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Start-Up Accounting – Oil and Gas Companies

Let’s face it. To “start-up” or “early-stage” oil and gas companies, accounting takes a back seat, usually way in the back. This is understandable – to a point. An oil and gas company isn’t really an oil and gas company until it has properties or is in acquisition mode on leases for exploration, exploitation or development. Decisions on acquisition, deal terms, insurance matters, the JOA and its terms, etc. are front and center as assets are acquired. The accounting treatment for such items needs to be considered early in the process.

One of the most important accounting decisions is that of choosing the “successful efforts” or “full cost” accounting method. This will determine how costs are charged to the income statement for the life of the company. Many start-up companies choose “successful efforts” as it tends to be more reflective of the actual outcomes of the company’s investment decisions. Investors tend to prefer this method. What companies should not allow to happen is to wait until production occurs to decide – what about our accounting? Too many things will have already occurred and how to account for all activity since the company began accumulating acreage and planning for seismic or drilling just stack up – and untangling the agreements and costs can be tedious and, honestly, not much fun when the activity may now be picking up and managements’ time should be focused on the next phase of development, etc.

While every company is different, we recommend getting the accounting started very early in the life of the company. Getting expert advice can save you time and money. When things are simple, the costs should be very reasonable. When activity picks up, the accounting is in place and decisions can be made smoothly and without anxiety and frustration. Let’s don’t forget – accounting is first, a tool for management and second, a scorecard for investors. Proper and timely accounting is necessary – and will assist management in making better decisions which will add value to the enterprise! This tool is only useful if it is operating properly. Good management teams, and experienced investors, know this.

Ralph