Conveyances

1
Conveyances

• Leasing contracts with mineral owner with the
  separation of the mineral right into RI and WI
• Sales or exchange
• Sharing arrangements

2
Types of Non-operating Interests

• ORI
• Production Payment Interest
• Net Profits Interest

3
ORI

• Created out of WI
• In effect only as long as the WI is in effect
• Methods of Creation
• Retained WI owner subleases the property to
  another party and retains the ORI
• Carved out The WI owner keeps the WI and carves
  an ORI out and transfers to another party

4
Production Payment Interest

• Created out of WI
• In effect only as long as the WI is in effect
• Often stated in terms of dollars, time, or
  barrels
• Generally runs out before reservoir is fully
  depleted
• If stated in terms of dollars, generally out of a
  share of the WI (say 50)
• Owner not responsible for costs of exploring,
  developing, or producing
• Methods of Creation
• Retained WI retains
• Carved out The WI owner keeps the WI and carves
  a PPI and transfers to another party

5
Net Profits Interest

• Created out of WI
• In effect only as long as the WI is in effect
• Receives a share of the WI owners net profit
  from the property
• The agreement must define how to compute net
  profits
• Methods of Creation
• Retained WI retains (most common)
• Carved out The WI owner keeps the WI and carves
  an PPI and transfers to another party

6
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• Generally, no gain or loss recognized in
  transactions that involve the pooling of assets
  in a joint undertaking involving a particular
  property or group of properties

7
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• Generally no gain recognized but loss is
  recognized where
• Part of interest is sold and substantial
  uncertainty exists about recovery of costs of
  retained interest
• Part of interest is sold and seller has
  substantial obligation for future performance
  without proportional reimbursement

8
Accounting for Conveyances SEC Adopted the SFAS
19 Rules

• For other transactions, if gain or loss
  appropriate under GAAP
• Sale of entire interest in proved or unproved
  property
• Certain production payments
• Treat as borrowing (and record interest) for some
  types of production payments that are essentially
  loans

9
SFAS 153 Exchanges of Nonmonetary Assets

• Transferor has no continuing interest in the
  exchanged asset
• Nonmonetary exchange has commercial substance if
• Entitys future cash flows are expected to
  significantly change
• Requires fair value accounting with gain or loss
  recognized
• See example on page 552

10
Exchange of OG Assets for Other OG Assets

• Farm-ins/Farm-outs Owner of the WI assigns all
  or part of the WI to another party in return for
  exploration and development of the property
• WI to farmee and retain ORI
• Farmor assigns all costs to retained (unproved)
  ORI then to proved ORI if reserves found
• Farmee accounts for drilling and development
  costs as per previous chapters

11
Farm-ins/Farm-outs Retention of Reversionary WI

• Farmor may retain ORI with reversion to a WI at
  payout (when farmee has recouped all costs to
  drill and operate through payout).
• The reversionary WI percentage must be agreed
  upon at the time of the farmout.
• Issues related to costs and DDA can get
  complicated.
• Costs for farmor in productive ORI will be
  transferred to producing WI.

12
Retention of Reversionary WI Example p. 556

• Tyler Oil Company signed a lease with Ms. Jones
  for a 400 Acre lease in Oklahoma, paying a lease
  bonus of 20,000 and Ms. Jones retained a 1/8 RI.
• Tyler Oil Company farmed out the WI to Frisco Oil
  and retained a 1/7 ORI.
• Frisco will drill a well and have 100 WI until
  payout. Then Tylers ORI will revert to a 50 WI.

13
Example p. 556 Tylers Journal Entries

• Unproved property - WI 20,000
• Cash 20,000
• Unproved property ORI 20,000
• Unproved property WI 20,000
• Proved property ORI 20,000
• Unproved property ORI 20,000

14
Computing Payout p. 556

• Frisco completed well 1 at a cost of 1,000,000
• Estimated gross reserves
• proved reserves - 400,000 bbls
• proved developed reserves - 200,000 bbls
• (7/8 x 6/7 x 60X) - 25X 1,000,000
• Payout 50,000 gross bbls, or 37,500 WI bbls

15
Computation of Tylers Proved Reserves p. 556

• Prior to Payout
• 50,000 x 7/8 x 1/7 6,250
• After Payout
• 50 of 7/8 (400,000 50,000) 153,125
• Tylers total proved reserves 159,375
• Tyler has only leasehold costs, which are
  depleted over proved reserves.

16
Computation of Tylers DDA

• 2011
• 20,000/159,375 x 3,125 392
• 2012
• (20,000 - 392)/(159,375 3,125) X 3,125 bbl
  392

17
Transfer Tylers ORI to WI

• Proved property WI 19,216
• Accumulated DDA ORI 784
• Proved property ORI 20,000

18
Friscos Entries

• Wells in Progress 1,000,000
• Cash 1,000,000
• Wells and Equipment 1,000,000
• Wells in Progress 1,000,000

19
Computation of Friscos Proved Developed Reserves

• Prior to Payout
• 50,000 x 7/8 x 6/7 37,500
• After Payout
• 50 of 7/8 (200,000 50,000) 65,625
• Friscos total proved reserves 103,125
• Frisco has only IDC and equipment costs, which
  are depleted over proved developed reserves.

20
Computation of Friscos DDA

• 2011
• 1,000,000/103,125 x 18,750 181,818
• 2012
• (1,000,000 - 181,818)/(103,125 18,750) X
  18,750 bbl 181,818