Production of Oil

1
Production of Oil Gas

• Fluids from the well usually contain oil, gas,
  and water
• Flow lines transfer the fluids from the well to
  separating, treating, and/or storage facility
• The mixture enters a separator to separate the
  gas from the liquids (oil and water)
• The liquid enters a heater-treater unit to
  separate the water and other impurities from the
  oil (BSW generally required to be less than 1)

2
Storage of Oil

• The oil then passes to a tank battery (several
  tanks) for storage
• Each tank is strapped to determine the number of
  gallons based on height of oil in the tank
  (generally to the ¼)
• Oil enters at the top of the tank and is removed
  (to the tank truck through the bottom of the
  tank)
• The amount of oil sold is measured by gauging the
  height of the oil in the tank before and after
  delivery to the tank truck

3
Unit of Measure for Oil

• The unit of measure is a 42 gallon barrel
• The standard condition is the API gravity at 60
  degrees F
• A thief is used to sample the oil from the tank
• Actual oil sold is adjusted for BSW and converted
  to standard conditions

4
Measurement Sale of Oil

• Manual system
• The pipeline gauger measures the oil and records
  the information.
• All data for the conversion is recorded on the
  run ticket
• The pumper-gauger observes the process and also
  initials the run ticket
• Automated system
• A LACT Lease automatic custody transfer) unit may
  measure the oil and make the adjustments
• Collection from several wells
• Wells must be connected to a gathering system
• Quantities allocated to wells by routine
  productivity test

5
Run Ticket Calculation

• Measure level of oil and temperature at the
  beginning and end of the run
• Use strapping table to determine volume of oil
  removed
• Use thief to gather sample of oil to get
  temperature, BSW, and gravity of oil removed
• Use tables to adjust beginning and ending bbls of
  oil
• See example on p. 288 in text

6
Gas Measurement Sale

• Gas is not stored on the lease but transferred to
  the pipeline
• Gas measurement is much more complicated than oil
  measurement
• Volumes of gas must be converted to volumes at
  standard (60 degrees and 14.65 psia)
• Orifice meter measures the flow of gas through
  pressure differentials.
• Data are recorded and converted to standard

7
Standard Division Order

• Legal document setting up ownership interests
• Must be signed by all owners before oil or gas
  can be sold
• Ownership percentages are based on
• Lease contract for royalty owners
• Operating agreement or unit agreement for WI
  owners
• Assignment document for ORI owners

8
Problem 9-4 Allocating Oil to Owners

• 45,000 bbls of oil
• Mr. Davis 1/5 RI 9,000
• Mr. Jones 1/7 ORI 5,143
• Mr. Brown PPI from ¼ WI 7,714
• Mr. Smith 1/3 WI 7,714
• Aggie Oil 2/3 WI 15,429
• Total 45,000

9
Payment for Oil Gas

• Oil
• Frequently, the purchase withholds the severance
  tax and remits balance to each owner
• If purchaser does not assume the responsibility,
  then the operator does
• Gas
• Usually, the purchaser remits 100 of proceeds,
  less severance tax, to the operator.
• Discuss accounting for these possibilities

10
Problem 9-9 (Purchaser disburses royalty and
severance tax)

• Sales Sev tax
• Gross sales 5,000 200
• JD Co (.875) 4,375 175
• Royalty Owner (.125) 625 25
• Entry
• A/R Big John 4,200
• Severance tax expense 175
• Oil revenue 4,375

11
Problem 9-5 (a) Purchaser distributes taxes and
royalty

• Oil sales 12,000 X 24 288,000
• Severance tax (5) 14,400
• Royalty pct 1/6
• Accounts receivable 228,000
• Severance tax 12,000
• Oil sales 240,000

12
Problem 9-5 (b) Operator distributes taxes and
royalty

• Accounts receivable 288,000
• Severance tax 12,000
• Royalties payable - 45,600
• Severance tax payable 14,400
• Oil sales 240,000

13
Unitizations

• Two or more properties are combined for a more
  efficient operation
• May be voluntary or required by state
• If voluntary, requires approval of owners equal
  to pre-agreed percentage
• Participation factors often are
• Net acreage contributed
• Net recoverable barrels
• Combination of the two
• Others

14
Problem 9-25 - Unitization
15
Use of Oil

• If on same lease (fuel generators or pumps or to
  put on road)
• Neither revenue nor expense is recognized
• Royalty generally not paid due to free fuel
  clause in lease
• Severance tax depends on state law
• If used off lease (on another lease)
• Treat as income from one lease and LOE on the
  other
• Severance tax and royalties are generally payable
• Omit crude oil exchanges