Overview Of Oil & Gas Accounting

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  • Overview of Oil and Gas Accounting & PSC Accounting Budi Hartono
  • Agenda Overview of Overview of accounting principle in upstream oil and gas Overview of PSC Accounting Other PSC consideration PSC Accounting vs GAAP Recording PSC Accounting & GAAP – Operator & NonOperator
  • Accounting Principles in Upstream Oil & Gas Full Cost Method Successful Effort Method
  • Full Cost Method All property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties. These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves. The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.
  • Successful Effort Method Only the cost of successful efforts is capitalized. Cost of exploratory dry holes, geological and geophysical (G&G) costs in general, delay rentals, and other property carrying costs are expensed. The net unamortized capitalized costs are amortized on unit-of-production method, whereby property acquisition costs are amortized over proved reserves and property development costs are amortized over proved development reserves.
  • Pre Licensing Cost Costs incurred prior signing of agreement such as cash pays for data and information to participate in a new PSC bid. License Cost Costs incurred upon signing of agreement such as signature bonus.
  • Acquisition Expenditures Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved). They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties
  • Geological & Geophysical Seismic Information that will help decide (1) whether contractors should be obtained in area of interest (2) whether and where exploratory areas should be drilled.
  • Exploration Expenditures Exploration involves: identifying areas that may warrant examination and examining specific areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test (appraisal) wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property
  • Appraisal drilling Drilling carried out to determine the physical extent, reserves and likely production rate of a field. Accounting for appraisal wells under IFRS tends to be based on whether the field or the reservoir is ultimately determined to be successful and developed, justifying the capitalization of dry appraisal wells in the same field. Under US GAAP, an appraisal well is treated exactly the same as an exploration well and should be written-off if unsuccessful, even the very same field or reservoir is determined to be successful and developed.
  • Development Expenditures Development costs are incurred to : Gain access to and prepare well locations for drilling such as clearing ground, draining, road building, gas and power lines; Drill and equip development wells including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly; Acquire, construct and install production facilities such as lease flow lines, separators, production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal system.
  • Production Expenditures Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation, and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities.
  • Impairment Impairment Triggers: Obsolescence Physical damage: accidents, fire, natural disasters Technical performance problems (lower production profile) Evidence from internal reporting: worse profit (bigger loss) or cash flow, anticipated loss on disposal, change in long term view of sales prices Lower estimates of physical quantities of petroleum reserves Lower reserves in PSC due to higher prices is not an impairment trigger.
  • Impairment Under IFRS impairment includes license acquisition costs and exploration and appraisal costs Exploration licenses in unproved properties must be assessed periodically (at least annually). If dry hole has been drilled and there are no firm plans for further drilling or appraisal activities, the property would be impaired. Under US GAAP, FAS 121 are applicable for proved properties and related equipment, and facilities whereas unproved properties are subject to the impairment provision FAS 19 (Accounting for Suspended Well Costs).
  • Decommissioning Process conducted in accordance with license requirements and relevant legislation and practice to: Plug and abandon wells Dismantle wellhead, production and transport facilities Remediate and restore producing areas
  • Decommissioning recognition Decommissioning provisions are recognized when there is Legal obligation Constructive obligation: Establishing a pattern of past practice Publishing policies Making statement to other parties that the company will accept responsibilities Creating a reasonable expectation that the company will act in a certain way.
  • Decommissioning Obligation Decommissioning costs are typically cost recoverable based on actual cash funding. Most PSCs have decommissioning obligations for the contractor, despite ownership of assets by government. Usually cash funding is required to make sure there will be enough fund to carry out decommissioning activities. Both contractor and government have control over the cash fund.
  • Full Cost vs Successful Efforts Accounting 1. Upstream companies generally account for their activities under two accounting practices - ‘full cost’ and ‘successful efforts’. 2. Under full cost accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Costs are accumulated in cost centres (known as ‘cost pools’). The costs in each cost pool are generally written off against income arising from production of the reserves attributable to that pool. 3. Successful efforts: exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon- bearing structure is identified and tested. 4. FRS 15 appears to present some conceptual problems for adopting full cost accounting, in particular paragraph 12:‘Capitalisation of directly attributable costs should cease when substantially all the activities that are necessary to get the tangible fixed asset ready for use are complete, even if the asset has not yet been brought into use.’ However the objective of full cost accounting is to write off the costs in each cost pool against production from the reserves attributable to that pool. Ie, production may not yet have started. In the case of full cost accounting the relevant section of FRS 15 is paragraph 7 as the asset is regarded as the entire cost pool: ‘Costs, but only those costs, that are directly attributable to bringing the asset into working condition for its intended use should be included in its measurement’.
