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Petroleum Industry Overview Series - Accounting Principles; Information Systems; Industry Operating Procedures; & Government Regulatory Requirements

LMSB-4-1208-056
Date: December 2008

"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

V. Accounting Principles

The link between financial accounting and tax accounting is the Schedule M-3 of the Corporate Income Tax Return, Form 1120. Examples of expenses that should be reviewed due to differences between financial and tax accounting includes:

  • Abandonments
  • Delay Rentals
  • Depletion (cost vs. percentage, tax basis vs. book basis)
  • Depreciation variances
  • Financial Product Transactions (Hedging, Interest Swaps, Gains/Losses, etc.)
  • Geological and Geophysical Expense
  • Indirect and Direct Costs Capitalized (Sec. 263A)
  • Intangible Drilling Cost
  • Interest Expense Capitalized (Sec. 263A)
  • Inventory Adjustments
  • Writedowns of Asset Values. FAS 121

The petroleum industry is generally divided into two broad segments: 1) Exploration and Production (the “upstream” segment) and 2) Transportation, Refining, and Marketing (the “downstream” segment).  Some companies have both segments, and are known as “integrated companies”.

The Exploration and Production segment of the petroleum industry follows two methods for financial reporting: 1) the Successful Efforts Method, and 2) the Full Cost Method.  The Successful Efforts method expenses all costs of exploring for and developing oil and gas properties except for those that are commercially successful.  Successful oil and gas development is capitalized and amortized on a units of production basis (similar to cost depletion).  The Full Cost Method capitalizes all of the costs of property acquisition, exploration, and development costs, even dry holes.  These costs are then amortized on a units of production basis on a country-by-country basis (again, very similar to cost depletion).

Accounting for the downstream segment of the industry (transportation, refining and retailing) various among companies but is comparable to similar businesses outside of the oil industry.


VI. Information Systems

The industry has made strides in developing systems which capture, sort, summarize, and store well-level information and fully integrating such information with the revenue, joint interest billing, accounts receivable, accounts payable, land lease records, and general ledger systems.  Some of the companies which provide such software include (but are not limited to): Allegro Development, Andersen Consulting, Artesia, Inc., Avatar Systems, Oracle Energy, Paradigm Technologies, Petroware Systems Inc, PriceWaterHouseCoopers, Questa Software Systems, and SAP.  SAP, in particular, has been embraced by several of the major oil companies.


VII. Industry Operating Procedures

The following operations are used in bringing the oil and gas to market:

  • Production Phase: Operations that deal with bringing the oil and gas to the surface and preparing them for transportation to the refinery or processing plant.

  • Transportation: Operations that deal with moving the oil and gas from the field to the refinery or processing plant. Transportation vehicles include inland barges, railway tank cars, transport trucks, oceangoing tankers, crude oil and products pipelines, and gas transmission pipelines.

  • Refining/Processing: Converting crude oil and gas in their raw state to marketable products.   Oil refineries typically produce motor fuels, heating oil, lubricating oils, waxes, asphalt, and coke.  Gas processing plants typically produce natural gas for end-user consumption and natural gas products such as propane, butane and LPG.  Petrochemical plants typically produce base plastics.

  • Distribution System: Operations include storage and handling, transportation, and delivery to the end user. End users for motor fuels can be terminals, company owned service stations and other branded outlets, and independent middlemen (jobbers).   Natural gas is usually distributed to end users by local distribution companies.  

VIII. Government Regulatory Requirements

Petroleum companies have the same general regulatory filing requirements as most other corporations.

A. Federal Requirements

Publicly held petroleum companies are required to file with the Securities and Exchange Commissions. The reports include 8-K, 10-K, and other reports required by the SEC.

B. State Requirements

States require petroleum companies, which are operating in their state to file reports with the appropriate agency. The agency varies from state to state. For example in Texas, the Texas State Railroad Commission regulates petroleum companies.

C. Local Requirements

Many localities require reporting by petroleum companies, especially in the area of environmental matters.

Chapter IV | Table of Contents | Chapter IX

Page Last Reviewed or Updated: 03-Mar-2014