Two methods of Accounting for Oil & Gas Companies

What are they?

Did you know, U.S companies follow one of two methods of financial accounting for petroleum E&P activities: successful efforts or full cost?

The successful efforts methods has only the cost of successful efforts capitalized as oil and gas properties. Cost of explanatory dry holes, geological and geophysical (G&G) cost in general, delay rentals, and other property carry costs are expensed. Under the full cost method all property acquisitions, exploration, and development cost, even dry hole costs are capitalized as oil and gas properties. These cost represent fixed assets, amortized on a country-by-country basis using a unit-of-production method based on volumes produced and remaining proved reserves.

If a company drills five exploratory wells for $1 million each and only one finds proved reserves, the successful efforts methods recognizes a $1 million asset, whereas the full cost method would recognize a $5 million asset.

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Source: Petroleum Accounting