  • Full Cost vs Successful Efforts Accounting Expensed Expensed Capitalised Capitalised Capitalise initially then write off, unless commercial reserves established Capitalised Expensed Expensed SUCCESSFUL EFFORTS FULL COST
  • Overview of PSC Accounting: Acquisition cost Operating costs Capital expenditures Non-capital expenditures Exploration expenditures Development expenditures Supporting equipment and facilities Depreciation, depletion and amortization Inventory
  • PSC Accounting Acquisition cost Acquisition cost is not classified as part of the operating costs as based on the constitution, the ownership of the natural resources stays with the state and is not transferred to the contractors. Signature Bonus IS NOT classified as part of the operating costs (cost recovery) but classified as deductible expense for tax purposes.
  • PSC Accounting Operating costs (cost recovery) For any year in which commercial production occurs, operating costs consist of: Current year non-capital costs Current year’s depreciation for capital costs Current year allowed recovery of prior year’s unrecovered operating costs.
  • PSC Accounting Capital cost Expenditures made for items which normally have a useful life beyond the year incurred Non-capital cost Expenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.
  • PSC Accounting Exploration expenditures All non-capital and Intangible Drilling Costs (IDC) exploration expenditures are expensed as operating expenditures as incurred, without considering whether they relate to a successful or unsuccessful exploration. Whilst for Tangible Drilling Costs (TDC) exploration, is capitalised for successful exploration and is classified as non-capital for unsuccessful expenditures.
  • PSC Accounting Development expenditures Upon dry-hole, all expenditures, the IDC and TDC development expenditures, are classified as non-capital and therefore expensed. Upon successful, the IDC development expenditures are still classified as non-capital and therefore expensed, whilst the TDC development are capitalised.
  • PSC Accounting Supporting equipment and facilities The treatment is the same as the development costs
  • PSC Accounting Depreciation, depletion and amortization (DD&A) DD&A will be calculated beginning the year in which the assets is placed into service. The method used to calculated the DD&A is double declining balance method, whereby in the last year, the residual value is recovered in full and therefore does not consider the amount of reserves
  • PSC Accounting Inventory The costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.
  • Other PSC Considerations First Tranche Petroleum Domestic Market Obligation Investment Credit Cost recovery Flow of PSC
  • First Tranche Petroleum 20 Percent of current year production or certain amount refers to contract Split between government and contractor Based on PSC’s sharing percentage FTP is taxable income
  • DMO (Domestic Market Obligation) A contractor has to surrender a part (25%) of its production for domestic market DMO fees received by a contractor: - The first 5 years production, fee is average ICP - After 5 years, fee is USD .20/bbls or 10% of average ICP (pack II), 15% of average ICP (pack III)
  • Investment Credit Investment credit is an additional allowance when a contractor invests in a new field Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pre-tertiary) Rate investment credit is: - 20% of direct investment amount (if tax rate is 56%) - 17% of direct investment amount (if tax rate is 48 %) - 127%, 142% (oil); 55%, 110% and 125% (gas) in deep sea and pre tertiary areas.
