Firms in the petroleum industry—producers as well as service-related companies—often engage in like-kind exchanges and frequently have assets that are involuntarily converted. A significant change in the depreciation of certain property that has resulted from the issuance of IRS Notice 2000-4 seeks to clarify the depreciation of Modified Accelerated Cost Recovery System (MACRS) property acquired in a Section 1031 like-kind exchange or an involuntary conversion covered under Section 1033. The new rules may prove beneficial to petroleum and service-related firms where the numbers related to the involuntary conversions and/or like-kind exchanges are material.

The Hoteling Valuation principle was first published in 1931. It holds that exhaustible resource prices should rise over time according to certain predetermined principles. Professor Crain provides an empirical test of the Hoteling Valuation Principle and finds that it is a good descriptor of oil and gas price behavior. He also suggests that the significance of the principle supports the need for supplemental disclosure of oil and gas value data.

Potentially one of the largest costs associated with oil and gas operations in the North Sea is the removal of platforms and facilities and the cleanup of the ocean bed when the reserves in a field have been produced. Professor Bentham analyzes the legal background of international laws governing removal and restoration, with special emphasis on the 1958 Convention on the Continental Shelf. He then discusses the requirements of Norway and the United Kingdom and concludes that there is a great deal of uncertainty about the requirements. Proposed legislation and tax impact are then examined.

A survey by the authors examined the accounting and legal issues associated with abandonment, querying oil companies about the commercial and legal issues arising from the 1987 Petroleum Act (UK) and the accounting issues involved both with the difficulties in estimating abandonment provisions and the disclosure in annual financial statements.

As margins have decreased in the petroleum industry, pressures have mounted to cut costs and increase efficiencies. A key issue, particularly within shared services, is whether or not to outsource. Activity based management (ABM) can provide a fresh perspective on cost control, process improvement, shared service management (e.g., service level agreements), and outsourcing analysis for even the most experienced shared service or business unit managers.

In order to properly account for the allocation of revenues and expenses, a thorough understanding of the specific terms and features of the PSC is essential. Ms. Geddie, controller and tax manager with Warrior Oil Company of Dallas, has worked extensively with production sharing contracts since 1987.

In international petroleum transactions, not only are the rules of the game different, the rules change with every host government jurisdiction in which the game is played. Without the benefit of competent accounting advice for each phase of the negotiation, the potential arises for costly mistakes.

The question of whether the FASB's required disclosures of net present values of oil and gas reserves is useful information has been of interest to preparers and to the profession. Professors Harris and Olson find that stock market values of oil company shares are better explained by historical cost book values than by the standardized measure disclosure.

Considerable diversity exists in the accounting treatment of issues related to what is variously described as abandonment, decommissioning or restoration. This article reviews the UK's Statement of Recommended Practice (SORP) on accounting for abandonment and includes the results of a survey of the actual disclosures of UK oil and gas companies.

The authors analyze the "pooling" and "purchase.' method of. accounting for oil and gas acquisitions, concluding that most present day acquisitions must be accounted for under the purchase method. They then discuss the valuation of unproved and proved properties and how these assets should he recorded.

One of the changes brought about by the moderation of natural gas prices in the mid-1980's in anticipation of natural gas price deregulation was the increase in volume imbalances. As more wellhead owners began selling more or less of their allocable portion of gas, gas balancing agreements were developed to remedy the growing volumetric imbalance condition. This article reviews the accounting for volume imbalances and valuation or settlement methods often applied upon depletion or for periodic cash balancing under a gas balancing agreement.

Until recently, guidance on accounting for asset retirement obligations has been limited. However, in June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143 (Accounting for Asset Retirement Obligations) which will be effective for most oil and gas producers during the current fiscal year. This paper reviews the methods that have been used in the past to account for asset retirement obligations and examines how the new standard may affect the manner in which oil and gas producing companies account for these future costs.

Dr. Coe first reviews the legislative history of Black Lung laws and then reviews the methods used to fund Black Lung benefits. Next he examines the accounting issues involved, including the need for accruing estimated benefit costs, the problem of determining the time to record costs, and the measurement problem involved. Dr. Coe concludes that Black Lung benefit costs should be accounted for in much the same way as pension costs.

Because of the large number of companies that have installed enhanced recovery projects using C02 injections in the past two years, the Institute of Petroleum Accounting recently conducted a survey of companies believed to be engaged in C02 projects. This article reports on the practices being used by thirteen companies to account for the cost of injected CO2, injection facilities, injection costs, separation costs, and for recovered C02.

Grier and Moore review the background of the controversy over deferred taxes in the oil and gas industry, discuss the basic timing differences between financial accounting and tax accounting, the problem of interaction between IDC and percentage depletion and analyze the problem of treating "excess percentage depletion" as a permanent difference not requiring tax allocation.

