SPE 162907

Basic Petroleum Accounting for Petroleum Engineers

Dan Olds, Ryder Scott Company, L.P.

Copyright 2012, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE Hydrocarbon, Economics, and Evaluation Symposium held in Calgary, Alberta, Canada, 24–25 September 2012.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents of the paper have not been
reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect any position of the Society of Petroleum Engineers, its
officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written consent of the Society of Petroleum Engineers is prohibited. Permission to
reproduce in print is restricted to an abstract of not more than 300 words; illustrations may not be copied. The abstract must contain conspicuous acknowledgment of SPE copyright.

Abstract
Oil and gas reserves are the assets that create value for oil and gas companies. While engineers are generally aware of the
importance of reserve calculations, many do not know exactly how their work impacts the financial results. Oil and gas
reserves, along with the book value, determine the depletion rate which impacts the net income of the company. This paper
describes the general accounting process as it relates to reserves, the depletion, depreciation, and amortization (DD&A)
process under Full Cost and Successful Efforts accounting methods, and its impact on net income.

Introduction
Engineers prepare reserve evaluations for a variety of reasons, but an annual reserve report is required so that a publically-
owned company’s accounting staff can calculate the financial performance of the company. Most engineers do not have a
clear idea how their reserve report is used by the accountants, or how their reserve numbers impact the financial results.
Since the reserve report is not prepared by accountants nor is prepared to the standards of Generally Accepted Auditing
Standards (GAAS), the accountants consider the reserve report to be supplemental information and may term it to be an
“unaudited statement” or “unaudited financials.” The company’s independent external auditor will not “audit” the reserve
report per se as a part of their annual audit process, but should review the report to ensure that it was prepared using the
appropriate regulatory guidelines, and that the person responsible for the preparation of the reserve report was qualified. So
while the reserve report is prepared outside of the accounting department and is not audited, data from the reserve report is an
integral part of the company’s financial reporting process.

The purpose of this paper is to give the engineer a general idea how reserve numbers impact the company’s financial results.
Because of the complexities of accounting, along with the various accounting guidelines, such as the Generally Accepted
Accounting Principles of the United States (US GAAP), Canada (Canadian GAAP), United Kingdom (UK GAAP) or the
International standards (International GAAP), this paper is presented as a very broad overview of the basic principles.

The Property is the Asset

The company’s oil and gas reserves are their primary asset. The production of the reserves via the company’s mineral
interests in oil and/or gas leases create a revenue income stream for the company. There are two ways that these properties,
which is the term that accountants generally use to refer to a well, lease, project, or field, are acquired by a company:

1) Explore, Discover, Develop. Companies typically generate prospects, gain the rights to acreage, drill wells
to discover resources, and develop those resources into reserves; or
2) Buy properties that are already developed or in the process of development.

Regardless of the method by which they acquire the oil and gas asset, the accountants keep track of the net costs that the
company incurs that are directly related to the acquisition. Some or all of these costs are “capitalized” and are the basis of the
“book value” of the asset.

Accounting Conventions
Before we go any further, we need to talk about the two different methods of accounting for oil and gas activities – Full Cost,
which was created by the U.S. Securities and Exchange Commission (SEC), and Successful Efforts, which was created by the
Financial Accounting Standards Board (FASB).
2 SPE 162907

Under full cost, all of the costs related to exploration and development drilling, including any dry holes, are capitalized into a
“full cost pool”. Capitalized costs means that the costs are recorded as part of the company’s long term assets on its balance
sheet. The rational for full cost is that the costs associated with unsuccessful wells are an inevitable part of the business, and
that the financial results should show the combined results. A full cost pool is limited to a single country, so a company whose
operations are limited to a single country will group all of their activities into a single pool. In practical terms, the impact of
any single well, whether successful or dry, should not have a material impact on a full cost company’s financial results.

Under successful efforts, the cost pool concept is limited to a single property or group of properties related by a common
geologic or stratigraphic feature (i.e. a reservoir or field). Exploratory dry holes are expensed in the accounting period in
which they occur, so the only costs that are capitalized are those that are associated with projects that find oil and gas.
Expensed means that the costs are written off in the period they occur, so they do not become part of the assets shown on the
balance sheet. Investors feel that the financial benefits of a significant discovery (or failure) are more readily reflected in a
successful efforts company’s financial results.