  • Cost Recovery Current year – non capital costs Inventories will be recoverable at the time when landed in Indonesia Current year’s depreciation for capital cost Declining balance method, yearly, grouping per PSC Current year’s allowed recovery of prior year’s un-recovered operating costs
  • Cost Recovery (continued) Operating cash directly associated with production of natural gas will be directly chargeable against natural gas revenues Other costs: - Overhead allocation, should be consistent and approved by BP Migas (generally max 2% of operating costs) - Interest recovery, has to be approved by BP Migas
  • Compensation and Production Bonus Signature bonus, when getting the PSC Production bonus, after reaching certain production volume Unrecovered cost but tax deductible
  • FLOW OF PSC oil GROSS REVENUE FTP INV.CREDIT COST RECOVERY EQUITY TO BE SPLIT Gov. Indonesia CONTRACTOR DMO DMO FEE TAX NET CONT.SHARE TOTAL TOTAL INDONESIA SHARE CONTR. SHARE pda-fde/mps gas PRODUCTION SHARING CONTRACT DIAGRAM PEMBAGIAN PRODUKSI DALAM JUTAAN US DOLLAR - GAS GROSS REVENUE $5,000 $423 FTP $577 $1,000 INV.CREDIT $200 COST RECOVERY $1,800 EQUITY TO BE SPLIT $2,000 $846 $1,154 PERTAMINA CONTRACTOR $1,269 $1,731 TAX $927 NET CONT.SHARE $804 TOTAL TOTAL INDONESIA SHARE CONTR. SHARE $2,196 $2,804 NOTES: - Corporate Tax 48% - Pertamina / Contractor : 70/30 ------------> Gross-up : 42.3077% / 57.6923% pda-fde/mps lng PRODUCTION SHARING CONTRACT DIAGRAM PEMBAGIAN PRODUKSI DALAM JUTAAN US DOLLAR - LNG LNG SALES $5,000 LNG COSTS $1,000 GROSS REVENUE $4,000 $338 FTP $462 $800 INV.CREDIT $200 COST RECOVERY $1,800 EQUITY TO BE SPLIT $1,200 $508 $692 PERTAMINA CONTRACTOR $846 $1,154 TAX $650 NET CONT.SHARE $504 TOTAL TOTAL INDONESIA SHARE CONTR. SHARE $1,496 $2,504 NOTES: - Corporate Tax 48% - Pertamina / Contractor : 70/30 ------------> Gross-up : 42.3077% / 57.6923% pda-fde/mps
  • PSC Accounting vs GAAP (*) it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. PSC US GAAP IFRS Acquisition cost Expense Capitalize Capitalize as long as meet with IFRS assets recognition criteria* Exploration expenditures: Dry hole Successful: - IDC - TDC Expense Expense Capitalize Expense Capitalize Capitalize Expense Capitalize Capitalize
  • PSC Accounting vs GAAP PSC US GAAP IFRS Appraisal drilling A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Unsuccessful exploratory wells drilled to delineate a potential reservoir are expensed A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists.
  • PSC Accounting vs GAAP PSC US GAAP IFRS Development expenditures Dry hole Successful: - IDC - TDC Expense Expense Capitalize Capitalize Capitalize Capitalize Not specified. Capitalized as long as meet with IFRS assets recognition criteria Not specified. Capitalized as long as meet with IFRS assets recognition criteria Supporting equipment and facilities Capitalize Capitalize Capitalize
  • PSC Accounting vs GAAP PSC US GAAP IFRS DD&A of capital costs Double decline Unit of production Not specified, to be allocated over useful life, reflecting consumption of assets’ benefits Non-capital inventory Expensed upon receipt Expensed as consumed Expensed as consumed Obsolete inventory or assets Write off upon approved by BPMIGAS Expensed/impaired upon identified Expensed/impaired upon identified Big table liabilities / severance Cash basis (pay as you go) Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation
  • PSC Accounting vs GAAP PSC US GAAP IFRS Abandonment / decommissioning liabilities Cash basis. New recent PSC contract – accrual basis, but no further guidance issued yet by BPMIGAS. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided in the period in which it is incurred if a reasonable estimate of fair value can be made, or as soon as a reasonable estimate of fair value can be made. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided as soon as the decommissioning obligation is created, which is normally when the facility is constructed and the damage that needs to be restored is done.
  • PSC Accounting vs GAAP PSC US GAAP IFRS Impairment Written off assets upon agreement from BPMIGAS All impairments are recognised in the income statement. The same as US GAAP, except that an impairment loss (downward revaluation) may be offset against revaluation surpluses to the extent that it relates to the same asset; any uncovered deficit is recorded to the income statement.
  • Recording PSC Accounting & GAAP (Operator) General industry practice use the JV book and Corporate book JV Book represent the recording of the transaction in the level of joint venture transaction (such as cash call request, cash call receipt, joint venture expenditures). Corporate Book represents the recording of transaction in the level of corporate as a separate entity. Consist of: joint venture transaction (multiplied by its shares) transaction which only incurred in corporate level (corporate adjustment) such as revenue, DD&A, deferred tax and other GAAP adjustment.
