OT02087 - Oil Industry Accounting

The Successful Efforts Accounting Method

• SORP updated 7 June 2001 defines this method of accounting as:-
• "A method of accounting for oil and gas exploration and development activities whereby exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised, and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon-bearing structure is identified and tested."
• Under the successful efforts method it is usual to use the field as the cost centre. SORP updated 7 June 2001 defines "field" as:-
• "An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition."
• All pre-licence, licence acquisition, exploration and appraisal costs should initially be capitalised (including those costs which may fall to be written off in the same accounting period) in well, field or general exploration cost centres as appropriate, pending determination.
• Exploration and appraisal costs should be accumulated on a well-by-well basis pending evaluation. Costs should be written off as abortive on completion of a well unless drilling indicates the existence of hydrocarbon reserves and there is a reasonable prospect that these reserves are commercial. After appraisal, if commercial reserves are found then the net capitalised costs incurred in discovering the field should be transferred into a single field cost centre. SORP updated 7 June 2001, at paragraph 56 provides rules limiting the length of time the determination process may last.
• Successful effort companies must disclose:-
• exploration and appraisal expenditure, pending evaluation, as "intangible assets - exploration expenditure"
• when commercial reserves are established, the reclassification from "intangible assets - exploration expenditure" to "tangible assets" of such directly related expenditure.