This section contains responses to specific questions raised by our readers. In this issue are: Transfer of Unproved Property with Retention of Production Payment, Effects of Post-Balance Sheet Price Decline on Full Cost Ceiling, Units-of-Revenue Basis of Amortization For Full Cost Company

This section contains responses to specific questions raised by our readers: Accounting for Costs of Brine Disposal Wells, Geological and Geophysical Costs Related to Locating Well Drilling Site, Inclusion of Royalty Interests in Reserve Disclosures

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

This section contains responses based on questions raised by our readers. The responses in this issue reflect a composite of opinions given to each question by several oil and gas accounting professionals.

With this issue of the Journal, we resume the Accounting Forum, 3 column which provides readers an opportunity to raise questions about accounting and reporting practices that may be of interest to other readers. Three topics are examined: chemicals used in tertiary injection projects; using the revenue basis for amortizing costs; and accounting for tubular goods in field inventory.

The two questions from readers addressed in this issue concern the appropriate statement presentation of liquid reserves related to gas processing giant operations when the plant is entitled to retain as compensation all liquid products removed from the gas stream and how to account for costs incurred in the "workover" of producing oil and gas wells.

When should a company apply a cost ceiling on capitalized costs in a new cost center under full cost accounting? When a working interest is subject to a net profit share interest, how should the owner of each interest report the revenues, expenses, and reserves of applicable and how should each report the net profit share payment made?

The topics covered in this issue's Accounting Forum are profit on sale of leases to partnerships, treatment of management fees, and effects of price increases subsequent to balance sheet date on cost ceiling.

This issue's Accounting Forum answers questions on accounting for field inventories of crude oil and allocation of book value when a portion of a producing field is sold.

This issue's Accounting Forum responds to readers' questions concerning liability for reclamation costs related to the purchase of producing properties and exploration services provided in return for interest in mineral property.

Topics covered in this issue concern reserves of investee accounted for under equity method and treatment of exploration costs of successful efforts companies in statement of cash flows.

Dr. Brock answers readers' questions concerning capitalization of interest during the construction period of oil and gas assets and the treatment of payments to obtain interest in oil and gas properties.

The editor answers reader's questions concerning amounts received as "cost recovery "oil under production sharing contracts and accounting for the costs of 3-D seismic studies of producing reservoirs.

Answers to reader's questions on inventory of oil in lease storage tanks, producing property subject to net profits interest, and cost of 3D seismic study of existing, producing reservoir by successful efforts company.

The Accounting Forum answers questions concerning the recorded value of equipment removed from joint operation and transferred to the operator's warehouse and accounting for the sale of "recovery oil" received under production sharing agreements.

There are many petroleum fiscal systems in the world, falling under two main families of systems, concessionary and contractual. Production sharing contracts (PSCs) represent the most common form of agreement being written in the world today. This paper will concentrate on the terms of production sharing contracts and their accounting implications.

In 2011, the Institute of Petroleum Accounting at the University of North Texas, in partnership with PricewaterhouseCoopers LLP, conducted its survey of U.S. accounting practices. The survey is the latest in a sequence of studies completed by the Institute since the late 1980s. This article discusses changes and new insights provided by the 2011 Survey.

The Foreign Corrupt Practices Act (FCPA) imposes unnecessary costs and disadvantages on American businesses competing in a global economy with other international businesses not restrained by this type of legislation. Mr. Yeates and Mr. Comeaux are Houston attorneys with the firm of Jackson & Walker. Mr. Kinsella is a Philadelphia attorney with Schrader, Harrison, Segal, & Lewis.

In this article, based on Mr. Johansen's presentation at the North Sea Oil and Gas Accounting Conference held in London in October 1989, the author gives a brief history of the Norwegian petroleum industry. He then analyzes the Norwegian joint operations agreement. Next he reviews Norwegian taxation and financial reporting in the industry.

In 1973, the Federal Trade Commission(FTC) filed an antitrust suit against the nation's eight largest oil producing firms. This article examines whether oil firms reduced their discretionary accruals in response to the FTC antitrust lawsuit and Congressional interest in divestitures. The evidence indicates that the eight firms named in the FTC lawsuit took lower discretionary accruals in the period when the lawsuit was pending. Similar tests show the 17 firms affected by the divestiture legislation took lower discretionary accruals while the legislation was before Congress.

