OIL & GAS ACCOUNTING & ECONOMICS: The Petroleum Industry Act & Investment Decisions

Oil and Gas firms can chose between the Successful Efforts Accounting and the Full Cost Accounting. While the latter capitalizes on all operating expenditures related to locating new oil and gas reserves, and subsequently allocates these costs to future periods, irrespective of exploration outcomes, the former, that is, Successful Efforts Accounting, allows a company to capitalize only those expenses associated with successfully locating new reserves. If unsuccessful or there is "dry hole" outcomes, the firm charges associated operating costs immediately against revenues for that period. With reliable unified reporting, informed decisions can be made as far as production planning, asset management and financial management are concerned. The Petroleum Profit Tax Act, provides for mandatory accurate hydrocarbon accounting including oil block acquisition, payables, receivables, joint venture accounting, tax oil, profit oil, operating income, depreciation, depreciation allowance, amortization, cost depletion, ringfencing, contractual systems such as pure service contracts, production sharing contract, pure service contracts, risk service contracts, technical assistance agreements, oil mining lease, petroleum licensing rounds and joint ventures, gross oil production, cost recovery, royalty oil, contractor share, Home Government share, contractor profit, income tax and bonuses, royalty payment, work commitment, cost recovery limits, participation agreement, operating agreement, MOU, depletion calculation, cost depletion, concessionary deductions, commerciaIty requirement, profits and taxes, the economic rent theory, economic limit, reserve recognition accounting, reserves classifications, bonuses, rents, royalty trust, cost and full accounting, royalties, concessionary fiscal systems, chargeable profit, chargeable tax, assessable tax, disallowed deductions, adjust for profit and production splits. The Petroleum Economists, on the other hand, assist and enhance making investment decisions by analyzing these and other factors including exploration and well drilling data driven decision making or whether or not the development of an entire gas production project should proceed. Their inputs are critical in Production Sharing Contracts negotiations and oil and gas block purchase. They are inevitably involved in the evaluation and management of the operational, environmental, geological, technical, economic and related risks involved in different phases of oil and gas projects. Their work includes the financial analysis of oil and gas production as well as the forecasting of cash flow, oil and gas development assessment, economic indicators, risk analysis and the analysis of the effects of taxation. They also advise on the economic viability and attractiveness of petroleum ventures and operations, quantification of all forms of uncertainties such as reservoir pattern, future oil and gas prices, development costs, bonus payment determination, when the organization is bidding for oil and gas tracts or leases. Using profitability analysis, they prepare guidelines for the selection of the best alternative development options. They provide economic frameworks through which help investors address the three major questions in E&P investment decision making: What is the cost of the proposed E&P venture? What are the absolute economic value and relative cost of the E & P venture? How profitable is the venture when compared to alternative available investment opportunities?