Full cost accounting is addressed in the Securities and Exchange Commission (SEC) literature.
The guidance in this Subtopic deals with accounting under a successful efforts method.
In the oil and gas industry, ultimately the expected future benefits that an entity is attempting to obtain through its acquisition, exploration, and development activities are represented by oil and gas reserves. But other than by purchasing minerals-in-place, an entity does not acquire reserves directly. Rather, it acquires properties (rights to extract any reserves that may be discovered in the future) and it acquires (develops) systems capable of producing the oil and gas reserves that are discovered.
Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property.
The costs of drilling exploratory wells and the costs of drilling exploratory-type stratigraphic test wells shall be capitalized as part of the entity's uncompleted wells, equipment, and facilities pending determination of whether the well has found proved reserves.
An entity sometimes conducts geological and geophysical studies and other exploration activities on a property owned by another party, in exchange for which the entity is contractually entitled to receive an interest in the property if proved reserves are found or to be reimbursed by the owner for the geological and geophysical and other costs incurred if proved reserves are not found. In that case, the entity conducting the geological and geophysical studies and other exploration activities shall account for those costs as a receivable when incurred and, if proved reserves are found, they shall become the cost of the proved property acquired.
Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering, and storing the oil and gas.
Development costs shall be capitalized as part of the cost of an entity's wells and related equipment and facilities. Thus, all costs incurred to drill and equip development wells, development-type stratigraphic test wells, and service wells are development costs and shall be capitalized, whether the well is successful or unsuccessful. Costs of drilling those wells and costs of constructing equipment and facilities shall be included in the entity's uncompleted wells, equipment, and facilities until drilling or construction is completed.
Stratigraphic test wells are drilled to obtain information. They are not normally intended to be completed for hydrocarbon production and are customarily abandoned after drilling is completed and the information is obtained. Normally, stratigraphic test wells are drilled offshore to determine whether an offshore property contains sufficient reserves to justify the cost of constructing and installing a production platform and to determine where to locate such a platform.
Land that is not undergoing developmental activities necessary to get it ready for its intended use is not an asset qualifying for interest capitalization. See paragraph
835-20-15-8 for the criteria and methods for capitalizing interest costs.
See Section
255-10-50 for methods of determining discounted future net cash flows relating to proved oil and gas reserve quantities.