  • Recording Joint Interest Transactions (Nonoperator) General industry practice use the proportionate consolidation method of accounting. Under proportionate consolidation, each owner picks up its proportionate share of each assets, liability, revenue and expense item in accordance with its own account classification. The principal source document is the monthly Joint Interest Billing (JIB) from the operator. The JIB do not coincide with GAAP or income tax accounting. The recording of Joint Interest Transactions of NonOperator will be detailed in Cash Call section
  • Question & Answer Session 1. Upstream companies generally account for their activities under two accounting practices - ‘full cost’ and ‘successful efforts’. 2. Under full cost accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Costs are accumulated in cost centres (known as ‘cost pools’). The costs in each cost pool are generally written off against income arising from production of the reserves attributable to that pool. 3. Successful efforts: exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon- bearing structure is identified and tested. 4. FRS 15 appears to present some conceptual problems for adopting full cost accounting, in particular paragraph 12:‘Capitalisation of directly attributable costs should cease when substantially all the activities that are necessary to get the tangible fixed asset ready for use are complete, even if the asset has not yet been brought into use.’ However the objective of full cost accounting is to write off the costs in each cost pool against production from the reserves attributable to that pool. Ie, production may not yet have started. In the case of full cost accounting the relevant section of FRS 15 is paragraph 7 as the asset is regarded as the entire cost pool: ‘Costs, but only those costs, that are directly attributable to bringing the asset into working condition for its intended use should be included in its measurement’.
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  • Overview of Oil and Gas Accounting & PSC Accounting Budi Hartono
  • Agenda Overview of Overview of accounting principle in upstream oil and gas Overview of PSC Accounting Other PSC consideration PSC Accounting vs GAAP Recording PSC Accounting & GAAP – Operator & NonOperator
  • Accounting Principles in Upstream Oil & Gas Full Cost Method Successful Effort Method
  • Full Cost Method All property acquisition, exploration and development costs, even dry hole costs, are capitalized as oil and gas properties. These costs are amortized using a unit-of-production method based on volumes produced and remaining proved reserves. The net unamortized capitalized costs of oil and gas properties less related deferred income tax MAY NOT exceed a ceiling consisting primarily of a computed present value of projected future cash flows, after income taxes, from the proved reserves.
  • Successful Effort Method Only the cost of successful efforts is capitalized. Cost of exploratory dry holes, geological and geophysical (G&G) costs in general, delay rentals, and other property carrying costs are expensed. The net unamortized capitalized costs are amortized on unit-of-production method, whereby property acquisition costs are amortized over proved reserves and property development costs are amortized over proved development reserves.
  • Pre Licensing Cost Costs incurred prior signing of agreement such as cash pays for data and information to participate in a new PSC bid. License Cost Costs incurred upon signing of agreement such as signature bonus.
  • Acquisition Expenditures Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved). They include the costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties
  • Geological & Geophysical Seismic Information that will help decide (1) whether contractors should be obtained in area of interest (2) whether and where exploratory areas should be drilled.
  • Exploration Expenditures Exploration involves: identifying areas that may warrant examination and examining specific areas that are considered to have prospects of containing oil and gas reserves, including drilling exploratory wells and exploratory-type stratigraphic test (appraisal) wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property
  • Appraisal drilling Drilling carried out to determine the physical extent, reserves and likely production rate of a field. Accounting for appraisal wells under IFRS tends to be based on whether the field or the reservoir is ultimately determined to be successful and developed, justifying the capitalization of dry appraisal wells in the same field. Under US GAAP, an appraisal well is treated exactly the same as an exploration well and should be written-off if unsuccessful, even the very same field or reservoir is determined to be successful and developed.
  • Development Expenditures Development costs are incurred to : Gain access to and prepare well locations for drilling such as clearing ground, draining, road building, gas and power lines; Drill and equip development wells including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly; Acquire, construct and install production facilities such as lease flow lines, separators, production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal system.
  • Production Expenditures Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation, and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities.