The distinction between exploration wells and development wells is important for successful efforts calculations. The SEC
defines a development well as “A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic
horizon known to be productive.”1 The SEC also defines exploratory wells as follows: “An exploratory well is a well drilled
to find a new field or a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally,
an exploratory well is any well that is not a development well, an extension well, a service well, or a stratigraphic test well as
those items are defined…2”. Extension wells are drilled to expand the limits of a known reservoir. Service wells support field
operations, such as injection wells. Stratigraphic test wells are drilled for the purposes of obtaining geological information in
wildcat areas, thus the treatment would be the same as for an exploratory well.

Costs associated with unsuccessful development wells get capitalized, whereas unsuccessful exploratory wells get expensed.
Therefore the distinction between development and exploration projects is of importance to accountants for reasons other than
determining whose budget is impacted.

Companies are free to adopt either method, but once chosen, it may be difficult to change. Full cost companies can change to
successful efforts without consent of the SEC, since the SEC prefers successful efforts. A change from successful efforts to
full cost would require justification from both the company and their independent accountants.3 If a change is made, the
company’s historical financial results must be restated consistent with the new method so that investors can see what the
performance would have been under the new method as opposed to the old method. Historically, we have seen that small
companies tend to favor full cost, and as they grow, switch to successful efforts. Most larger companies use the successful
efforts method.

Outside of North America, most companies are successful efforts, although Canada is an exception. Many Canadian upstream
companies are full cost4. Typically, smaller companies prefer full cost, since the impact of any single unsuccessful project
should not materially affect their financial performance – it will smooth out the year to year financial results. By the same
token, larger companies prefer successful efforts, since the results of a successful project are more immediately reflected in the
financial results.

Book Value
The value of the particular asset or property that is recognized by the company’s accountants is called its “book value”,
sometimes called the “carrying value” or the “value carried on the books”. The book value is the sum of all of the capitalized
costs associated with that property, net to the company (i.e. the company’s working interest share of capital expenditures).
The book value is recorded as a long term asset on the company’s balance sheet. It is the summation of all of the capitalized
costs that the company incurred to develop or acquire the property.

The book value is not fair market value, nor is it the value that we calculate when we prepare the reserve report. Typically, the
book value will be lower than the fair market value or the reserve report value (i.e. PV 10% for an SEC reserves report). If the
book value is greater than the reserve report value then the property may be “impaired”. If the accountants determine that
impairment has indeed occurred, then the property value must be written down to the reserve report value.

!
"SEC Amended Rules and Regulations, 17 CRF Part 210, §210.4-10, section (a)(9)"
#
"SEC Amended Rules and Regulations, 17 CRF Part 210, §210.4-10, section (a)(13)
$
SEC Staff Accounting Bulletin: Topic 12, C (1) First Time Registrants.
%
PWC Energy Insights: International Financial Reporting Standards, page 2
SPE 162907 3

As we produce the oil and gas reserves associated with a property, we are reducing the value of that asset. Thus the book
value needs to be adjusted to reflect this diminution of value, which results in the net book value5. In order to determine the
net book value, we first need to discuss DD&A.

Depreciation, Depletion, and Amortization (DD&A)

When we produce the oil and gas reserves, we are converting the reserves to current income. Thus the value of the reserves in
the ground is constantly being reduced as production occurs. This reduction in value of a mineral asset is called depletion, and
the accountants must adjust the book value to reflect the impact of removing the reserves from the reservoir. In order to
determine what portion of the reserves have been removed, the accountants need to know both the production during the
accounting period, and the reserves remaining to be produced as of the end of the accounting period – typically December 31.

The production equipment wears out over time, so its value also decreases over time. The process by which the book value of
the equipment is adjusted is called depreciation. The cost to acquire and install the equipment is included with that of the
reserves and depreciated over time proportionate to the production and remaining reserves.

Amortization is the generic term used to describe the process of adjusting the value over time. However, it is also sometimes
used to describe the process of adjusting the value of an intangible asset over time, such as a patent. In practice, the terms
depletion, depreciation, and amortization are often used interchangeably or collectively.

DD&A is sometimes called a “non-cash” adjustment. It is treated as an expense for the purposes of calculating net income,
although there is no actual payment of cash. Rather, it is an accounting entry that is made to adjust the books.

In the remainder of our discussion on depletion, we will assume that it includes the depreciation of any of the well and production
equipment associated with the project. That portion is usually small when compared to the depletion of the reserves.

