As an Accountant in the Oil and Gas industry, you may spend a great deal of time analyzing accounting data, reconciling general ledger accounts and trying your hardest to listen very close in meetings as you try to figure out the many acronyms that are flying around in converstations.  I'm here to encourage you to not be afraid to ask those questions.  The way I see it, the more you know about your role the bigger the contribution is to the team. 

The process in which production cost is incurred generally ties back to the maintenance or opportunity to increase production activities on a well.  After a well has been completed, and flow lines, heater treaters, separators, storage tanks, etc., have been installed, production activities begin.  If you are an accounting professional presently working within the industry all of the production expenses are key to cost control for producers and operators.  Production activities involve lifting the oil and gas to the surface and then gathering, treating, processing, and storing the oil and gas.  

Production cost is defined as those cost incurred to operate and maintain an enterprise's wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities and other cost of operating and maintaining those wells and related equipment and facilities.  They become part of the cost of oil and gas produced.  

The accounting role you are in today speaks volumes because your skills and knowledge matters for many reasons.   What remains important in an accounting role, undeniably, starts with understanding your industry and this process is generally a hands on learning curve?  But this learning curve should not keep the accountant from showing initiative and inquiring from management when an assigned task is unclear.  Production cost has it's challenges because the accountant must be aware of how cost is attributable to wells, directly or allocated.  

Here are some examples of production-related cost and how cost are assigned:

Directly Attributable Costs:

• Direct materials, supplies, and fuel -- wells and leases involved identified in the invoices
• Repairs and maintenance that can be traced to individual wells and leases
• Operating cost of water flooding system -- only one lease involved

Allocable Cost:

• Field offices and facilities serving several leases
• Transportation and hauling -- several leases involved
• Boat and fuel expenses, offshore operations -- several leases involved

These examples are just a few of what an accountant must consider in their roles each day.  When investing in companies involved in the exploration and development of oil and natural gas reserves, company analysis should include recognizing which accounting method a company follows. The development of extensive policies and procedures can support the professional accountants and managerial team with monthly responsibilities and meeting company expectations. 

Exploration may be carried out either prior to or after mineral leases are acquired.  In most cases, if exploration is to be conducted before a lease is obtained, an exploration permit, commonly called shooting rights, must be obtained from the property owner.  If offshore exploration is involved, a permit that does not usually require the payment of a fee must be obtained, normally from the U.S. Department of Interiors Minerals Management Service (MMS) now ONRR.  In either offshore or onshore activities, permission is required to conduct exploration.

​Onshore exploration rights may take one of two forms. Under a shooting rights only contract, the rights holder is allowed to enter onto the property and conduct exploratory activities, up to but not including the drilling of an exploratory well.

​The entry to record would be similar to the entry below:
​Work in Progress -- Shooting rights & damages          2,300
​Vouchers Payable                                                                                        2,300

​The comprehension of accounting expectations in accounting remains a key tool to the oil and gas industry.  Extensive documentation supports the operations team with their day to day and monthly deadlines and provide additional assurance of journal entries being recorded properly. 

​Some of the main features of an exploration permit can be reviewed here.

How much do you know about problems that occur in the oil and gas industry?  The workmen in the field have to complete many phases to ensure a well gets to the producing phase.  If there is a delay, it can be for reasons we have identified and shared below. 

Workover operations generally involve using a special workover rig to restore or stimulate production from a particular well.  A situation in which a workover may be necessary would be an open hole completion where sand from the producing formation has clogged the tubing end, reducing or completely cutting off the fluid flow from the producing horizon.  A workover may also be necessary when the casing has been perforated, and rock or sand particles have clogged the openings in the casing.

​Other problems and oil and gas company may encounter is regarding damaged or lost equipment and materials.  Equipment or materials may be damaged or lost during the drilling process.  Some examples of damaged equipment would be twisted drillpipe or broken bit.  Examples of lost equipment include parts of the drill bit, hand tools (e.g., wrenches) and drillpipe twisted off downhole.  If the well is an exploratory well, the cost are expenses or capitalized, depending upon whether the well is unsuccessful or successful.

​The oil and gas industry offers great opportunities to learn a wide range of rules, regulations and professional growth.  Learning is key for any industry, thus I encourage you to never stop learning and to take on opportunities that allow you to learn more.

In the Oil and Gas industry one of the common related cost is Production Cost.  Theoretically, the production cost are part of oil and gas produced and, therefore, allocable to inventory and cost of goods sold.  However, crude oil and natural gas inventories are usually insignificant and not recognized on E&P company balance sheets.

​In accounting for production costs, one of the first requirements is to determine the functional accounts that will be used.  The accounting system must provide information in sufficient detail to permit accounting cost in accordance with recognized accounting principles and at the same time meet the needs of operating personnel in evaluating operations. 

​In accounting for production costs, it is also essential that the accounting records furnish the necessary data for federal income tax purposes.  Production cost are expensed as incurred except in two cases:

1. ​Recording oil and gas inventory at cost and
2. Accrual or deferral of production cost associated with gas imbalances using the sales method of accounting​

​Accounting for production expenses is key to financial reporting and other groups such as Revenue who may be responsible to accurately allocating cost. 

​Fontenot & Associates Solutions has the skills and knowledge to support companies establish policies and procedures with extensive detail and definitions.  Visit our website today.