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Four Basic Costs:

Acquisition, exploration, development, and production

Acquisition Costs
Costs incurred in acquiring property: rights to explore, drill, and
produce oil and natural gas.

Exploration Costs
Costs incurred in exploring property: identifying areas that may
warrant examination and examining specific areas .

Development Costs
Costs incurred in preparing proved reserves for production:
obtain access to proved reserves and to provide facilities for
extracting, treating, gathering, storing oil/gas.

Production Costs
Costs incurred in lifting the oil and gas to the surface and in
gathering, treating, and storing oil/gas.

Exploratory Well
A well drilled in an unproved area.

Development Wells
If additional wells are drilled within the proved area, to the
proved depth.

Exploratory Well
A well drilled within a proved area with respect to the surface
acreage, but to shallower depth, is not being drilled in a proved
area.

New Field Wildcat Well


The first well drilled in a location where there has been no
previous drilling or production; should be classified as an
exploratory well.

Delineation Well
A well drilled along what the engineers believe to be the outer
perimeter of the reservoir.

Extension Well

A well that is drilled to test whether a known proved reservoir


actually extends beyond what engineers had previously believed
to be the outer reservoir perimeter; should be classified as an
exploratory well.

Successful Efforts Method


Expense: G&G cost, exploratory dry hole, production cost;
capital: acquisition cost, exploratory well successful,
development dry hole, development well successful
Amortization cost center detailed property, field, etc.

Full Cost Method


Expense: production costs; capital: acquisition cost, G&G cost,
exploratory dry hole, exploratory well successful, development
dry hole, development well successful
Amortization cost center by country

Characteristics of Oil and Gas Industry:


High risk
High cost of investment
Lack of correlation between the size of expenditure and the
value of any resulting reserves
Long time span from when costs are first incurred until benefits
are received

COPAS
Formed in 1961 - activities and projects directed primarily
toward issues and problems encountered in joint interest
operations - issued "pronouncements" in the form of procedures,
guidelines, interpretations.

Joint Operating Agreement


Contract used by shared working interests to specify how costs
are going to be shared and how the property is going to be
managed - include an accounting procedure to address which
costs are directly shared by the parties to the contract,
determination of overhead rates, acquisition and transfer
materials, and conduct of audits and inventories.

Accounting Guidelines (AG):


Cover topics as accounting for unitizations, imbalances, and
conducting revenue audits.

Unproved Reserves

All reserves not satisfying the conditions for proved reserves.

Proved Reserves
those reserves that are:
1. Reasonably certain to be recovered in the future
2. From known reservoirs under existing economic and operating
conditions, such as
a. Current prices and costs
b. Current technology
3. Economic producibility supported by actual production or
conclusive formation test.

Proved Developed Reserves


Reserves expected to be recovered through
1. Existing wells with existing equipment and operating methods
2. Improved recovery techniques, if
a. Successful pilot project, or
b. Successful installed program

Proved Undeveloped Reserves


Reserves expected to be recovered from either 1. New wells
drilled on undrilled acreage (must be offsetting productive units)
2. Existing wells where a relatively minor expenditure is required
for recompletion 3. Improved recovery techniques, only if
effective actual tests in the same area and in same reservoir

Acquisition costs
Successful Efforts---Capital
Full Cost ----Capital

G&G costs
Successful Efforts---Expense
Full Cost ---Capital

Exploratory dry hole


Successful Efforts----Expense
Full Cost---Capital

Exploratory well, successful


Successful Efforts----Capital
Full Cost---Capital

Development dry hole

Successful Efforts----Capital
Full Cost---Capital

Development well, successful


Successful Efforts----Capital
Full Cost---Capital

Production costs
Successful Efforts---Expense
Full Cost---Expense

designated a proved area


When an exploratory well finds proved reserves, an area around
the well at the depth of the proved reservoir

Field
An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to same individual geological structure.