Briefly, depletion adjustments to book value are calculated by taking the net book value at year end and dividing by the year
end reserves, which yields the depletion rate in dollars per barrel-oil-equivalent (BOE). The depletion rate is then multiplied
by the production for the year to determine the total depletion expense to be deducted to the net book value. But while this
describes the basic concept, there are several details to consider, such as: exactly what costs get capitalized; what reserves to
use; how to convert gas to barrels of oil equivalent; etc. Since the answers to these issues depend on whether we are
discussing full cost or successful efforts, we will consider the DD&A process under each separately.

Full Cost DD&A

We earlier noted that all of the costs for exploration wells, development wells, and dry holes (both exploration and
development) are capitalized. To go further, all of the costs associated with lease rentals, geological studies, and any
administrative overhead costs that are directly related to exploration or development, or acquisitions of properties are
capitalized. Lease operating costs are expensed. The sum of the capitalized costs would be the net book value, which is often
referred to as the full cost pool. If the company has properties in more than one country, each country will have its own full
cost pool. Future abandonment costs are included in the capitalized costs.

Total proved reserves (developed and undeveloped) are considered for amortization purposes, using the units of production
method. Since total proved reserves are used, it is important that the capitalized costs include the estimated cost to develop the
undeveloped reserves.

When both oil and gas are produced, the gas is converted to BOE, or oil converted to MCFGE. The conversion can be based
on volume (i.e. MCF) or an energy equivalence basis (i.e. MMBTU), or if the price disparity is extreme, the company can
choose to convert based on the current prices received during the year. There is no preclusion of using other units such as
cubic meters or tons. However, barrels and cubic feet are commonly encountered in DD&A calculations for SEC registrants
due to the requirement of using these units for reporting reserves. 6

Certain costs can be excluded fully or partially from the full cost pool. A common example might be a large offshore project.
Early in its life, it may not have many proved reserves although the costs will be very high. Inclusion into the full cost pool
may result in distortions. In these cases, a portion of the costs proportionate to the unproved reserves may be excluded from
the cost pool until such time the reserves become proved.

&
"Strictly speaking, book value would refer to the values carried during the first accounting period, prior to any adjustments.
Net book value would result after the first accounting period, when adjustments such as additional capital and DD&A have
been applied to the initial book value. In practice, the terms book value and net book value are used interchangeably.
'
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4 SPE 162907

If an acquisition includes unproved properties, the cost associated with the unproved properties can be excluded until the
reserves become proved.

Successful Efforts DD&A

Determination of the appropriate costs to capitalize under successful efforts is more problematic than full cost. Costs related
to exploration dry holes are expensed. Development dry holes are capitalized. Geological evaluation costs that would be
capitalized under full cost are expensed under successful efforts.

In General:
Under successful efforts, reserves and related production equipment are amortized over the life of the proved developed
reserves, although proved property acquisition costs (bonus payments, lease acquisitions) are amortized over the total proved
reserves (developed and undeveloped). As mentioned earlier, a successful efforts company will have many properties that are
considered individually – each property will have its own depletion rate, as opposed to the full cost situation of one depletion
rate applied to the full cost pool.

GAAP Specific issues:

For U.S. GAAP, proved developed reserves are used for amortization. Since no proved undeveloped reserves are
considered, no future costs for development are included. Similar to full cost, some costs can be excluded when a
significant mismatch would occur, such as the offshore example cited in the full cost discussion.

Under UK GAAP or International GAAP, a company may elect to use both proved developed and undeveloped
reserves, and may also elect to include probable reserves, although the use of probable reserves is uncommon. Once
the election has been made, the company must consistently use the methodology. If undeveloped reserves are
included, the appropriate estimated development costs must be included.

When both oil and gas are produced, the gas is converted to BOE (or oil converted to MCFGE) based on the energy
equivalence. Many companies use a conversion factor of 5.8 or 6 mcf of natural gas per barrel of oil. Conversion based on
revenue related to oil and gas prices, which is an option in full cost, is not permitted under successful efforts. If the amount of
the secondary phase is minimal, it can be ignored.

The Depletion Calculations:

While the basic calculations are the same, there are different considerations between full cost and successful efforts. The
equations are as follows:

For Full Cost7:

A two-step process is used to first compute the Amortization Base, then to determine the Amortization Expense.

Amortization Base (B) = C-A +D –V –E +F, where:

C = total capitalized costs at the end of the current period

A = accumulated amortization from prior periods
D = Estimated undiscounted future dismantlement and reclamation costs (P&A)
V = Estimated undiscounted future salvage value of lease equipment
E = the Excluded capitalized unproved property costs and certain capitalized development costs
F = Estimated future expenditures (based on current cost rates) to be incurred in developing proved reserves.

