OilGas Intro PDF
OilGas Intro PDF
OilGas Intro PDF
Accounting &
Financial Statement Analysis
sector
Given the complexities of
this extractive industry,
most companies focus on Oilfield
Services
one particular sector.
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Oil & gas industry sectors and players
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Oil & gas industry sectors and players
Exploration Production
Phase Phase
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Oil & gas industry sectors and players
Prospecting Exploration costs (part 1)
Involves performing a number of geological evaluations/surveys Geological and
to determine hydrocarbon presence . geophysical (G&G)
costs
Property acquisitions
Involves activities relating to securing the rights from the Acquisition costs
property owner to explore for and produce oil & gas in that Related to acquiring
field/area. the rights to explore
Fiscal terms surrounding property acquisitions (what is owned by and develop
the oil companies versus original land owners/government) are
complex; we will examine them in the later section. Exploration costs (part 2)
Exploration (drilling) Exploratory drilling
Involves drilling exploration wells to determine if commercial
hydrocarbon quantities exist. Exploration costs (part 3)
Evaluation and appraisal Often include
Involves confirming the initial exploration results through appraisal-related costs
appraisal wells drilled to gain further insight into the property,
including the size of the reservoir. Development costs
Development Drilling costs
Involves activities relating to developing the discovered O&G Storage costs
reserves for production.
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Oil & gas industry sectors and players
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Oil & gas industry sectors and players
Estimated Reserves
Proved Proved
Developed Undeveloped
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Oil & gas industry sectors and players
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Oil & gas industry sectors and players
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Oil & gas industry sectors and players
Transportation store and transport
Major midstream players
Involves all operations associated with storing O&G
Enterprise Products
and transporting it from fields to refineries and
Partners
processing plants.
Kinder Morgan
O&G can be transported by pipelines, trucks, and oil
tankers. Northern Border Partners
The sector is typically referred to as midstream, to Plain All-American Pipeline
indicate its role as a connection between E&P and TEPPCO Partners
refining and marketing operations.
Source: EIA
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Oil & gas industry sectors and players
Refining and Marketing refine and
get ready for end-users
Includes refining crude oil into
petroleum products (gasoline, jet
fuel, heating oil, diesel, fuel oil,
asphalt, etc.) and marketing them
to end-users (i.e. through gasoline
stations).
As with its E&P counterpart, the
downstream sector can be
examined by looking at refining
separately from marketing.
Refining terms
Refining & Marketing is typically
referred by its acronym: R&M
R&M is also known as the
downstream sector, to indicate the
delivery of petroleum products to
end-users
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Oil & gas industry sectors and players
Refining from crude oil to petroleum products
Since crude oil cannot be used in its natural unrefined form, it must first be converted
(refined) into petroleum products this is accomplished in processing plants known as
refineries.
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Oil & gas industry sectors and players
How are refining profits calculated?
Refining terms
Refining margins refer to the difference between
Refining profits are
the price of a petroleum product (output) and raw
interchangeably referred to:
material costs (feedstocks/input) expressed on a
per barrel basis. Indicator margin
Often based on benchmark feedstocks such as (Margin) differential
WTI. Crack / spread / crack
Refining margins exist for each petroleum product: spread
o Gasoline crack = 1 bbl gasoline 1 bbl crude oil
o Heat crack = 1 bbl heating oil 1 bbl crude oil
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Oil & gas industry sectors and players
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Oil & gas accounting
O&G costs
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Oil & gas accounting
Different treatments of unsuccessful exploration methods:
Full costs (FC) method
Allows all exploration results (dry holes and discoveries) to be capitalized (on the balance
sheet) and amortized (on the income statement) over the estimated lives of the
properties.
Successful efforts (SE) method
Requires unsuccessful exploration results (dry holes) to be expensed as incurred.
Only successful exploration wells are capitalized (on the balance) and amortized (on the
income statement) over the estimated lives of the properties.
O&G Costs Successful Efforts Full Cost
Acquisition costs CAPITALIZED Cap
Geological & geophysical Exp Cap
Exploratory dry hole Exp Cap
Successful exploratory well Cap Cap
Development dry hole Cap Cap
Successful development well Cap Cap
Operating costs Exp Exp
Size of cost center Small Large
Amortization Cost Center Single well / field Company / country
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Oil & gas accounting
Depreciation
Whats depreciated?
A method by which the cost of long-term fixed assets
(over 1 year) is spread over a future period (number of Fixed assets:
years), when these assets are expected to be in service Plants
and help generate revenue for a company. Machinery
An allocation of the costs of an original purchase of fixed Drilling equipment
assets over the estimated useful lives of those fixed
assets. Pipelines
Depletion
O&G industry specific Whats depleted?
Same concept as depreciation that is applied to mineral O&G reserves
resources.
Whats amortized?
Amortization
Amortization is the systematic allocation of the cost of Acquired intangible
acquired intangible assets over a period of time that assets:
these assets are expected to be in service and help Brand
generate revenue for a company. Franchise
All 3 appear on the income statement
Trademarks
Combined into 1 line item: Depreciation, Depletion, and
Amortization (or DD&A).
Patents
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Oil & gas accounting
Full costs (FC) method
Requires companies to perform a ceiling test limitation (impairment test) comparing the
book value of O&G assets against the SEC value of reserves (market value proxy) that all
O&G producing companies must disclose in their footnotes (more on this in the later
section).
If SEC value is lower than the capitalized costs, a write-down is required.
This is why companies using the FC method utilize large cost centers.
Successful efforts (SE) method
Companies are not required to perform a ceiling test limitation.
Write-downs are less frequent than under the SE method, since unsuccessful exploration
costs are expensed.
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