Overview ofOil and Gas Accounting

& PSC AccountingBudi Hartono

2

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

3

Accounting Principles in Upstream Oil & Gas

Full Cost Method

Successful Effort Method

4

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.

5

6

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.

7

8

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 CostCosts incurred upon signing of agreement such as signature bonus.

9

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

10

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.

11

Exploration ExpendituresExploration involves:

(a) identifying areas that may warrant examination and

(b) 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

12

Appraisal drillingDrilling 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.

13

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.

14

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.

15

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.

16

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).

17

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

18

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.

19

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

Production costs

Development costs

Specific pre-licence, licence acquisition, exploration and appraisal costs

General costs prior to acquisition of licence

SUCCESSFUL EFFORTS

FULL COSTCosts

21

Full Cost vs Successful Efforts Accounting

ExpensedExpensed

CapitalisedCapitalised

Capitalise initially then write off, unless commercial reserves established

Capitalised

ExpensedExpensed

SUCCESSFUL EFFORTS

FULL COST

Production costs

Development costs

Specific pre-licence, licence acquisition, exploration and appraisal costs

General costs prior to acquisition of licence

Costs

22

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

23

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.

24

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.

25

PSC Accounting

Capital costExpenditures made for items which normally have a useful life beyond the year incurred

Non-capital costExpenditures relating only to current operation, including costs of surveys and the intangible drilling costs of exploratory and development wells.

26

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.

27

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.

28

PSC Accounting

Supporting equipment and facilities

The treatment is the same as the development costs

29

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

30

PSC Accounting

InventoryThe costs of non-capital items purchased for inventory will be recoverable at such time the items have landed in Indonesia.

31

Other PSC Considerations

First Tranche Petroleum

Domestic Market Obligation

Investment Credit

Cost recovery

Flow of PSC

32

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

33

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)

34

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.

35

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

36

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

37

Compensation and Production Bonus

Signature bonus, when getting the PSC

Production bonus, after reaching certain production volume

Unrecovered cost but tax deductible

38

FLOW OF PSCGROSS REVENUE

FTP

INV.CREDIT

COST RECOVERY

EQUITY TO BE SPLIT

Gov. Indonesia CONTRACTOR

DMO

DMO FEE

TAX

NET CONT.SHARE

TOTAL TOTALINDONESIA SHARE CONTR. SHARE

39

PSC Accounting vs GAAP

PSC US GAAP IFRSAcquisition 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

(*)• 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.

40

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.

41

PSC Accounting vs GAAP

PSC US GAAP IFRSDevelopment 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

42

PSC Accounting vs GAAP

PSC US GAAP IFRSDD&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

43

PSC Accounting vs GAAP

PSC US GAAP IFRSAbandonment / 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.

44

PSC Accounting vs GAAPPSC 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.

45

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.

46

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

47

Question & Answer Session