Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 29. OIL, GAS, AND OTHER NATURAL RESOURCES

Richard P. Graff, CPA

The Graff Consulting Group

Joseph B. Feiten, CPA

INTRODUCTION

Accounting for oil and gas activities can be extremely complex because it encompasses a wide variety of business strategies and vehicles. The industry's diversity developed in response to the risk involved in the exploration process, the volatility of prices, and the fluctuations in supply and demand for oil and gas. In addition to having a working knowledge of accounting procedures, the oil and gas accountant should be familiar with the operating characteristics of companies involved in oil and gas activities and understand the impact of individual transactions.

Oil and gas activities cover a wide spectrum—ranging from exploration and production activities to the refining, transportation, and marketing of products to consumers. Special accounting rules exist for exploration and production activities. Accounting for refining activities is similar in many ways to other process manufacturing businesses. Likewise, transportation and marketing do not differ significantly from one end product to another. This chapter focuses on the special accounting rules for petroleum exploration and production.

The same may be said for the mining and processing of minerals except that the accounting rules for mineral exploration and production are not so formalized as for petroleum.

OIL AND GAS EXPLORATION AND PRODUCING OPERATIONS

Oil- and gas-producing activities begin with ...