Where do you start talking about credit and debit when it comes to oil exploration and mining?
Recognition of revenue in the oil and gas exploration industry may appear simple for outsiders, but nothing can be further from the truth.
The sale of commodities and performance of particular services in exchange for consideration is responsible for a majority of revenue generated in gas and oil industries. Accounting for revenue, given the nature and extent of such arrangements, leads to the rise of complexities.
Payments that include non-cash considerations, variable considerations, and contractual agreements between processors and producers make revenue accounting in this industry an opaque and complicated process.
The oil and gas value chain
The primary activity of oil and gas organizations is exploring commercially feasible hydrocarbon reserves, extracting them, and refining them to different products for sale. The extent of these activities is broad and requires a well-established oil and gas revenue and profits accounting practice.
Substantial capital investments and long lead times are some of the characteristics associated with successful hydrocarbon exploration and exploitation. The environmental conditions in which exploration and exploitation happen are often challenging, and the outcomes are not always guaranteed.
Due to the environmental challenge and uncertainty in outcomes, joint ventures are common to spread losses and pool substantial developmental costs. All of these efforts and characteristics of developing oil fields contribute to making revenue accounting a complicated endeavor.
Once hydrocarbons get recovered from a well, they get refined and transported to vast distances through the use of pipelines and tankers. Gas products get liquefied at the source and get re-gasified at the destination.
Due to the demands and capital-intensive procedures used, organizations in the energy sector seek long term contracts to develop major fields. Contracts and elaborate capital generation ventures are necessary for ensuring the profitability of hydrocarbon value chains.
Hydrocarbon accounting 101
The primary task in oil and gas revenue accounting is determining revenue production at a well and paying this revenue to their owners. In a majority of industries, products get made, and their prices set for sale. Products get sold, and their income gets collected.
Transactions get booked together with a simple accounting to account for the trade. In the oil industry, bookkeeping is much different as the price of the product changes rapidly, and the inventory is mostly unknown.
The main asset for a gas or oil organization is the mineral reserve in a developed or undeveloped field that it holds. Accounting for the size of a reserve requires that geologists or petroleum engineers estimate them.
Estimating reserves is quite an imprecise process, and this makes it impossible to set plausible accounting baselines for revenue generation. Inaccurate estimations can, in turn, make the timing of revenue recognition, as required under-reporting laws, impossible.
Organizations working in the oil and gas industries need well-structured and diligent accounting practices to ensure their legal compliance in recognizing and accurately reporting realized revenues in hydrocarbon exploration and production.
Conclusion: Understand what makes your organization special
In light of the several challenges facing accounting for oil and gas resources, the solution would be to understand what makes every organization unique. Revenue accounting is distinct from one organization to the other because of contractual obligations and the number of joint ventures.
If accounting is to be precise and accurate, accounting organizations must develop a grasp of their clients and the legal obligations that bind them.