Important aspects of derivatives accounting associated with the oil and gas industry, including: derivative identification, valuation of derivative instruments, cash flow hedging, presentation and disclosure are discussed in this article.

In the first of two articles in this issue dealing with equalization procedures in unitizations, Mr. Campbell reviews various procedures that may be used in equalizing costs of wells and facilities and discusses the appropriate accounting treatment that should be given by participants.

Despite the fact that the extractive industries are a major component in Australia's economy, the accounting for preproduction costs and mineral reserves and the disclosure practices of Australian extractive firms are woefully inadequate. With the forthcoming IASC position paper on extractive industries accounting due out later this year, Australian accounting professionals hope this will provide the impetus to bring more efficiency and comparability to the financial reporting system of the Australian extractive industries.

This article briefly considers why hydraulic fracturing procedures are of vital importance politically and economically to the U.S. and, in light of the high profile media attention devoted to the fracking industry, discusses the issues that need to be addressed in setting reporting standards for the front line fracking companies.

Twelve years ago, in the inaugural issue of the Journal, Dr. Wright wrote an article addressing the issue of reclamation costs of oil and gas operations. Since then, numerous state and federal government regulations have passed which require companies to clean up, remediate, and protect the environment. This article revisits the topic of accounting for future dismantlement and environmental reclamation costs as they relate to the oil and gas industry.

The FASB and IASB are currently involved in a joint project that will change the accounting rules pertaining to leases by adopting a right of use approach for almost all lease transactions. This article explains the conceptual evolution of the proposed changes to lease accounting over the last several years and provides specific examples and context for how the proposed lease accounting changes will affect oil and gas producers going forward.

Alkire, Meisenheimer and Carroll discuss the appropriate treatment of both retained and carved out net profits interests at the time they are created and subsequent to creation. They conclude that the most commonly used approach is to treat a net profits interest as a net overriding royalty interest, but that it may also be accounted for as a carved interest. Both methods are discussed.

FASB 143 dramatically changes the manner in which companies account for the dismantling, removal, and abandonment (DR&A) of oil and gas facilities. In the final installment of this four-part series on the application of FASB 143 to offshore decommissioning, a methodological framework is developed to assess the fair market value of decommissioning obligations.

This is the third installment of a four-part series on FASB Statement No. 143. In this installment empirical estimates of the economic limit of production are used to forecast the expected abandonment time of offshore structures. Also, a meta-modeling technique is introduced to explore the manner in which variations in system parameters impact the determination of abandonment time.

FASB Statement No. 143 requires recognition of the liability for retiring oil and gas structures that are likely to have a material impact on the financial statements of companies. In Part 2 of this four-part series on FASB 143, the costs to decommission offshore structures in the Gulf of Mexico are estimated across the three main stages of the operation: plugging and abandonment, structure removal, and site clearance and verification.

This is the first installment of a four-part series on accounting for the decommissioning of offshore oil and gas facilities in the Gulf of Mexico, the factors that impact these operations, the methods used to estimate decommissioning costs and liabilities, and how uncertainty can be incorporated into fair market valuation. Part One introduces SFAS 143, along with the regulatory requirements of offshore decommissioning, the business models, and the factors that influence decision-making. Parts Two through Four will appear in the next three consecutive issues of the Journal.

An explanation of how the well-informed oil and gas bankruptcy practitioner can exploit common misperceptions about the nature and magnitude of environmental liabilities and avoid being exploited by those same misperceptions.

Mr. Adkerson reviews the economic developments leading to the recent surge in transfers of oil and gas properties to "exchange companies," discusses application of the purchase method and pooling method of accounting for properties acquired, and reviews the position of the SEC's staff toward exchange accounting.

The U.K. is presently involved in the promulgation of accounting rules for oil and gas exploration and development activities. This article surveyed oil and gas producers in the U.K. to identify actual practice as it currently exists so that the accounting rule makers could have further guidance. The results of the report are summarized in this article and provide insight into international practices.

Oil and gas accounting systems in developing countries such as Libya may differ from full cost and successful efforts principles. This paper provides a perspective from an emerging economy (Libya), who does not apply global standards, gaining insight into an alternative reporting framework, and an understanding of the choices being made by agency entities reporting to their principal (the Libyan Government).

Mr. Lee discusses the nature of "gas balancing arrangements" and specific points that should be included in such agreements. He reviews the deferred sales accounting approach that might be used by both parties in recording imbalances. In addition he explains the use of exchange agreements in handling imbalances.

