1. Guidance Note on Accounting for
Oil and Gas Producing Activities
Presented by:
Kumar Gaurav
Email: KumarGaurav1@icai.org

2. Contents
• Introduction
• Basics
• Objective and Scope
• Important Definitions
• Activities
• Accounting Methods

3. Introduction
Oil and gas producing industry (Upstream Petroleum
Industry) is a highly capital intensive industry as a huge
amount of expenditure is required to be incurred on
acquisition, exploration and development activities before
the commencement of actual production.
At the time of incurrence of expenditure,
particularly on exploration activities, the
result of the same is not known and a
large portion of the expenditure does
not normally result in discovery of any
oil and gas.

4. Objective
This Guidance Note is to provide guidance on
accounting for costs incurred on activities
relating to acquisition of mineral interests in
properties, exploration, development and
production of oil and gas.

5. Scope
This Guidance Note also deals with other
accounting aspects such as accounting for
abandonment costs and impairment of assets
that are peculiar to the enterprises carrying on
oil and gas producing activities.
• Present framework and guidance: an overview
• Indian GAAP : an overview

6. Present framework and guidance
• INDIAN GAAP
Guidance Note on Accounting for Oil and Gas
Producing Activities. This guidance note is under
review due to convergence with IFRS.
• Exclusions from respective Accounting Standards (AS)
- AS-2 (Valuation of Inventories) Para 1(d)
- AS-6 (Depreciation Accounting) Para 1 (ii)
- AS-10 (Accounting for Fixed Assets) Para 3(ii)
- AS-26 (Intangible Assets) Para 1(c)

7. Indian GAAP : an overview
• Indian GAAP (IGAAP)
Acquisition cost
Exploration cost
Development cost
Production cost
Abandonment cost

8. Basics

9. Identifying Opportunities
Geological and geophysical department
Geological and geophysical (G&G) surveys are
used to locate and identify properties with the
potential to produce commercial quantities of
natural gas and oil, as well as to determine the
optimal location for exploratory and
developmental wells.

10. Seismic Surveys
• An exploration method in which strong low-frequency sound
waves are generated on the surface or in the water to find
subsurface rock structures that may contain hydrocarbons.
• The sound waves travel through the layers of the earth’s crust;
however, at formation boundaries some of the waves are
reflected back to the surface where sensitive detectors pick
them up.
• Reflections from shallow formations arrive at the surface
sooner than reflections from deep formations, and since the
reflections are recorded, a record of the depth and
configuration of the various formations can be generated.
• Interpretation of the record can reveal possible hydrocarbon-
bearing formations.

13. Definitions
• Cost Centre: Cost centre is a unit identified to capture
costs based on suitable criteria such as geographical or
geological factors. Cost centre is not larger than a field in case
of Successful Efforts Method and under Full Cost Method, the
cost centre is not normally smaller than a country except
where warranted by major difference in economic, fiscal or
other factors in the country.
• Exploratory Well: A well drilled for the purpose of
searching for undiscovered oil and gas accumulations on any
geological prospect.

14. • Development Well: A well drilled, deepened,
completed or recompleted within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to
be productive.
• Oil and Gas Reserves: Oil and gas reserves are those
quantities of oil and gas, which are anticipated to be
commercially recoverable from known accumulations from a
given date forward.
Proved Oil and Gas Reserves : reasonable certainty to be
commercially recoverable in future from known oil and gas
reservoirs under existing economic and operating conditions.
This can be further bifurcated into

15. • Proved Developed Oil and Gas Reserves: Proved
developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with
existing equipment and operating methods. Additional
oil and gas expected to be obtained through the
application of advanced recovery techniques.
• Proved Undeveloped Oil and Gas Reserves: Proved
undeveloped oil and gas reserves are reserves that are
expected to be recovered from new wells on undrilled
acreage, or from existing well for which a relatively
major expenditure is required for recompletion.
• Service Well: A service well is a well drilled or
completed for the purpose of supporting production in
an existing field. i.e. gas injection, water injection etc

