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?

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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

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