Messrs. Chambers and Russell explain why petroleum exchanges are made. They then illustrate typical entries made in the inventory records and the exchange ledger to record deliveries and receipts of crude. Accounting entries to record the transactions are demonstrated. Reporting requirements and tax considerations are discussed.

A typical lease habendum clause deals with the lessee's right, after the primary term of the lease, to keep the lease in force as long as production from the lease is in paying quantities. If a lessor successfully asserts that the lease has terminated because of nonpaying production, the lessor is entitled to all of the working interest proceeds for the period under claim.

Dr. Porter reviews the nature of both carved-out and retained production payments. Then he explains the appropriate accounting treatment to be given both types of payments under different circumstances by both the operator of a property subject to a production payment and by the owner of the payment. Differences in the accounting required by full cost companies and by those using the successful efforts method also are pointed out.

In this report on a research project in the Institute of Petroleum Accounting, Mr. Cappel reviews the background and legal issues involved in removal and reclamation of offshore platforms. He then examines the accounting problem involved placing special emphasis on the difficulties in estimating future costs. Mr. Cappel also discusses the recommendations of the Oil Industry Committee in the United Kingdom. Finally, he makes a survey of the treatment and disclosure of reclamation costs in the annual reports of27 companies known to have offshore operations.

Ms. Wright examines the nature of future reclamation costs of oil and gas producers in such situations as offshore or the North Slope of Alaska. She analyzes the problems of recording related assets, liabilities, and expenses from the viewpoint of generally accepted accounting principles, concluding that the nature and magnitude of removal and reclamation costs requires recording of an asset and liability at the time of development.

Prior to the Enron/Arthur Andersen scandal, special purpose entities (SPEs), by which a company could fund growth initiatives without the burden of using market loan rates to finance that growth, were not well understood or publicized. Since becoming front-page news, the effective demise and decline of Enron and Arthur Andersen have made these off-balance sheet financing tools one of the hottest accounting topics in years. What did Enron, Arthur Andersen, and others do that was wrong? This paper examines the mechanics of SPEs (before Enron) to find out what went wrong and asks whether the proposed regulations for using SPEs (post-Enron), if pursued, might have prevented the Enron debacle.

Petroleum firms will bear a significant portion of the cost of environmental clean-ups mandated by the Superfund, and it appears that many firms have significant liabilities that have not yet been recorded. This article summarizes the empirical findings of Superfund research to date.

Mr. Kelley discusses the way in which changes in reserve estimates that are made during the year affect previously issued interim statements for the year. His analysis deals essentially with the definition of the "accounting period." Different approaches to handling the necessary adjustment are discussed.

Messrs. Burke and Durand discuss the following areas of financial accounting for oil and gas limited partnerships from the viewpoints of the partnership and the general partners: organization and syndication costs; property conveyances from the partner to the partnership; fees and costs charged to the partnership; windfall profit taxes; and assessments. The authors emphasize the importance of a clear separation between the general partner and the partnership.

Mr. Burke discusses alternative methods that might be used by the general partner to account for its investment in a limited oil and gas partnership. He then illustrates the effects of the different methods. In addition, Mr. Burke reports the results of a survey of accounting methods used by 100 general partners in limited partnerships.

Oil and gas companies have unique problems with the use of historical cost in reporting exploration and development activities, problems which impact the usefulness of their financial reports in evaluating performance and making informed investment decisions. This paper offers an accessible review of responses received when the issue of historical costs was raised in a recent UK discussion paper by the Oil Industry Accounting Committee.

Messrs. Nigg and Keeling review the computation of the government royalty from U.K. oil and gas production and how the royalty may be accounted for. They then analyze the Petroleum Revenue Tax, including the advanced PRT, suggesting appropriate methods to account for the tax. Finally they summarize the Corporation Tax and discuss the proper accounting treatment to be given to it.

A new section of the Journal providing a forum for letters from readers, questions for discussion, etc. is inaugurated in this issue.

The forum provides an opportunity for readers to raise questions about accounting problems that have arisen in their activities.

A number of oil and gas accounting questions have been transmitted to the Research Institute in recent months. Suggested answers to these questions have been prepared by various individuals who are well versed in the accounting problems of the oil and gas industry.

A number of oil and gas accounting questions have been transmitted to the Research Institute in recent months. Suggested answers to these questions have been prepared by various individuals who are well versed in the accounting problems of the oil and gas industry.

This section contains responses by individuals in industry and public accounting to specific questions raised by our readers.

This section contains responses by individuals in industry and public accounting to specific questions raised by our readers.

This section contains responses by individuals in industry and public accounting to specific questions raised by our readers. Included in this issue are: Cost Ceiling for Successful Efforts Company, Cost of Abandoned Portion of Exploratory Well, Geophysical Work Undertaken as Part of Unitization