  • Impairment Impairment Triggers: Obsolescence Physical damage: accidents, fire, natural disasters Technical performance problems (lower production profile) Evidence from internal reporting: worse profit (bigger loss) or cash flow, anticipated loss on disposal, change in long term view of sales prices Lower estimates of physical quantities of petroleum reserves Lower reserves in PSC due to higher prices is not an impairment trigger.
  • Impairment Under IFRS impairment includes license acquisition costs and exploration and appraisal costs Exploration licenses in unproved properties must be assessed periodically (at least annually). If dry hole has been drilled and there are no firm plans for further drilling or appraisal activities, the property would be impaired. Under US GAAP, FAS 121 are applicable for proved properties and related equipment, and facilities whereas unproved properties are subject to the impairment provision FAS 19 (Accounting for Suspended Well Costs).
  • Decommissioning Process conducted in accordance with license requirements and relevant legislation and practice to: Plug and abandon wells Dismantle wellhead, production and transport facilities Remediate and restore producing areas
  • Decommissioning recognition Decommissioning provisions are recognized when there is Legal obligation Constructive obligation: Establishing a pattern of past practice Publishing policies Making statement to other parties that the company will accept responsibilities Creating a reasonable expectation that the company will act in a certain way.
  • Decommissioning Obligation Decommissioning costs are typically cost recoverable based on actual cash funding. Most PSCs have decommissioning obligations for the contractor, despite ownership of assets by government. Usually cash funding is required to make sure there will be enough fund to carry out decommissioning activities. Both contractor and government have control over the cash fund.
  • Full Cost vs Successful Efforts Accounting 1. Upstream companies generally account for their activities under two accounting practices - ‘full cost’ and ‘successful efforts’. 2. Under full cost accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Costs are accumulated in cost centres (known as ‘cost pools’). The costs in each cost pool are generally written off against income arising from production of the reserves attributable to that pool. 3. Successful efforts: exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon- bearing structure is identified and tested. 4. FRS 15 appears to present some conceptual problems for adopting full cost accounting, in particular paragraph 12:‘Capitalisation of directly attributable costs should cease when substantially all the activities that are necessary to get the tangible fixed asset ready for use are complete, even if the asset has not yet been brought into use.’ However the objective of full cost accounting is to write off the costs in each cost pool against production from the reserves attributable to that pool. Ie, production may not yet have started. In the case of full cost accounting the relevant section of FRS 15 is paragraph 7 as the asset is regarded as the entire cost pool: ‘Costs, but only those costs, that are directly attributable to bringing the asset into working condition for its intended use should be included in its measurement’.
  • Full Cost vs Successful Efforts Accounting Expensed Expensed Capitalised Capitalised Capitalise initially then write off, unless commercial reserves established Capitalised Expensed Expensed SUCCESSFUL EFFORTS FULL COST
  • Overview of PSC Accounting: Acquisition cost Operating costs Capital expenditures Non-capital expenditures Exploration expenditures Development expenditures Supporting equipment and facilities Depreciation, depletion and amortization Inventory
  • PSC Accounting Acquisition cost Acquisition cost is not classified as part of the operating costs as based on the constitution, the ownership of the natural resources stays with the state and is not transferred to the contractors. Signature Bonus IS NOT classified as part of the operating costs (cost recovery) but classified as deductible expense for tax purposes.
  • PSC Accounting Operating costs (cost recovery) For any year in which commercial production occurs, operating costs consist of: Current year non-capital costs Current year’s depreciation for capital costs Current year allowed recovery of prior year’s unrecovered operating costs.
  • PSC Accounting Capital cost Expenditures made for items which normally have a useful life beyond the year incurred Non-capital cost Expenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.
  • PSC Accounting Exploration expenditures All non-capital and Intangible Drilling Costs (IDC) exploration expenditures are expensed as operating expenditures as incurred, without considering whether they relate to a successful or unsuccessful exploration. Whilst for Tangible Drilling Costs (TDC) exploration, is capitalised for successful exploration and is classified as non-capital for unsuccessful expenditures.
  • PSC Accounting Development expenditures Upon dry-hole, all expenditures, the IDC and TDC development expenditures, are classified as non-capital and therefore expensed. Upon successful, the IDC development expenditures are still classified as non-capital and therefore expensed, whilst the TDC development are capitalised.
