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Oil & Gas Accounting 101 – Leases

 

LeaseA mineral lease is a contract between a mineral owner (lessor) and a second party (lessee). The lessor grants to the lessee the exclusive right to drill for and produce oil and gas, or other minerals on the property described in the lease. A lease usually provides for:
  • Cash (lease bonus) payable to the lessor upon the execution of the lease and approval of title
  • A specified term of years, usually from three to ten years
  • Delay rental for each expiring year during which the lessee has not commenced drilling operations
  • Lease cancellation if the lessee does not pay the delay rental by the due date
  • The basis for division of oil and gas produced between the lessor and the lessee
  • Continuation of the contract between the lessor and lessee as long as oil or gas is produced from the property

The lessor’s share of the production is known as the royalty or landowner’s royalty. It is common for the share to be stated as a fraction of the oil and gas produced, for example 1/8. The lessee acquires the right to the oil and gas produced less the landowner’s royalty.

The lessee does not take on a specific obligation to develop the property or to pay delay rentals, but does agree that the lease will expire if the property is not developed or rentals are not paid. Normally the lessee can abandon the lease without penalty.

lease_example

When the landowner signs the lease, the owner will be given a “Bonus.” The bonus is a sum of money, agreed upon both the Lessor and the Lessee to be given on signing of the oil and gas lease. If there are producing wells near the land, the bonus is usually higher than when there is no drilling yet or none of the existing wells are not producing.

The length of time established in the oil and gas lease is called the “term.” This is the primary length of the lease. The term is usually a fixed length of time, such as one to five years.

Another part of the oil and gas lease is royalty payments. It is an agreed on percentage of the profits of the oil and gas. The lease will specify what, if anything, can be deducted from the royalty payments such as, severance taxes and/or gathering or marketing charges.

If the term of the oil or gas lease extends beyond the time that the bonus was paid, and a well was not drilled, then the Lessee is required to pay the landowner an agreed on sum. This sum could be $1.00 or more per acre. This is called a delay rental. The payment is due on or around the anniversary of the lease. Occasionally oil and gas companies pay this fee up front when an oil lease is negotiated and signed. The company’s failure to pay a delay rental on time cancels the lease.

Accounting 101 E-Book


Source: SherWare Blog

3 Reasons To Purchase Oil & Gas Software

For small or medium sized oil and gas companies, software is often an overlooked part of their business process. People often assume that software is too costly and does not provide a good return on investment (ROI). Here are some important things that aren’t always at the top of your list to consider when deciding whether to upgrade your current software systems that probably should be when dealing with oil and gas disbursement software.

1) Automation

SoftwarePurchase

If your business operates wells, tracking income and expenses is incredibly important. Without proper tracking and accounting integration, you could be setting yourself up for problems between your investors and well owners and other parts of the distribution chain – because it all comes down to one thing: accurate numbers.

If you can’t be sure that you 1) have all the pertinent bills, lease details, division of interest breakdowns and production receipts entered correctly for the month and 2) that your math to split it out evenly between 10 or 100 owners in a well is correct, then essentially the work you’re putting in is useless.

What good is it to you if you have the division of interest equations right to divvy up income flowing in, but some bills that were supposed to run through in April were entered with the wrong date and weren’t processed in April’s distribution that you just mailed checks out for?

While there are many things that software can do, the most important thing to look for in a software program is how it handles the data you enter. How much of the software is run on automated processes either you set up or are already set up within the software?

Are there checks in place to be make sure everything you’ve entered for the period you’re processing is showing up? How do you know if the division of interest has been added up correctly? Does the software automatically link bills to wells to owners or do you manually type that in? How much room for error is there?

2) Manage & Share Information

From well-specific to owner-specific information, data in your business needs to be accessible and available to interested parties. When considering a software upgrade, your data needs are nearly as important as managing distribution. The more parties which you need to interact with on a daily, weekly, quarterly or yearly basis, the more oil and gas software can produce positive results. The next thing you should consider is how easily can your data be shared with others?