Mr. O'Neill, MP and chairman of the U.K.'s Trade and Industry Select Committee, discusses the steps being taken by the British government to establish proper regulations and ensure consumer safeguards in the wake of utility privatization.

Alaska receives nearly 90% of its income from petroleum, and it looks as though it is about to enter a new dimension. On August 10, 2006, after six long, hard months of work, the Alaska legislature passed one of the most significant pieces of legislation in the state's history—House Bill 3001 (HB 3001). HB 3001 changed the oil severance tax from the long-standing economic limit factor to a new system, the petroleum profits tax. Next on the agenda for lawmakers is the Alaska gas pipeline deal.

This paper describes the advantages and disadvantages of basing joint cost allocation methods on product revenue or physical attributes for the allocation of upstream exploration, drilling, development, and production costs. Drs. Wright and Hall suggest that two engineering methods, functional analysis and design benefit, may provide acceptable alternatives.

A growing trend among firms has been a formal "promotion from within" policy. Firms with such a policy are able to effect the choice of the professional accounting examination taken and to indicate acceptance of, or even preference for, the CMA or CIA designation for specific career paths within the company.

This article discusses intangible drilling costs as it relates to AMT preferences, application to the oil and gas industry, and determination of non-productive wells.

Dr. Lee reports on her research project examining the factors that are perceived by public auditors to indicate risk in connection with their "association" with oil and gas reserve data. In addition changes in the audit that might be made because of changes in the degree of risk are discussed.

This study investigates auditor concentration in the energy industry in the Big Four era, a period also marked by enactment of the Sarbanes-Oxley Act of 2002 (SOX) which some have claimed has further reduced client choice. By examining the market for audit services in the light of these recent developments, insight into the relative competitiveness of current conditions may be gained.

There is continuing concern that the quantities of proved reserves reported by oil and gas companies are highly unstable. This instability usually shows up through subsequent revisions to reported reserve quantities. Professor Campbell reviews reported revisions relative to reserve quantities and finds that, for the most part, reported amounts are relatively stable and free from bias.

In recent years several studies have been made of the usefulness of oil and gas reserve disclosures in published financial statements. One question that has been raised and studied in several research projects is the reliability of estimates. In this article Mr. Campbell discusses the results of his research project, evaluating the direction and magnitude of revisions in reserve estimates. Mr. Campbell's focus is on whether reserve estimates are negatively or positively biased.

Mr. Duet explains the features of interest-rate swaps and uses a similar approach in examining the new commodity-linked swaps. He illustrates oil price swaps and points out their potential benefits to oil and gas managers.

What is the relationship between profits (losses) at the major oil companies and companies in related industries? Do increased profits result in increased cash flows? This article presents an overview of the sales/profits interrelationship between integrated oil companies, secondary oil companies, drillers, oilfield equipment/service companies, and pipelines.

The objective of a new exposure draft issued in July 1999 by the Oil Industry Accounting Committee addressing oil and gas exploration, development, production, and decommissioning activities is to make oil company financial disclosures more comparable. However, its relationship with previously released financial reporting standards from the UK's Accounting Standards Board is problematic.

The authors analyze the election available to mining companies under Sec.617(a) of the Internal Revenue Code to expense all exploration costs (except for the first 20 percent of such costs incurred each year) and the options by which the costs expensed under Sec. 617(a) may be "recaptured." They show that the election to expense the costs should almost always be made. They also show that if mines are expected to be profitable, the costs should be recaptured by foregoing depletion until the costs are recaptured (Sec.617(b)(1)(B)). If the mines are expected to be non-profitable or only margin-ally profitable, the decision depends on several factors.

This article reports on a study by Messrs. Glascock and Impson of the effect of dividend change announcements for a sample of 21 petroleum firms for the period 1975 through 1982. The authors conclude that a strong signal of a dividend increase generally has a positive impact on stock prices of oil and gas companies.

The authors examine the relationships between the average return on company stocks, the gross national product, the Consumer Price Index, prime interest rate and other economic factors for the years 1963-1984.

Dr. McCarty concludes that management estimates of estimated future net revenues from the production of proved oil and gas reserves (required by the SEC as a "disclosure" for years ending after December 25, 1979, and before December 25, 1982) may not be sufficiently reliable to justify their required disclosure.

