Production from the Tano Water Field, the field asset for which you are the Accountant, has started in the current year. 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                                7,500,000 

2 Acquisition                                   82,500,000 

3 Geological and Geophysical  23,200,000 

4 Exploratory Dry hole              25,000,000 

5 Exploratory Successful hole 27,500,000 

6 Non-drilling Exploratory 10,300,000 

Total 176,000,000 

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 $247.5 million which covers three exploration and producing fields including the Tano Water Field. The cost is shared equally among the three fields. 

3. The company considers 45% of the non-drilling exploratory cost as meeting its policy re-garding capitalization Data relating to Development costs for the Tano Water Field are below: 

Number Type of Expenses                                               Cost ($) 

1   Facilities, topsides and pipelines                           1,788,050,000 

2 15 Development Well Successful – Platform A         354,750,000 

3   5 Development Dry Hole – Platform A                     118,250,000 

4   10 Development Well Successful – Platform B        198,000,000 

5 4 Development Dry Hole – Platform B                     79,200,000 

Total                                                                              2,538,250,000 

Further information on Development Costs 1. An additional future facilities, topsides and pipelines cost of $450,000,000 is expected to be incurred to enable the Company to develop its huge undeveloped proved reserves. 2. There are 8 development wells yet to be drilled on platform A and a further 10 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. Data on reserves and production for the first year are below: Description Oil (Barrels) Gas (MCF) Total proved reserves 455,400,000 643,500,000 Proved developed reserves 302,500,000 243,000,000 Production 56,350,000 46,800,000 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 [5 Marks] 

b. Total proved reserves including an estimate for future developments costs – method 2 [5 Marks] 

c. Depreciating development wells on proved developed only with other capitalized costs being depreciated over total proved reserves – method 3 [5 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, the following additional information were provided: Description Oil (Barrels) Gas (MCF) 

Total proved reserves          605,000,000    858,000,000 

Proved developed reserves 354,000,000   265,200,000 

Production                                65,550,000      54,600,000 

5 Using the total proved reserves, calculate the DD&A charge for the second year using the prospective method.

Answer rating: 100% (QA)

1 DDA charge for the accounting period using different methods Method 1 Proved developed reserves on... View the full answer