What reports can be created? How quickly can they be reproduced? How will I get monthly distribution statements out? Can I email reports to investors when they call in? Can I create tailored reports for the accountant and COO to get the numbers they need?

What if I need to go back and look at reports from January? Will they still be available?

Getting answers to your questions regarding how proficient the software’s reporting capabilities are is paramount. Automation does you no good if it’s cumbersome to share the data with those asking the tough number questions.

And finally, your business’s need for information management needs to be balanced with your budgeting priorities. In order to decide when start with a new software program, you must address the price of software versus the cost of labor to manage your information without the software.

3) Profit Equation

For businesses, one of the chief ways to decide whether the cost of upgrades are worth more than the expense is through the simple accounting equation to analyze profits – income (or money saved) minus expenses (and labor) equals profit. Installing a new software system makes sense if the money saved (or earned) is worth more than the costs of installing and training on the new software.

So the final piece to look at, and the one that often is the only piece looked at, is to ask yourself, is it worth it?

How much time could be saved with new software? What personnel changes could I make with new software? Will I no longer need an accountant to handle this aspect of my business? Can my office manager finish disbursements in less time – leaving her more time to complete all the other tasks?

What costs can be saved by handling everything in one place? If I am able to handle AFEs, leases, directly deposit revenue into an owner’s account and no longer need to print and mail statements, for example, how much time, office supplies and money could I save per month?

Now the final question is does your current system for handling distributions and joint interest billing meet all of these requirements you’ve just answered for yourself?


Source: SherWare Blog

Oil & Gas Accounting 101 – Terminology

 

terminology

To be able to work effectively in Oil & Gas Accounting, you need to understand some of the terminology for the oil & gas industry. Here are some of the terms you’ll encounter…

 

  • Authorization for Expenditure (AFE) – A document shown to investors in a well that will estimate drilling and completion costs. An AFE can then be used as drilling occurs to show actual costs versus estimated costs.
  • Barrel (BBL) – The basic unit for measuring oil. A barrel is equal to 42 U.S. gallons.
  • Credit – The right side of an entry to the G/L.
    Crude Oil – Liquid petroleum as it comes out of the ground. Crude oil varies radically in its properties, such as specific gravity and viscosity.
  • Debit – The left side of an entry to the G/L.
  • Delay Rental – Paid to the lessee (person or company who leased the land to be drilled upon) to retain concession if production is not taking place on the land.
  • General Ledger – The main record keeping location for all debits and credits for the company (entity).
  • Intangible Drilling Costs (IDC) – All costs incurred in drilling a well other than equipment or leasehold.
  • Intangible Completion Costs (ICC): Costs incurred with completing a well that are nonsalvageable if the well is dry or not including labor, materials, rig time, etc.
  • Joint Interest Billing Statement – The monthly statement sent from the operator to all the working interest holder’s within an oil and gas property detailing the expenses charged each month.
  • Lease – A legal document specifying the right to the minerals in a certain piece of property.
  • Leasehold Costs – The costs associated with obtaining and keeping a lease on a parcel of land on which a well is drilled.
  • Legal Suspense – Amounts held in suspense instead of being paid to an owner. Reasons for holding the suspense could be they moved with no forwarding address, a title dispute on the lease or they haven’t reached the minimum check amount set by the operator.
  • MCF – Thousand Cubic Feet. The standard unit for measuring the volume of natural gas.;
  • Natural Gas – Hydrocarbons, which at atmospheric conditions of temperatures and pressure, are in a gaseous phase.
  • Owner Deficit – Amounts held in suspense when a working interest owner, who’s expenses are being netted from their revenue, has expenses that exceed their revenue.
  • Payout – When the costs of drilling, producing and operating a well have been recouped from the sale of the products of the well.
  • Posting – Entering transactions that debit and credit accounts in the general ledger.
  • Production Tax – A tax levied by the residing state on production in that state. Normally withheld from royalty and working interest checks.
  • Revenue Statement: The monthly statement sent from either the purchaser or operator to al the interest holder’s within an oil and gas property detailing the expenses and revenue charged or received each month.
  • Royalty – The landowner’s share of production, before the expenses of production.
  • Severance Tax – A tax on the removal of minerals from the ground. The tax can be levied either as a tax on volume or a tax on value. In Louisiana oil is taxed at 10 cents per BBL and Natural gas is taxed at 5 cents per MCF. This tax is normally withheld form royalty and working interest checks.
  • Spudding In – The first boring of the hole in the drilling of an oil well.
  • Tangible Completion Costs – Lease and well equipment costs incurred from completing a well.
  • Tangible Drilling Costs – Actual costs of drilling equipment.
  • Well – A hole drilled in the earth for the purpose of finding or producing crude oil or natural gas or providing services related to the production of crude oil or natural gas.
  • Working Interest – An interest in an oil and gas well that shares the expense associated with drilling, completing or operating a well, as well as the share in the revenue made on the well.

