Accounting for the oil and gas industry isn’t for the faint of heart. You must possess a deep breadth of knowledge about contemporary financial techniques and how they apply to the energy industry.
In this article, we’ll touch on the following:
- The concept of best practices
- The fundamentals of oil and gas accounting
- The key aspects of oil and gas accounting
- The two primary schools of accounting
- The importance of your area of operations
- What any oil and gas accountant should know
You must be abreast of your discipline’s core fundamentals so that your employer can find success with its operations and your career can grow.
Is There a Standard Definition of Best Practices?
At EAG 1Source, we think of “best practices” as the set of techniques and procedures that allow you to produce the most efficient results with the least number of resources. For accounting in the oil and gas industry, best practices are ever-evolving due to technological advancements, macroeconomic conditions, and the continual need to reduce general and administrative (G&A) costs.
The Fundamental Principles of Oil and Gas Accounting
You should always follow U.S. Generally Accepted Accounting Principles (GAAP) as set forth by the Financial Accounting Standards Board (FASB) when managing the book of any company regardless of the size and whether a company is public or private. Additionally, it is essential to act with the utmost integrity, respect, and due diligence.
An old mentor once relayed this adage: “Accountants are simply scorekeepers, no matter what the outcome is.” Their job is to keep the “financial score” of an organization by upholding US GAAP standards with the highest degree of ethics.
What are the Major Fields of Oil and Gas Accounting?
We break down the overarching discipline into the following six categories:
- Marketing to end-users
Upstream companies primarily operate within exploration, development, and production. Midstream companies focus solely on transportation. Downstream companies pay attention to refining and marketing to end-users.
Each of these has its own unique set of departments that handle the various entries and procedures to ensure costs and revenue are accounted for properly. You can roll up most niche accounting functions into one of those six primary functions because all industries have capital expenditures, operating costs, G&A, revenue, and production.
The Differences Between Upstream, Midstream, and Downstream Accounting Services
No matter their area of operation, all oil and gas companies will perform the same core activities: capital expenditure, G&A, interest, revenue recognition, operating expenses, etc. However, there are some distinctions in how they go about performing them.
- Upstream companies engage in lease acquisitions, joint operating agreements, exploration activities, drilling & development, reserve accounting, and production – all of which have rules that govern how and when to account for various elements.
- Midstream entities focus on product imbalances, storage, gathering, treatment, and processing.
- Downstream entities concentrate on sourcing, refining, distribution, and inventory.
- Service organizations fixate on the construction, drilling services, and services other than drilling.
Any actual difference comes down to an individual company’s overall business processes and how they meet their customers’ needs.
What are the Differences Between Successful Efforts and Full Cost Accounting?
When it comes to oil and gas companies, everything revolves around how they treat capitalized costs.
Most major E&P companies implement the Successful Efforts (SE) method due to the transparency it provides. In SE, costs are capitalized based on whether the well is successful or not (i.e., hydrocarbons are produced). If it’s unsuccessful, the costs are immediately expensed to the income statement. Other costs, such as geological and geophysical costs, are mostly expensed as incurred.
Additionally, SE costs are aggregated by geological structure (typically “fields” or depletable units, “DU”), and there are two depletion calculations for each DU: one based on leasehold costs, and the other is based on well costs. The company then performs the impairment evaluation on the unproved property and DCF (discounted cash flow) for proved properties. However, SE is much more complicated, requiring more significant accounting resources to execute.
Under the Full Cost method (FC), most exploration and development costs are capitalized by an aggregated “cost pool” regardless of the outcome. Typically, you will have one single depletion calculation on each pool, and you base the asset impairment tests on a ceiling test.
Your Company’s Field(s) of Interest Matters
EAG 1Source operates under the principle that best practices can vary from company to company. It truly depends on what a business determines to be the most important for their operations in any given situation.
Typically, there is a correlation between the amount of G&A spent and the amount of attainable detail. Luckily, the industry is doing a great job of utilizing technology to eliminate tedious, non-value-added tasks. These improvements should ultimately lead to being more efficient with fewer resources, but it’s still a work in progress.
We believe the oil and gas industry is at the beginning of the back-office technological revolution. Over the next decade, companies will see a fundamental transformation of how they can eliminate waste, streamline accounting, and automate daily tasks, as well as reduce overall G&A. The more you can think outside the box to challenge the status quo, the more efficiencies you’ll gain in the long term.
Key Information Oil and Gas Accountants Should Know
Welcome to our challenging world! Our recommendations include:
- Understand the macro impact of what your job entails for the overall company.
- Learn from your mistakes.
- Invest in productivity tools such as Excel, Access, Power BI, and other tools to make you more efficient in your daily responsibilities.
- Become an expert in financial record keeping.
- Develop a reliable system for preparing financial reports.
- Be familiar with the relevant tax calculators for the regions your company operates.
- Plan and track budgets.
- Prepare taxes
- Keep track of expenses, transactions, and market pricing.
If your company is on the lookout for high-quality oil and gas accountants, talk to EAG 1Source. We offer a host of helpful back-office administrative services designed to help you drive your business forward.