16. Financial aspects of Activities
Acquisition
Exploration
Development
Production
Abandonment

17. Acquisition
• Acquisition process:
Obtaining of right over the area.
Obtain license for mining and exploration from the
Government.
• Acquisition Cost:
Acquisition costs cover all costs incurred to purchase,
lease or otherwise acquire a property or mineral right.
These include lease bonus, brokers' fees,
legal costs, cost of temporary occupation of the land
including crop compensation paid to farmers and all
other costs incurred in acquiring these rights

18. Exploration
Exploration costs cover all direct and allocated indirect
expenditure which include depreciation and applicable
operating costs of related support equipment and facilities
and other costs of exploration activities that are:
(i) costs of surveys rights of access to properties to conduct
those studies (e.g., costs incurred for environment clearance,
defense clearance, etc.), and salaries and other expenses of
geologists, geophysical crews and other personnel conducting
those studies. Collectively, these are referred to as geological
and geophysical or 'G&G' costs;

19. Exploration Continued
(ii) costs of carrying and retaining undeveloped properties, such
as delay rental, ad valorem taxes on properties, legal costs for
title defense, maintenance of land and lease records and annual
license. Fees in respect of Petroleum Exploration License
(iii) costs of drilling and equipping exploratory and
appraisal wells; and
(iv) costs of drilling exploratory-type stratigraphic
test wells.
All acquisition cost and exploration cost involved in drilling and
equipping exploratory and appraisal wells are initially capitalized
as pre-producing properties reflected under head CWIP till they
are either transferred to fixed assets as producing properties or
expensed in the year when determined to be dry or of no future
use.

20. Development
• Development activities for extraction of oil and gas include,
activities involved in developing oil and gas accumulations,
completion of successful exploration wells, the drilling,
completion, re-completion and testing of development wells,
the drilling, completion and re-completion of service wells,
the laying of gathering lines, the construction of offshore
platforms and installations, the installation of separators,
tankages, pumps, artificial lift and other producing and
injection facilities required to produce, process and transport
oil or gas into main oil storage or gas processing facilities,
either onshore or offshore, including laying of infield
pipelines, the installation of the said storage or gas processing
facilities.

21. • Development Cost: Costs incurred in
preparing proved reserves for production i.e.
costs incurred to obtain access to proved
reserves and to provide facilities for
extracting, treating, gathering and storing oil
& gas.

22. Production
Production Activities:- Production activities consist
of pre-wellhead (e.g., lifting the oil and
gas to the surface, operation and maintenance of
wells, extraction rights, etc.,) and post-wellhead
(e.g., gathering, treating, field transportation, field
processing, etc., up to the outlet valve on the lease
or field production storage tank, etc.,) activities for
producing oil and/or gas.

23. • Production Cost: Cost incurred in lifting the oil
and gas to the surface and gathering, treating
and storing the oil and gas.

24. Abandonment Cost
• The liability towards costs relating to dismantling,
abandoning and restoring well sites (net of salvage value),
other than those relating to Joint Ventures, are capitalized
as additional cost when the well is complete and is
reasonably estimated.
• The abandonment cost on exploratory dry well is expensed
during the year. Liability for abandonment cost is updated
annually based on the technical assessment available at
current costs.
• The actual cost incurred on abandonment is adjusted
against the liability and the ultimate gain or loss is
recognized in the profit/loss, when the designated oil/gas
field or a group of oil/gas fields ceases to produce.

25. Methods of Accounting
• Successful Efforts Method
• Full Cost Method

26. Successful Efforts Method
• Expenditures for successful projects are deferred while those
for unsuccessful ones are immediately expensed. Capitalized
costs applicable to producing properties are amortized based
on the reserves produced.
• An asset is recognized in the balance sheet when it is
probable that the future economic benefits associated with it
will flow to the enterprise and the asset has a cost or value
that can be measured reliably.
• The only implication is that the degree of certainty that
economic benefits will flow to the enterprise beyond the
current accounting period is insufficient to warrant the
recognition of an asset.”

28. Full Cost Method
• All exploration costs are capitalized whether
the projects are successful or unsuccessful.
The capitalized cost is then amortized into
expense as the total reserves are produced.

30. Thank You