Accounting 101 E-Book

 


Source: SherWare Blog

Oil and Gas Accounting – Account for What?

As we’ve said in a prior post, “Accounting is Accounting”. This means that all accounting is essentially the same except for what you’re “accounting” for. What are you keeping track of? In the case of oil & gas accounting, you’re keeping track of wells that are being drilling and the products those wells produce over their lifespan.

In order to understand this accounting process, it’s good to take a look at how a well comes to be.

So how does a well get drilled? How do they determine where to drill the well? How are they sure where oil & gas will be found?

oilguys

An oil & gas operator will research different areas where oil & gas has been found in the past. But before they can begin drilling, they have to have permission to drill from the landowner and/or mineral owner where the well is to be drilled. They will need to get a Lease from the landowner and/or mineral owner in order to drill on their property. A lease is a legal document that spells out what the operator or owner of the lease will do for the landowner for the permission or right to drill wells on their property. There are also payments involved in order to get the lease. These payments consist of a lease bonus of so many $ per acre being leased.

Usually, in order to keep the lease until a well is drilled, the operator has to pay Delay Rental Payments to the landowner of so much per acre per year. This keeps the lease in effect until a well is drilled on the property.

Production from the well will be paid to the mineral owner, (hereinafter called the Royalty owner). The amount paid is typically 12.5% – 25% of the production before expenses.

Sometimes, the person who found the lease and did all the work in getting it signed, called the Landman, is paid by giving them a percentage of the production from the wells on the lease. This is called an Overriding Royalty. This percentage usually varies from 1% – 5%.

The people who provide the money to drill the well are called Working Interest owners. Their percentage is based on the amount of money they invested. Working interest owners share in the expenses incurred during the drilling and production phases of a well.

Find out more by downloading our free Oil & Gas Accounting 101 ebook below!

Accounting 101 E-Book


Source: SherWare Blog

Oil & Gas Accounting 101 – Revenue Accounting

One of the main tasks in oil & gas accounting is accounting for the revenue being produced by the wells and paid out to the owners. Here is where we start talking about debits and credits.

Before we get into debits and credits, let’s talk about the challenges of accounting for revenue in the oil & gas industry. In most other industries, the product is made, the price is set, then it’s sold and cash is received. The transaction is booked as a simple two-sided accounting entry debiting cash and crediting revenue.

revenueIn the oil & gas industry, we have to manage booking revenue for a product who’s price is a moving target and who’s inventory is mostly unknown. Oil and gas producers’ main assets are the minerals in place on the developed and undeveloped properties it holds. Most of these properties have been leased by the producers. These minerals in place are known as reserves. The accounting for oil and gas reserves requires the use of estimates made by petroleum engineers and geologists. Reserves estimation is a complex, and imprecise process.

Once properties are producing, the oil and gas reserves related to the producing properties will deplete resulting in a decline in production from the properties.

