Jones oil Company operates under a production sharing contract 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- Tax 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.

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

 

 

Case:

Fortune Company enters into a risk service agreement with the Chilean government. Fortune pays the government, in U.S. dollars, a $5,000,000 signing bonus and also agrees to pay all of the costs associated with exploration, development, and production. (The contract defines costs incurred in the exploration and development phase of each project area as being capital costs (CAPEX), and all costs incurred in the production phase as being operating costs (OPEX).

Each year, in which production occurs, the government agrees to pay Fortune a fee comprised of the following:

a- All OPEX incurred in the current year.

b- 1/10th of all unrecovered CAPEX.

c- $0.40/bbl on production from 0 to 4,000 bbl/day, $0.60/bbl on production from 4,001 to 10,000 bbl/day, and $0.90/bbl on production above 10,000 bbl/day.

The maximum total fee that will be paid in any year is $1.20/bbl times the total number of barrels produced. Any unrecovered OPEX or CAPEX can be carried forward to future years.

Assume that in 2012, production commences on the LIama field. At that time, Fortune had spent $10,000,000 on CAPEX, and during 2012, spends $3,000,000 in OPEX. Production equals 5,000,000 barrels or 5,000,000/365= 13,699 bbl/day.

Compute the fee that Fortune Company would receive for 2012.

 

 

Case:

Prospect Petroleum had the following transactions in 2017 concerning test-well contributions:

a- Contracted with Alan Energy Corporation, agreeing to pay $50,000 if a well was drilled on Alan’s lease to a depth of 10,000 feet.

b- Contracted to pay Varsity Oil Company $40,000 if a well being drilled on a Varsity’s property was dry.

c- Agreed to pay Richards Oil Company $100,000 if a well being drilled reached a depth of 7,500 feet.

Results from the above transactions were the following:

a- Because of mechanical difficulty, the Alan well was abandoned at 9,500 feet.

b- The Varsity well was dry.

c- The Richards well was completed as a producer at 12,000 feet.

Prepare entries for the above transactions assuming Prospect Petroleum fulfilled its contractual obligations.

Case:

Gamma Oil Company obtained the rights to shoot 25,000 acres at a cost of $0.20/acre on May 3, 2017. Gamma contracted and paid $80,000 for a reconnaissance survey during 2017. As a result of this broad exploration study, Lease A and Lease B were leased on January 9, 2018. The two properties totaled 1,500 acres, and each had a delay rental clause requiring a payment of $2 per acre if drilling was not commenced by the end of each full year during the primary term. Detailed surveys costing a total of $30,000 were done during January and February on the leases.

During July, Gamma entered into two test-well contribution agreements: a bottom –hole contribution agreement for $15,000, with a specified depth of 10,000 feet, and a dry-hole contribution of $20,000, also with a specified depth of 10,000 feet. In November both wells were drilled to 10,000 feet. The well with the bottom-hole contribution was successful, but the well with the dry- hole contribution was dry.

The cost for maintaining land and lease records allocated to these two properties for 2018 was $2,000. Property taxes were assessed on Gamma’s economic interest in both properties, amounting to $2,500 for 2018. After preparing their financial statements for 2018, Gamma decided to delay drilling on these properties until sometime in 2010.

On April 15, 2020, enough money was left after paying taxes for a well to be drilled on a lease B. Before drilling the well, costs of $7,000 were incurred to successfully defend a title suit concerning Lease B. Give all entries necessary to record these transactions. Assume any necessary delay rental payments were made.

Case:

Basic Oil Company conducted G&G activities on leases owned by Artificial Oil Company and Universal Oil Company. Each agreement provides for Basic Oil Company to receive one-fourth of each working interest if proved reserves are found and to be reimbursed if proved reserves are not found. Basic Oil Company incurred the following G&G costs on Artificial and universal’s leases:

Artificial $50,000

Universal $40,000

The well drilled on the Artificial Oil lease was successful, and one-fourth of the working interest was assigned. Drilling on the Universal lease resulted in a dry hole, and Basic was reimbursed for the G&G costs incurred.

Prepare entries for the above transactions.