These Factors Continue to Challenge Accounting in Oil and Gas

oil and gas

Accounting is one of the oldest disciplines in the world. You can trace it back to the discovery of counting and money. Even the ancient Mesopotamia already practiced it. In the Bible, Julius Caesar’s empire minted coins, while Matthew was a tax collector.

Despite being around for centuries, it remains to be one of the most complexing. This is especially true in oil and gas accounting.

Why Is Oil and Gas Accounting Challenging?

COPAS stands for Council of Petroleum Accountants Societies. It is a non-profit organization for petroleum accountants in North America. One of its primary objectives is resolving some of the issues that surround accounting for oil and gas books. It can achieve this by harmonizing methods or setting best practices for its members.

But why is this so? It turns out managing financial accounts for oil and gas can be challenging for the following reasons:

1. The Need to Present Better-Looking Books

Oil and gas is not a cheap industry. It demands substantial investment and high capitalization costs. Building an offshore rig, for instance, can already be worth a whopping $650 million. For this reason, oil and natural gas companies pursue investors through joint ventures or profit-sharing.

Regardless of their desired setup, these firms need to provide a good-looking book. That is, their numbers should be appealing to their investors. It can then affect the type of accounting method they use, especially in recording expenses or costs.

2. Different Stages of Oil Production

oil and gas workers in front of large fuel storage tanks

One of the goals of accounting is to reflect transactions in every stage in a numerical way. In this manner, companies can make sound financial decisions at any time.

Producing oil has many stages, and in each, costs can widely vary. Usually, expenses are the highest during the initial phases. These refer to the research and exploration stages. How they want their books to appear during these phases might then matter. Companies usually use either of the two methods called full cost and successful efforts.

Startups or young firms, though, prefer the former since it can yield a higher net income during the production’s early years. This is even though it recognizes all expenditures, including those related to unsuccessful explorations.

3. Globalization

Oil and natural gas remain one of the world’s essential resources. Countries, therefore, continue to explore regions for reserves. Today, some of the highest oil-producing countries include Saudi Arabia, the United States, China, Canada, and Russia.

With globalization, companies are better able to serve more markets and handle logistics more efficiently. But it can be confusing when it comes to accounting financial transactions. The standards and even methods can differ among these countries.

Being an accountant in an oil and natural gas industry can be challenging. Factors such as globalization and internal financial objectives can impact how one should record transactions.

With organizations like COPAS, though, new accountants can learn from the veterans. The idea to create a more standardized approach to accounting issues will make any professional’s job more convenient and less intimidating.