An independent oil and gas producer’s revenue consists primarily of:

  • Oil and gas revenue
  • Operating revenue
  • Income from the sale or sublease of property
  • Income from hedging transactions.

Let’s take a look at each of these.

Oil and gas revenue

For producers the majority of the oil and gas revenue will be in the form of working interest. Overriding royalties are also common, while landowner royalties are less common for exploration and production companies. Oil and gas revenue might also be in the form of a net profits interest and production payments.

Operating revenue

Some operators generate income from operating wells, supervising drilling, transporting gas, hauling and disposing salt water, and other activities incidental to their operations. Sale or sublease of property.Producers frequently sell or sublease property. Transactions include both developed and undeveloped property. Distinguishing between a sale and a sublease is critical for tax purposes.

Hedging transactions

Some exploration and production companies use derivatives in their operations to hedge risk associated with oil and gas prices. Derivatives are financial instruments whose values are derived from the value of an
underlying asset. Typically, oil and gas companies use futures, options and swaps.

Accounting 101 E-Book


Source: SherWare Blog

3 Reasons to Integrate Oil & Gas Software with QuickBooks

When considering accounting software for your oil and gas company, what makes the decision to integrate your internal software with Quickbooks® accounting software a good one?

A Quickbooks integrated software solution makes sense for your business when your accountant or bookkeeper uses Quickbooks, when Quickbooks is required for governmental reporting, or when key players use Quickbooks for their accounting needs.integration

Increase Communication

Integrating your software systems with other software programs or systems should be done when it increases communication internally (between departments, employees, etc.) and externally (between your business and your outside accounting firm). Integrating your business critical oil & gas software with QuickBooks helps with communication between you and your accountant since most accountants are familiar with QuickBooks and can actually restore your data and run the reports they need.

Increase Quality Control

The most important reason to integrate your internal accounting software with Quickbooks is to facilitate quality control processes between your business and your bookkeepers and accountants. With automatic integration, you reduce the chance of data errors or information loss between different wells, different departments and your final financial reporting for the month/quarter/year.

With the increased communication available through a Quickbooks and accounting software integration between your company and your accountant, communication gives your management tools to have accurate and real-time financial reports, manage long-term accounting problems and build predictive algorithms to predict financial returns.

Decrease Costs

Decreasing costs is every business owner’s quest. Costs are usually more under the business’s control than revenues are, so that makes cutting costs a priority. The first way that integrating your oil & gas software with QuickBooks reduces costs is in hiring. Bringing on a new employee is much easier if the accounting system is easy to learn or probably already known by the new hire. This has already been mentioned, but costs are lower when the information provided to your accountant at year-end is organized and in a format they can readily use. QuickBooks helps with this tremendously.

When to Integrate

Since the most important part of using internal software which integrates with external Quickbooks programs is improving your communication processes and systems, the most important question to ask is “Who needs the integration?”

Any software integration should promote communication, increase efficiency and decrease costs. If serving the right relationships, a Quickbooks integrated software system for your oil and gas software firm can increase quality communications.

SherWare’s Disbursement and JIB Manager Integrated Edition is the only oil & gas software that integrates directly with QuickBooks. It handles all the wells, owners and division of interests and let’s QuickBooks handle the accounting. Click the link below to learn more!

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Source: SherWare Blog

Oil & Gas Accounting 101 – Chart of Accounts

Accounting for Oil & Gas requires a good set of accounts which are used to keep track of all accounting activities. This list of accounts is called the “Chart of Accounts” and will be every account needed for oil & gas operations accounting. There are two main sections of the chart of accounts, which are, Balance Sheet accounts and Income Statement or Profit & Loss accounts.

Balance Sheet accounts consist of categories such as Assets, Liabilities and chart_of_accounts Equity. Assets are items of value owned by the company. Liabilities are obligations of the company to transfer something of value, like an Asset, to another party. Equity is the value of the assets contributed by the owners of the company.

