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.
In 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.
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.
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.
Source: SherWare Blog