Production from the Blue Ocean Sea Field X, the field asset for which you are the Asset Accountant, has started in the current year 2018. You have been asked to recommend the basis on which the charge for Depreciation, Depletion and Amortization (DD & A) for your field asset should be calculated. You have been asked to consider three different methods for calculating the DD&A and to calculate the results of the various methods for the accounting period just ended. To assist you in your calculations, you have gathered the following data: Details of Pre-development cost are as follows Number Type of Expenses Cost ($) 1 Prospecting 6,500,000 2 Acquisition 72,000,000 3 Geological and Geophysical 21,200,000 4 Exploratory Dry hole 32,000,000 5 Exploratory Successful hole 36,500,000 6 Non-drilling Exploratory 10,500,000 7 Appraisal 12,800,000 Total 191,500,000 The following additional information relating to pre-development were made available 1. The company applies the successful efforts principles in deciding whether to capitalize or expense pre-development costs. 2. The total acquisition cost incurred is $216 million which covers three explorations and producing fields including the Blue Ocean Sea Field X. The cost is shared equally among the three fields. 3. The company considers 45% of the non-drilling exploratory cost as meeting its policy regarding capitalization 4. The expected decommissioning costs in present value terms is estimated to be $450 million 5. The company owns a building that houses the corporate headquarters. The operations conducted in the building are general in nature and are not directly attributable to any specific exploration, development, or production activity. Since the building is not related to exploration, development, or production, the building is depreciated using straight line method. The depreciation is charged to general and administrative overhead and not to the field. The cost of the building was $15.8 million. The building has an estimated life of 40 years and could be resold for $4.6 million after end of the useful life. 2 6. The company has five trucks serving this field in a production capacity. The cost of these truck is $1.2 million and salvage value is estimated to be $0. 7. The company has 250 miles pipeline which serves the Blue Ocean Sea Field X and other two fields. The unit costs of constructing this pipeline are below: Components Unit Cost ($'000) / Mile Material 1,525 Labour 322 Miscellaneous 104 Right of way / damages 220 2,171 The expected reserves and production for the other two fields apart from Blue Ocean are below: Tatale Field Mahogany Field 2018 Estimates Description Oil (Barrels) Gas (MCF) Oil (Barrels) Gas (MCF) Total proved reserves 240,000,000 360,000,000 360,000,000 540,000,000 Proved developed reserves 180,000,000 300,000,000 270,000,000 450,000,000 Production 15,000,000 24,000,000 22,500,000 36,000,000 2019 Estimates Description Oil (Barrels) Gas (MCF) Oil (Barrels) Gas (MCF) Total proved reserves 288,000,000 432,000,000 432,000,000 648,000,000 Proved developed reserves 216,000,000 360,000,000 324,000,000 540,000,000 Production 18,000,000 28,800,000 27,000,000 43,200,000 Data relating to Development costs for the Blue Ocean Sea Field X are below: Number Type of Expenses Cost ($) 1 Facilities, topsides and pipelines 1,788,050,000 2 10 Development Well Successful - Platform A 283,800,000 3 6 Development Dry Hole - Platform A 170,280,000 4 12 Development Well Successful - Platform B 297,000,000 5 3 Development Dry Hole - Platform B 74,250,000 Total 2,613,380,000 Further information on Development Costs 1. An additional future facilities, topsides and pipelines cost of $385,000,000 is expected to be incurred to enable the Company to develop its huge undeveloped proved reserves. 2. There are 6 development wells yet to be drilled on platform A and a further 8 wells on platform B. 3. There is no cost differential for successful and dry hole development wells drilled on both platform A and B. However, it is estimated that future drilling costs for development wells on Platform A and B will increase by 2.5% and 3.5% respectively. 4. All other construction work had been completed. 3 Data on reserves and production for the first year (2018) are below: Description Oil (Barrels) Gas (MCF) Total proved reserves 455,400,000 594,000,000 Proved developed reserves 302,500,000 194,400,000 Production 53,900,000 43,200,000 Required: 1) Use the following three DD&A methods to calculate the DD&A charge for the accounting period. The methods to be used are: a. Proved developed reserves only - method 1 [7 Marks] b. Total proved reserves including an estimate for future developments costs - method 2 [7 Marks] c. Depreciating development wells on proved developed only with other capitalized costs being depreciated over total proved reserves - method 3 [8 Marks] 2) Compare the rate per barrel and the DD&A charge for the period the three methods you have used. [3 Marks] 3) Assuming in the second year (2019), the following additional information were provided: Description Oil (Barrels) Gas (MCF) Total proved reserves 605,000,000 726,000,000 Proved developed reserves 324,500,000 244,800,000 Production 62,700,000 50,400,000 Using the total proved reserves, calculate the DD&A charge for the second year using the prospective method [10 Marks] Question