Income Statement accounts consist of categories such as Revenue, Cost of Goods Sold and Expenses. Revenues are the result of the sale of production, oil & gas, from the wells. Revenues can also result from services provided or the gains on equipment sold. Cost of Goods Sold are the costs related to the sales of production or services provided. Expenses are the costs incurred in order to operate the wells and company.

The accounts in the chart of accounts are crucial to good accounting. For every transaction in your accounting system, one account will be debited and one account will be credited. This keeps the accounting system in balance. For example, when you pay your telephone bill, you will take money from your cash account (credit) to pay the bill and you’ll recognize the telephone expense by debiting the telephone expense account for the same amount.

Account Date Debit Credit
Cash 04/23/2015 $385.90
Telephone Expense 04/23/2015   $385.90

The chart of accounts is the heart of the accounting system. Every transaction entered has to be tagged with an account so it knows where to post. Once the accounts are set up. They can be used to build the accounting system.

Accounting 101 E-Book


Source: SherWare Blog

Oil & Gas Accounting 101 – Accounts

Oil & Gas accounting isn’t that difficult to understand. Accounting is accounting, so the first step in learning oil & gas accounting is to understand accounting.

Accounts

The basic element in accounting is an account. Accounts are how transactions are grouped and collected. For instance, Cash could be an account. This account could reprecheckbooksent a checking or bank account where a business’s cash or money is kept. Accounts Receivable is another example of an account. This is where money owed to the business is kept. An account called Wages is used to keep track of the wages paid to employees.

Accounts are grouped together according to the type of account. Some of the account groupings are:

  • Assets – this is what the company owns. Includes accounts such as Cash, Inventory, Wells and Land
  • Liabilities – this is what the company owes to others. Includes Accounts Payable, Payroll Taxes and Loans
  • Equity – this is what the company has after all liabilities are paid
  • Income – this is the revenue or economic gains recieved for items sold or services provided. Includes Oil & Gas Revenues, Administration Revenue and Service Revenue
  • Expense – this is the costs the company incurs doing business. Includes Rent, Telephone, Well Expenses and Taxes

Debits and Credits

Every transaction in accounting has at least two parts, a debit and a credit. This is the essence of what’s called double-entry accounting. Because of the two-fold effect of transactions, the total effect on the left, or debit, side will always be equal to the right, or credit, side. All the debits in a transaction must equal all the credits in a transaction.

Here’s a posting example using the cash method: On February 1st, 2015 you receive $25,500 of oil revenue.

Account Date Debits Credits
Cash – Operating 2/1/2015 $25,500
Revenue Payable 2/1/2015 $25,500

Cash is debited and Revenue Payable is credited creating a balanced transaction.

Here are the rules for debiting and crediting accounts. To increase an asset, you debit it; to decrease an asset you credit it. The opposite applies to Liabilities and Equity.

 Accounting Element To Increase To Decrease
 Asset Debit Credit
 Liability Credit Debit
 Equity investment Credit Debit
 Equity withdrawal Debit Credit
 Income Credit Debit
 Expense Debit Credit

Once you have a basic understanding of accounting, understanding a specific type of accounting, such as Oil & Gas Accounting is much easier.

Accounting 101 E-Book


Source: SherWare Blog

10 Steps For Picking the Best Oil & Gas Accounting Software For You

Picking oil & gas accounting software may be one of the most important decisions you make for your company. I mean, after all, how else do you make business decisions if you don’t know how much money is flowing in and out of your business each day? Here are 10 steps to helping you select the best oil & gas accounting software package for your company.

1. Make a list of your company’s needs. Talk to everyone who will be using the software to get their input. Discuss everything from your preferences and what all you need the software to do to what reports you need and end-of-year tasks.oil & gas accounting software

2. Make a list of all the potential oil & gas accounting software packages.This isn’t a list of just the best oil and gas accounting packages out there; it’s more of a collection of everything you can find so you have something to work with when you begin to get picky. List every software package you are aware of, have read about, seen online, heard from others, etc.