Amortization Expense = B * S / (S + R), where:

B = amortization base from above

S = Volume (units) sold during the period
R = Total Proved reserves at the end of the period

4
"Brock, Jennings, & Feiten. Petroleum Accounting, 4th edition, page 470.
SPE 162907 5

For Successful Efforts8:

Amortization Expense = (CC – AA) / (EREP + CPP) * CPP, where:

CC = total capitalized costs at the end of the current period

AA = accumulated amortization from prior periods
EREP = Estimated reserves at the end of the current period
CPP = current period’s production

Ceiling Test and Impairment

After the depletion calculations described above have been performed and the new net book value(s) for the year end are
determined, the ceiling test is performed where the net book value of the property is compared to its net recoverable value.
Net recoverable value is taken to be either the fair market value less any costs associated with the sales process, or the asset’s
value in use. For full cost companies, the value in use is taken to be the discounted future cash flows expected from the
continuing use of the asset with consideration of any necessary anticipated future expenditures. This is usually the discounted
present value from the reserve report.

If the net book value is greater than the asset’s value in use, the asset is said to be impaired and must be written down. In this
case, the difference between the net book value and the value in use would be the amount that must be written down
(expensed, or applied against earnings). This process ensures that the long term assets on the company’s balance sheet are not
overvalued.

In some cases, a reversal of impairment taken in prior years may be possible if the impairment has been recovered. In these
cases, the write up would be limited to the book value at the time of impairment, less any subsequent depletion. Such a write
up is an unusual circumstance. Absent this special situation, there is no process to “write up” the book value to reflect the
current market value; the guiding principle is “the lesser of cost or value”.

For successful efforts companies, the process is more complicated. Prior to 1995, companies used an approach similar to that
of full cost companies except that the value was compared to the undiscounted cash flow instead of the discounted present
value. In 1995, FAS 1219 was issued that introduced many changes to the process. Changes include10:

• The carrying value can ignore deferred income taxes

• The measured impairment loss is considered on a pre-tax basis
• The future cash flows are expected cash flows that can consider expected price and cost changes, probable and
possible reserves
• Impaired costs are limited to fair value, using a discount rate deemed appropriate

It should be noted that impairment is more likely to occur in situations where full cost accounting is used. This is because the
full cost pool may include unsuccessful wells that would be expensed in a successful efforts situation.

The Reserves Report

The accountants get their reserve numbers from the engineer’s year end reserve report. The effective or “as-of” date of the
reserve report must coincide with the company’s fiscal year – i.e. a company that uses a January 1 to December 31 fiscal year
will need a reserve report prepared as of 12/31/xx. The reserves report should have been prepared in accordance with the
requirements of the accounting guidelines that the company ascribes, as well as the appropriate regulatory authority guidelines
for public companies (i.e. SEC for U.S. registrants, NI51-101for Canadian registrants, etc.).

It was noted earlier that the reserve report is considered part of the unaudited financials. A reserve report is a forward looking
projection, whereas the accountant’s goal in preparing year-end financial reports is to state the position of the company at that
particular point in time. Also, the independent auditor’s focus is to review the work of the company’s accountants and
perform tests on samples of the data to ensure that the financial reports have been prepared according the appropriate GAAP
and regulatory guidelines. Thus the reserve information that is provided in a company’s annual report is included in the
supplemental financial section, where it will be clearly labeled as unaudited.

5
"Brock, et al. Page 411
1
"Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of (FAS 121). Note that FAS 121 was superseded by FASB 144 in August 2001.
!6
Brock, et al. Page 436.
6 SPE 162907

Other issues

Capitalize or Expense?
We have seen that certain expenditures get different treatment depending on whether the company is full cost or successful
efforts. For example, an exploration dry hole gets capitalized under full cost but expensed under successful efforts. For
workover operations to existing wells, the determination of whether to capitalize or expense requires consideration as to the
nature of the workover.

In general, the guiding factor in the decision is whether the workover results in additional proved reserves. If the goal of the
workover is to stimulate or restore production from the current completed zone, then the workover would be expensed and
charged to lease operating expenses. If the goal of the workover is a recompletion, deepening or sidetrack to access new
reserves, the workover operation would be capitalized if successful, but would be expensed if it were not successful in a
successful efforts company. It is important to note that the additional proved reserves may or may not be reserves that have
already been recognized or booked, i.e. proved behind pipe reserves. The nature of the expenditure is that it is for the
development of proved reserves, therefore it is capitalized. Due to the many different potential workover scenarios and
outcomes, and company’s internal guidelines for accounting for such operations, the company’s accounting staff should be
consulted for more specific guidance.