  • PSC Accounting Supporting equipment and facilities The treatment is the same as the development costs
  • PSC Accounting Depreciation, depletion and amortization (DD&A) DD&A will be calculated beginning the year in which the assets is placed into service. The method used to calculated the DD&A is double declining balance method, whereby in the last year, the residual value is recovered in full and therefore does not consider the amount of reserves
  • PSC Accounting Inventory The costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.
  • Other PSC Considerations First Tranche Petroleum Domestic Market Obligation Investment Credit Cost recovery Flow of PSC
  • First Tranche Petroleum 20 Percent of current year production or certain amount refers to contract Split between government and contractor Based on PSC’s sharing percentage FTP is taxable income
  • DMO (Domestic Market Obligation) A contractor has to surrender a part (25%) of its production for domestic market DMO fees received by a contractor: - The first 5 years production, fee is average ICP - After 5 years, fee is USD .20/bbls or 10% of average ICP (pack II), 15% of average ICP (pack III)
  • Investment Credit Investment credit is an additional allowance when a contractor invests in a new field Applicable mainly for oil investment, gas is on pack II (deep sea) and pack III (pre-tertiary) Rate investment credit is: - 20% of direct investment amount (if tax rate is 56%) - 17% of direct investment amount (if tax rate is 48 %) - 127%, 142% (oil); 55%, 110% and 125% (gas) in deep sea and pre tertiary areas.
  • Cost Recovery Current year – non capital costs Inventories will be recoverable at the time when landed in Indonesia Current year’s depreciation for capital cost Declining balance method, yearly, grouping per PSC Current year’s allowed recovery of prior year’s un-recovered operating costs
  • Cost Recovery (continued) Operating cash directly associated with production of natural gas will be directly chargeable against natural gas revenues Other costs: - Overhead allocation, should be consistent and approved by BP Migas (generally max 2% of operating costs) - Interest recovery, has to be approved by BP Migas
  • Compensation and Production Bonus Signature bonus, when getting the PSC Production bonus, after reaching certain production volume Unrecovered cost but tax deductible
  • FLOW OF PSC oil GROSS REVENUE FTP INV.CREDIT COST RECOVERY EQUITY TO BE SPLIT Gov. Indonesia CONTRACTOR DMO DMO FEE TAX NET CONT.SHARE TOTAL TOTAL INDONESIA SHARE CONTR. SHARE pda-fde/mps gas PRODUCTION SHARING CONTRACT DIAGRAM PEMBAGIAN PRODUKSI DALAM JUTAAN US DOLLAR - GAS GROSS REVENUE $5,000 $423 FTP $577 $1,000 INV.CREDIT $200 COST RECOVERY $1,800 EQUITY TO BE SPLIT $2,000 $846 $1,154 PERTAMINA CONTRACTOR $1,269 $1,731 TAX $927 NET CONT.SHARE $804 TOTAL TOTAL INDONESIA SHARE CONTR. SHARE $2,196 $2,804 NOTES: - Corporate Tax 48% - Pertamina / Contractor : 70/30 ------------> Gross-up : 42.3077% / 57.6923% pda-fde/mps lng PRODUCTION SHARING CONTRACT DIAGRAM PEMBAGIAN PRODUKSI DALAM JUTAAN US DOLLAR - LNG LNG SALES $5,000 LNG COSTS $1,000 GROSS REVENUE $4,000 $338 FTP $462 $800 INV.CREDIT $200 COST RECOVERY $1,800 EQUITY TO BE SPLIT $1,200 $508 $692 PERTAMINA CONTRACTOR $846 $1,154 TAX $650 NET CONT.SHARE $504 TOTAL TOTAL INDONESIA SHARE CONTR. SHARE $1,496 $2,504 NOTES: - Corporate Tax 48% - Pertamina / Contractor : 70/30 ------------> Gross-up : 42.3077% / 57.6923% pda-fde/mps
  • PSC Accounting vs GAAP (*) it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. PSC US GAAP IFRS Acquisition cost Expense Capitalize Capitalize as long as meet with IFRS assets recognition criteria* Exploration expenditures: Dry hole Successful: - IDC - TDC Expense Expense Capitalize Expense Capitalize Capitalize Expense Capitalize Capitalize
  • PSC Accounting vs GAAP PSC US GAAP IFRS Appraisal drilling A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists. Unsuccessful exploratory wells drilled to delineate a potential reservoir are expensed A dry appraisal could still be carried forward in the Balance Sheet, provided that the intend to drill more wells or to develop the field still exists.