3. Set a timeframe for when you’d like to make a decision and for when you’d like to begin implementing a new solution. Being able to define how fast you’ll need to move through these research steps will help you in the long run when talking with software representatives and deciding when the best time to implement you system will be, depending on downtime at your office, end of year times, etc.

4. Decide what your budget range is and how flexible or inflexible it is.It’s never a good idea to eliminate products simply because of price unless it’s REALLY out of your range, but having a ballpark figure will help you as you begin narrowing down the oil and gas accounting packages.

5. Eliminate all oil and gas software packages that aren’t a good fit.This isn’t the first time you’ll see this step in here because of how important it is to keep evaluating throughout the entire process. Many eliminations will come easy at this point.

6. Collect information on your top 4 to 5 choices (or less if you’ve narrowed it down that far). You can get a wealth of information from the Internet by collecting and reading everything off of the company’s website, other user’s reviews and anything else you can dig up. Call or email the company to get any literature maybe not available online or to get any information you couldn’t find online. Talk to peers in your area to see what they use for their oil and gas accounting software and why.

Find out the answers to these questions during your research: Is the software user-friendly? Can it grow as our business grows? What after sale service and support is available? Will the software let me handle distributions and joint-interest billing the way I want to? Will I like how the reports look and how much data can be reported on?

7. Evaluate your choices again and eliminate any that don’t seem to be the best fit.

8. Review the software either through an evaluation or trial version of the software, or by going through an online demo of the software with the company. Make sure you have a list of any questions you want answered by the software company and get to see every aspect of the software that you’ll need to use. Seeing how the software works firsthand will help you determine if it’s user-friendly enough for your company as well.

9. Evaluate your choices again. At this point, you should have a pretty good idea of which oil and gas accounting software packages will work best for you.

10. Contact references for the software. Talk to a few of the clients in your area, similar to your profile or who use the same product to get an idea of what life is really like with the software.

After this step, you should be ready to take that next step with whichever software provider you’ve decided on. You’ve down your homework and all your research – so making the final decision should come easy.

Will U.S. soon reach natural gas storage capacity?

If forecasters are correct, the United States should run out of natural gas storage space by October – a short 5 months away. Thanks to the natural gas rush on the Eastern coast in the Marcellus shale, an unseasonably warm winter – and a mild summer predicted, there’s little chance for producers to unload some of that glut without further dropping the already low price of natural gas in the market.

A few weeks ago the Wall Street Journal ran an article predicting this gas storage problem. Chesapeake Energy has already determined it will be curbing production, (Big surprise move, right? thanks to Aubrey McClendon), following a trend producers are seeing across the country with natural gas drilling rig counts down nearly 20 percent already this year.

According to the Department of Energy, 120 gas storage operators maintain about 400 underground facilities made up of aquifers, depleted oil and gas reservoirs and salt caverns with a working gas capacity of nearly 4 trillion cubic feet. These storage facilities are mostly heavily concentrated near major eastern and mid-America markets, with some in Texas, Oklahoma, California, Colorado and surrounding areas.

Not only are we running out of space to store the gas glut, but nearly 25 percent of the existing pipelines used to deliver gas across the country are more than 50 years old. In 2004, it was projected that nearly $19 billion of investment would be needed to replace the current pipe simply to maintain existing capacity. That was before the Marcellus shale became a household name. Nearly $42 billion was estimated to be needed for new pipeline and storage projects on top of that.

Naysayers argue that the U.S. will never actually run out of natural gas storage, and data – while slightly outdated from the U.S. Energy Information Administration suggests that to be true. According to whom you talk to, and more importantly, what numbers and equations you use, you can get entirely different numbers for what “percent” full we are today. Back in 2003, with the data the U.S. Department of Energy used, that percentage ranged from 79 to 95 percent full with calculations differing based on the equation, not numbers used.

So which is it? Are forecasters merely presenting a doomsday approach to the natural gas market, much like we producers already see and feel? Or is there something to the idea that the market will soon be so saturated that space will run out?


Source: SherWare Blog