Goodwill
Sometimes a company will purchase a property, and pay more for the property than what the value of the reserves and
equipment can justify. This excess is called goodwill. Goodwill is not amortized, but if the present value of the company’s
expected future cash flows is less than the book value and goodwill, the goodwill may be impaired and will need to be
reduced.11 While relatively common in some industries, goodwill is not normally encountered in oil and gas property
acquisitions.

IFRS – International Financial Reporting Standards (International GAAP)

The International Financial Reporting Standards (IFRS) are the principles-based standards, interpretations and the framework
adopted by the International Accounting Standards Board.12 The SEC announced their support of IFRS in 2010, which would
imply the eventual adoption of the international standards. Since that time, the process appears to be stalled as the SEC staff
has worked towards a recommendation for a possible method in incorporation or adoption for the commission to consider. 13 It
appears that a decision and guidance may not be forthcoming in the near future. The guidelines of International GAAP appear
to effectively prohibit the use of full cost14, implying that SEC adoption of International GAAP / IFRS would imply that full
cost registrant companies would have to change to successful efforts.

Royalty and Overriding Royalty Interests

In many situations, owners of royalty interests and/or overriding royalty interests may not have sufficient information to
determine the reserves. Under successful efforts, aggregation of the interests into a single entity and an alternative depletion
method, such as straight line depletion may be adopted15. In a full cost situation, the properties would be added to the full cost
pool.

Sale of Properties or Abandonment

Under successful efforts, if a property is sold, the amount of gain or loss recognized would be the amount of proceeds less the
net book value. If the property is being abandoned (including a relinquishment to the government upon expiration of the
license), the net book value would be zero in theory but in practice, there will likely be some small (hopefully) net book value
that will be written off as a loss. For full cost, the proceeds from a sale or costs of abandonment are applied to the full cost
pool.

Statutory Depletion
It can be easily seen that correct depletion calculations are dependent on having a reserves report and production data for each
well or property. For small investors or royalty owners, this information may be difficult to obtain. In these cases, statutory
depletion (sometimes called percentage depletion) is allowed, where a straight line approach is adopted. Since the use of
statutory depletion is limited, we will ignore it for the purposes of this paper.

!!
Goodwill (accounting), Wikipedia.
!#"
International Financial Reporting Standards, Wikipedia.
13
SEC Shuts Down IFRS Decision Time Line, Compliance Week, July 18, 2012.
!%"
Charlotte J. Wright and Rebecca A. Gallun, International Petroleum Accounting, 2005. Page 34.
!&
"Charlotte J. Wright and Rebecca A. Gallun, Fundamentals of Oil & Gas Accounting, 2008. Page 199.
SPE 162907 7

What volumes do we use?

There is little mention in the literature regarding whether to use gross volumes, working interest volumes, or net volumes of
reserves and production. However, there are strong implications that the volumes should represent entitlement volumes. In
most cases, this would imply that net volumes are appropriate for the reserves and production volumes used in the depletion
calculations. One area for consideration is how royalties are treated in the revenue recognition process, and the reserves in
which the company has an economic interest. The different treatment of royalties in revenue recognition arises from situations
where the royalties are treated more like a tax that is payable in-cash. In these cases, the company may elect to report revenue
including royalties, and show the payment of royalties as an expense. In cases where the royalty owner has the right (but not
necessarily the obligation) to take royalties in-kind, revenues are reported net of royalty. This is the usual situation for
properties located in the U.S.

It can be seen that the overall intent is to deplete the reserves on a basis proportional to the reserves and production. For
example, don’t mix gross production with net reserves. As long as a consistent approach is taken, the end result should be the
same

Observations and Conclusions

One of the implications of having two different accounting methods for oil and gas activities is that for a given set of
circumstances, the financial results will be different depending on which accounting method is used. The DD&A process is
heavily dependent on events that occurred in prior years, thus it is difficult to generalize as to which accounting method would
be more favorable, or would present the better financial results.

Because DD&A is a non-cash adjustment, its impact on earnings can lead to some surprising results. “A company with
positive cash flow can report an operating loss or negative earnings due to the deduction of DD&A which is not a cash item. A
company with a negative cash flow can show positive earnings or profits by capitalizing certain costs incurred during the year
and amortizing these costs over a future period of years.”16

Engineers may be surprised to find that many of the complex reserve assignment situations that require experience and
judgment on the part of the evaluation engineers also pose similar burdens on the accountants. There are exceptions and
alternatives to almost all of the accounting concepts presented here. The purpose of this paper is to help the engineer become
more aware of the way that reserves and production data are used by the accountants, and how that data directly impacts the
company’s financial results.

