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Development Cost associated with Oil & Gas Upstream could be related to Proved or Unproved properties i.e. developing a property i.e. Oil and/Gas

Well or Platform etc.

These costs as well be categorized as:

  • Developed and/or
  • Undeveloped Leasehold.

Now the question pops up what is Developed Leasehold

Many a times it is a common scenario that certain property acquisitions may cover a very large area, particularly international properties. In such cases, the property

cost may be allocated to a portion of the concession area and these are considered as productive and termed as Developed Leasehold.

What about Undeveloped Leasehold ?

The other cost applicable to the Unproved area is termed as Undeveloped Leasehold. Unproved properties are those which has no associated Proved

reserves and are classified as Undeveloped Leasehold.

How the allocations are made between these two ?

In these cases generally the allocations are made on the basis of ratio of Proved and risked probable reserves or on the basis of acquisition case factors.

Let's see which kind of Development Costs are incurred:

Development costs can be of various types.

  • Costs incurred to drill & equip different kind of wells like development or service wells, cost associated with platforms, different kind of well equipment

        costs like casing, tubing, pumping equipment etc.

  • Preparations of well locations for drilling including surveying well locations for the purpose of determining specific development drilling sites, clearing

        ground, draining, road building, and relocating public roads, gas lines, and power lines, to the extent necessary in developing the proved reserves are

        as well considered as development cost.

  • Costs necessary to install production facilities like lease flow lines, separators, heaters, measuring devices, natural gas cycling etc. are also considered

        as development cost.

Treatment of Development Costs in Accounting:

We would be able to appreciate when we know how to treat development cost related expenses that are incurred during the course of developing a property.

  • Generally all development costs, including unsuccessful development wells, are capitalized and i.e. booked through WBS and then settle to AUC and finally settle to an Asset.

How to decide which Costs to be Capitalized:

  • Always there will be internal policies, guidelines or rules that needs to be followed in order to decide which costs and what portion need to be capitalized.

  • These treatment as well be in line with the prescribed International Accounting Standards as well as other established International Standards.

  • Stringent approval processes as well are followed in order to establish a treatment of a particular costs with necessary justification.
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