Yet the endemic lack of talent shared with many industries requiring engineering, procurement and construction skills, is creating additional pressures in the management of complex capital project execution. Our team of oil and gas accounting professionals has decades of experience in the oil and gas industry. We have worked with oil and gas operators of all sizes, from small family offices to large private equity backed operators.
Production Sharing Contracts
While tracking your company’s finances and maintaining basic bookkeeping is essential, it has limited use as a tool to give companies a competitive advantage. Instead, business leaders need data that can help support critical business decisions and oil and gas bookkeeping fuel growth. Adherence to financial reporting standards is paramount in the oil and gas industry, given the sector’s complexity and the significant financial stakes involved. Companies must comply with both national and international accounting standards, such as the Generally Accepted Accounting Principles (GAAP) in the United States and the International Financial Reporting Standards (IFRS) globally. These standards provide a framework for consistent and transparent financial reporting, which is crucial for investor confidence and regulatory compliance.
Cash Flow Statement
Stakeholders rely on financial statements to assess the financial health of oil and gas companies. Proper accounting practices build trust among investors, regulators, and the public, fostering confidence in the industry. At the center of a complex and changing regulatory environment, the oil and gas industry faces challenges on a daily basis. Many oil and gas companies struggle with a backlog in non-operating joint interest billing and revenue data entry, leading to shortcuts, workarounds or delays in the monthly closing process. Outsourced accounting can create business process automation, resulting in oil and gas companies achieving significant savings and reduced cycle times.
Accounting for Depletion, Depreciation, and Amortization (DD&A)
Inderpal is a Chartered Accountant with more than 15 years’ experience in the resources sector. He is Managing Director of Singh Oil & Gas Consultants which is a specialist consultancy providing audit services to the oil and gas industry. There’s surprisingly little to say about merger models and LBO models in the oil & gas industry. This doesn’t really affect the income statement, but you do need to add back deferred taxes on the cash flow statement. When you project a natural resource company’s statements, you begin by projecting its production by segment based on its reserves and its historical patterns.
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. You must possess a deep breadth of knowledge about contemporary financial techniques and how they apply to the energy industry. No matter what part of the oil and gas industry you play in, you face complex regulatory challenges on a daily basis.
Taxation in Oil and Gas Sector
Under a PSC, the state grants an oil company the right to explore and produce hydrocarbons in a specific area, with the understanding that the company will recover its costs and share the remaining production with the state. Accounting in the oil and gas industry is a specialized field that requires a deep understanding of both financial principles and sector-specific practices. The complexity arises from the unique nature of exploration, extraction, and production activities, which involve significant capital investment and long-term project timelines.
- You want to track the beginning and ending reserves each year, the annual production volume, and the average price for each commodity; typically you use the same low/mid/high price cases that you used in the company’s operating model.
- At the center of a complex and changing regulatory environment, the oil and gas industry faces challenges on a daily basis.
- When there are conflicts between different accounting principles or methods, a hierarchy exists to guide the selection of the most appropriate principle.
- On the other hand, the proportionate consolidation method involves recognizing the investor’s share of the joint venture’s assets, liabilities, revenues, and expenses directly in its financial statements.
- This can vary depending on whether the sale is made at the wellhead, at a processing facility, or at the point of delivery.
- Financial statements should include all necessary information to ensure that users can make informed decisions.
Another critical aspect of joint venture accounting is the allocation of costs and revenues among the partners. This allocation is usually governed by petty cash the joint operating agreement (JOA), which outlines each partner’s share of costs and production. The JOA specifies how costs are to be divided, whether based on ownership percentages, capital contributions, or other agreed-upon metrics. Accurate cost allocation is essential for ensuring that each partner’s financial statements reflect their true economic interest in the joint venture. The process of calculating DD&A involves several steps, starting with the estimation of the total recoverable reserves for depletion purposes. This estimation is crucial as it directly impacts the rate at which costs are allocated over the productive life of the asset.
- For instance, a contract might stipulate that revenue is recognized when the oil is delivered to a storage facility, rather than when it is extracted from the ground.
- For instance, the introduction of IFRS 16, which deals with lease accounting, has had a significant impact on how oil and gas companies report their lease obligations.
- This involves estimating the future costs of dismantling and restoration, which are then discounted to their present value.
- Reserves are estimated quantities of oil and gas that can be economically recovered from known reservoirs under existing economic conditions and operating methods.
- These reports enable the non-operating partners to account for their share of the joint venture’s activities in their financial statements.
Our professionals
You measure the company’s reserves (how much they have on their balance sheet, ready to extract, produce, and sell) and production (how much they produce and sell each day, month, quarter, year, etc.) in these units. The good news is that while bank and insurance modeling is almost a different game entirely, oil & gas modeling is more like a variation on a game you’re already familiar with. However, many people don’t know where to begin or if an outsourced accounting team is even necessary for their business. Information is considered material if its omission or misstatement could influence the economic decisions of users. Assets are generally recorded at their original cost, which is the amount paid to acquire them.