Controversy continues to surround the FASB's required standardized measure disclosures under Standard No. 69. This article tests the usefulness of the FAS 69 disclosure data for predicting financial distress. They found that traditional distress measures were better at predicting firm failure than the FAS 69 data.

Oil trade and investment between the Gulf and Asia are becoming mutually strategic and attracting diplomatic focus from both sides. This article addresses some of the pressing economic challenges which the Middle East petroleum sector faces and trends in the Gulf–Asia energy relationship.

The lengthy process used by the Financial Accounting Standards Board which culminated in the issuance of FASB Statement No. 87, “Employers' Accounting for Pensions,' attracted an unusual number of responses from industry. The authors compare selected financial characteristics and the lobbying activities of corporations within the petroleum industry to those of other industrial firms in response to the issues raised in the discussion Memorandum on this topic.

One of the greatest strengths of the FASB is its practice of open due process procedures, yet participation in the FASB's standard-setting process has been poor with only an estimated 0.002 percent of corporations in the U.S. submitting a comment letter concerning the first 100 FASs issued. Companies in the petroleum refining industry, however, have been visible participants in this process. An analysis of Fortune 500 companies' participation from 1973-1997 reveals that of the 20 companies submitting the greatest number of comment letters, seven were in the petroleum refining industry. Furthermore, research indicates that differences exist between the petroleum industry and other industries for lobbying behavior, accounting choices, and tax rates. This study explores further the participation of petroleum refining companies in the standard-setting process during the FASB's first 25 years.

One method of measuring production efficiency and the input/output relationship is the study of production functions. Unfortunately, rigorous empirical studies of production functions for the U.S. petroleum industry are relatively scant. The authors compare a number of production functions to see which one is appropriate for the U.S. petroleum industry and present and interpret the empirical results of a theoretical model.

The standard setting bodies face ethical questions about the nature of empirical evidence when they consider assertions made by respondents against or in favor of a proposed standard. This study explores whether respondent firms to the International Accounting Standards Committee's extractive industries issues paper (issued for comment in November 2000) possess characteristics likely to induce managerial intent to smooth income and if these possibly influenced the pattern of their responses.

This study analyzes the reliability of the reserve estimates of 106 leading oil and gas companies over the years 1985-1994. The authors compare accounting method choice, reserve engineer choice, and industry type on reserve estimates and then examine the sensitivity of the results to the location of proved reserves (domestic vs. foreign) and the nature of proved reserves (oil vs. natural gas).

Heazlewood and Chye point out the need for authoritative accounting guidelines for the extractive industries in the countries involved. They review the historical development of such accounting rules in the U.S.A., then discuss specific developments and currently existing standards in each of the three countries.

The economic interest concept is of major importance for determining the tax treatment of investments in oil and gas interests. This paper reviews the development of the concept by the judiciary. The analysis provides guidance into the current status of the economic interest concept and how it has evolved.

The case of Shell Oil Co. v. Commissioner established in law some significant concepts for the allocation of costs to properties for income tax purposes. These concepts had previously been subject to significant diversity in practice. This paper reviews the issues addressed in Shell, the conclusions reached by the tax court, and the implications that these conclusions have for other allocation decisions in the industry.

Capital budgeting decisions made by firms in the petroleum industry are extremely important to their financial performance. Based on a survey of oil and gas firms, this paper analyzes the procedures used by both large and small firms to evaluate project returns and incorporate risk.

Investment projects must be justified on the basis of economic returns on investment and acceptable risk. This article presents a probabilistic cash flow analysis model, using a cash flow analysis spreadsheet on LOTS 1-2-3, for evaluating a C02 miscible flooding project. The model combines cash flow analysis, cost analysis, risk assessment and the impact of taxation into an integrated decision making tool.

In the Fall/Winter 1985 edition of the Journal of Petroleum Accounting , Mr. Kelly explored the special rules governing oil and gas partnerships in the proposed Section 704(b) regulations that were issued in March, 1983. In this article Mr. Kirkland examines the special rules pertaining specifically to oil and gas partnerships contained in the final Section 704(b) regulations issued on December 31, 1985, with special emphasis on the most substantial changes from the proposed regulations.

Mr. Kirkland analyzes major aspects of the Proposed Regulations issued in 1983, interpreting Internal Revenue Code Section 704. The article focuses on the requirement that "special allocations" must have "substantial economic effect." Mr. Kirkland explains and illustrates the capital accounts that must be maintained under the Proposed Regulations.