  • PSC Accounting vs GAAP PSC US GAAP IFRS Development expenditures Dry hole Successful: - IDC - TDC Expense Expense Capitalize Capitalize Capitalize Capitalize Not specified. Capitalized as long as meet with IFRS assets recognition criteria Not specified. Capitalized as long as meet with IFRS assets recognition criteria Supporting equipment and facilities Capitalize Capitalize Capitalize
  • PSC Accounting vs GAAP PSC US GAAP IFRS DD&A of capital costs Double decline Unit of production Not specified, to be allocated over useful life, reflecting consumption of assets’ benefits Non-capital inventory Expensed upon receipt Expensed as consumed Expensed as consumed Obsolete inventory or assets Write off upon approved by BPMIGAS Expensed/impaired upon identified Expensed/impaired upon identified Big table liabilities / severance Cash basis (pay as you go) Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation Accrual basis based on the discounted present value of the expected expenditures required to settle the obligation
  • PSC Accounting vs GAAP PSC US GAAP IFRS Abandonment / decommissioning liabilities Cash basis. New recent PSC contract – accrual basis, but no further guidance issued yet by BPMIGAS. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided in the period in which it is incurred if a reasonable estimate of fair value can be made, or as soon as a reasonable estimate of fair value can be made. Accrual basis - based on the discounted present value of the expected expenditures required to settle the obligation. The provision should be provided as soon as the decommissioning obligation is created, which is normally when the facility is constructed and the damage that needs to be restored is done.
  • PSC Accounting vs GAAP PSC US GAAP IFRS Impairment Written off assets upon agreement from BPMIGAS All impairments are recognised in the income statement. The same as US GAAP, except that an impairment loss (downward revaluation) may be offset against revaluation surpluses to the extent that it relates to the same asset; any uncovered deficit is recorded to the income statement.
  • Recording PSC Accounting & GAAP (Operator) General industry practice use the JV book and Corporate book JV Book represent the recording of the transaction in the level of joint venture transaction (such as cash call request, cash call receipt, joint venture expenditures). Corporate Book represents the recording of transaction in the level of corporate as a separate entity. Consist of: joint venture transaction (multiplied by its shares) transaction which only incurred in corporate level (corporate adjustment) such as revenue, DD&A, deferred tax and other GAAP adjustment.
  • Recording Joint Interest Transactions (Nonoperator) General industry practice use the proportionate consolidation method of accounting. Under proportionate consolidation, each owner picks up its proportionate share of each assets, liability, revenue and expense item in accordance with its own account classification. The principal source document is the monthly Joint Interest Billing (JIB) from the operator. The JIB do not coincide with GAAP or income tax accounting. The recording of Joint Interest Transactions of NonOperator will be detailed in Cash Call section
  • Question & Answer Session 1. Upstream companies generally account for their activities under two accounting practices - ‘full cost’ and ‘successful efforts’. 2. Under full cost accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Costs are accumulated in cost centres (known as ‘cost pools’). The costs in each cost pool are generally written off against income arising from production of the reserves attributable to that pool. 3. Successful efforts: exploration expenditure which is either general in nature or relates to unsuccessful drilling operations is written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves are capitalised and are depreciated over the lives of these reserves. The success or failure of each exploration effort is judged on a well-by-well basis as each potentially hydrocarbon- bearing structure is identified and tested. 4. FRS 15 appears to present some conceptual problems for adopting full cost accounting, in particular paragraph 12:‘Capitalisation of directly attributable costs should cease when substantially all the activities that are necessary to get the tangible fixed asset ready for use are complete, even if the asset has not yet been brought into use.’ However the objective of full cost accounting is to write off the costs in each cost pool against production from the reserves attributable to that pool. Ie, production may not yet have started. In the case of full cost accounting the relevant section of FRS 15 is paragraph 7 as the asset is regarded as the entire cost pool: ‘Costs, but only those costs, that are directly attributable to bringing the asset into working condition for its intended use should be included in its measurement’.
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