Recall that under successful efforts, wells drilled in the proved area will be capitalized if dry. Now that the industry has more
opportunities to book proved undeveloped locations, particularly in resource plays, it follows that there are more opportunities
to impact the financial results with proved undeveloped locations. While the decision to categorize proved reserves should
always be based on technical, economic, and regulatory factors rather than potential financial reporting impacts, engineers
should be aware of the implications.

Proved undeveloped reserves de-booking situations will result in higher DD&A rates. While this impact is somewhat diluted
in the full cost situation by the full cost pool and by only impacting the leasehold DD&A rate for successful efforts, the results
may be significant in resource plays where large leaseholds and proved undeveloped reserve situations may occur. Problems
with the SEC’s five year rule may contribute to such problems.

In summary, the DD&A process relies on two types of information: expenditures and reserves. The expenditures are objective
in that they are easily tabulated by the accountants. The reserves process is more subjective, and thus engineers need to be
aware of the importance of their responsibilities and how their reserve numbers impact the financial performance of the
company.

Acknowledgment
The author extends appreciation to Ryder Scott Company Petroleum Consultants, L.P. for permission to write and present this
paper, and to the numerous individuals within Ryder Scott who encouraged and assisted in the preparation of the paper.

!'"
B.P. Huddleston, An Engineer’s Introduction to Generally Accepted Accounting Principles, 2002.
8 SPE 162907

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Brock, Horace R., Dennis R. Jennings, and Joseph B. Feiten. Petroleum Accounting – Principles, Procedures, & Issues. PDI,
4th Edition, 1996.
Burke Jr., Frank M. and Mark L. Starcher. Oil & Gas Taxation in Nontechnical Language, Pennwell, 1993
Compliance Week: “SEC Shuts Down IFRS Decision Time Line”. www.complianceweek.com. July 18, 2012.
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of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. March 1995.
Financial Accounting Standards Board. Extractive Activities – Oil and Gas (Topic 932). Oil and Gas Reserve Estimation and
Disclosures. January 2010.
Huddleston, B.P. An Engineer’s Introduction to Generally Accepted Accounting Principles, SPEE presentation of November
6, 2002, Houston, Texas.
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(accessed 30 May 2012)
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(accessed 30 May 2012)
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Glossary of acronyms and accounting terms as used in this paper:

Amortization – the process of recognizing the reduction in value due to depreciation or depletion over time.
Audit (financial) – an independent review of a company’s financial records to determine if the financial results have been
correctly reported in accordance with the appropriate generally accepted accounting principles and regulatory authorities.
BOE – barrels of oil equivalence.
Book Value – the initial balance of capitalized expenditures related to a specific property, as recorded on the balance sheet as
a long term asset.
Capitalize – the recording of an expenditure on the books as a long term asset
Ceiling Test – the process of comparing a property’s current value with its recorded book value to determine if impairment
has occurred.
DD&A – Depreciation, Depletion, and Amortization.
Depletion – the systematic decrease in value of a mineral asset in place due to production.
Depreciation – the systematic decrease in value of an asset due to usage and wear.
Expense – the recording of expenditure as a deduction from income. May be an actual cash payment or a non-cash item such
as recognized depreciation.
Full Cost – one of two methods of accounting for oil and gas activity, where the major tenant is that all activity considered
necessary and related to oil and gas production, whether successful or not, is capitalized.
Goodwill – value over and above what can be attributed to the assets themselves
Impairment – situation where a property’s value is less than the recorded book value.
Net Book Value – the current balance of capitalized expenditures related to a specific property, with consideration of any
prior DD&A, as recorded on the balance sheet as a long term asset.
MCF – thousands of standard cubic feet.
MCFGE – thousands of standard cubic feet gas equivalence.
MMBTU – million British thermal unit.
Successful Efforts – one of two methods of accounting for oil and gas activity, where the major tenant is that exploration dry
holes are expensed and successful exploration and all development activities are capitalized.
Units of Production Method – method of determining the amount of depletion that has occurred by considering the units of
production of oil and/or gas (i.e. barrels, cubic feet, cubic meters, tons, MMBTU, etc.) that occurred during the period as
compared to the total units of reserves.