Jones Oil Company operates under a PSC agreement in the South China Sea. Jones has 49% of the working interest, and Sinhai Oil Company (which is owned by the Chinese government) has 51% of the working interest. The agreement calls for annual gross production to be split in the following order:

a. VAT equal to 7% of annual gross production

b. Royalty of 13% of annual gross production

c. Cost oil is limited to 62% of annual gross production, with costs to be recovered in the following order:

1) Operating expenses 2) Exploration expenditures (Jones Oil Company, 100%)

3) Development costs (Jones Oil Company, 49%, and Sinhai Oil Company, 51%)

d. Annual gross production remaining after cost recovery becomes profit oil and is split:

1) The government receives 15% of profit oil.

2) The remaining 85% is shared by Jones and Sinhai based on their working interests.

During 2012:

Recoverable operating costs equal $4,000,000.

Unrecovered exploration costs equal $10,000,000.

Unrecovered development costs equal $100,000,000.

The annual gross production for the year is 2,000,000 barrels of oil.

REQUIRED:

a. Assuming the price to be used to convert costs into barrels is $100/bbl, allocate the production to the parties.

b. Assuming the price to be used to convert costs into barrels is $60/bbl, allocate the production to the parties.