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Gold/Mining/Energy : Canadian Oil & Gas Companies
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To: Doug who wrote (4710)2/21/1998 2:41:00 AM
From: Richard Saunders  Read Replies (1) of 24921
 
Doug/ (warning: not an accountant so beware of inaccuracies....) Difference between FULL COST and SUCCESSFUL EFFORTS accounting? There are a bunch of more qualified folks on this thread who can reel me in if this gets out of hand - you've been warned.......... Most Cdn. producers use the full cost method of accounting while the integrateds for the most part use succesful efforts. Full cost method lets companies capitalize the costs of trying to produce oil/gas. This means that all costs such as land acquisition, seismic, carrying charges, drilling (FOR BOTH SUCCESSFUL WELLS & DUSTERS), gathering, producing, financing and admin. related to capital projects are added to the balance sheet as an asset and will show up under the "petroleum, property and equipment" category. The capitalized costs are then charged against earnings (depletion, depreciation & amortization) as oil/gas is produced. Successful efforts method only capitalizes costs related to successful drilling. The costs related to dry, uneconomic or abandoned wells are immediately written off against earnings in the year the costs were incurred. In Canada the Canadian Institute of Chartered Accountants (CICA) has a Handbook which sets the direction for oilpatch accounting. The Handbook indicates that for companies using the full cost method a "ceiling test" is required. This basically means (remember the initial warning....) that the maximum amount of allowable costs which can be capitalized (ie. added to the balance sheet as an asset) is limited by future net revenue that will be obtained from proven reserves. Lower commodity prices basically "lower the ceiling" and if costs exceed the upper threshold then writeoffs occur at year end. In 1991 low natural gas and heavy oil prices combined with the then high Canadian dollar contributed to a pile of write-downs of property costs under the CICA guideline. Companies using successful efforts method are also required to demonstrate that there has been no permanent impairment in the carrying value of assets but I believe (might be wrong......) they aren't bound by tight CICA Handbook rules. Companies that use successful efforts method tend to have more volatility in their earnings but will generally have lower depletion, depreciation and amortization charges since their unsuccessful activities are already expensed. As well, unit or per barrel of oil equivalent charges will be lower than their finding and onstream costs for the same reason. Anyways, hope the above makes sense and if anything spewed is out of whack someone please tune it up....... the CICA homepage is at cica.ca
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