share of GOI revenue
from above in the 2 years and share of the 3 PIs in
these 2 years ( both cost and profit petroleum).
 Also compute aggregate of costs that are yet to be
recovered to wards exploration and development.
 Compute IM to be used for 3rd year i.e. 2010-11.