Oil and Gas Industry Overview

Study Notes

The oil and gas (O&G) industry is responsible for extracting, refining, and selling oil and gas, refined products, and related products.
It plays a crucial role in the global economy as the primary energy source.
The industry requires substantial capital investment and long lead times due to challenging environmental conditions and uncertain outcomes.
The industry is exposed to macroeconomic factors such as commodity prices, currency fluctuations, interest rate risk, and political developments.

The oil and gas industry is divided into three sectors: upstream, midstream, and downstream.
Upstream: This sector involves exploration, development, and production of oil and gas resources.
Midstream: This sector focuses on the transportation, storage, and processing of oil and gas.
Downstream: This sector involves refining, marketing, and distribution of oil and gas products.

The upstream sector requires environmental impact assessments to minimize their impact on the environment.
Philippine Environmental Code (P.D. 1152) outlines regulations for air quality, water quality, land use, natural resources, and waste management.
Environmental Impact Statement System (P.D. 1586) provides details on the Environmental Impact Statement (EIS) System.
National Integrated Protected Areas System (NIPAS) Act of 1992 regulates protected areas, allowing energy resource surveys for data gathering but requiring congressional approval for exploitation and utilization.
Indigenous People's Rights Act of 1997 establishes mechanisms to protect and promote the rights of indigenous communities.

Some private oil and gas entities use special purpose frameworks, typically the income tax basis, for financial reporting.
Each owner of an oil and gas mineral interest owns an undivided interest in the underlying minerals, with proportionate shares in the asset and liabilities.
Oil and gas reserves are crucial for calculating depreciation, depletion, and amortization of oil and gas property costs, as well as assessing impairment.
Oil and gas producing properties are accounted for using either the full cost method or the successful efforts method.
Declining revenue and reduced value of proved reserves can significantly impact oil and gas producers.
Oil and gas entities are obligated to record asset retirement obligations (ARO) during the period they are incurred.
Falling oil prices can affect the collectability of receivables from interest owners and purchasers.

The risk-based audit process is generally the same across industries, focusing on specific accounts and transactions.
The auditor may focus on the following accounts/transactions for each sector:

Exploration and Evaluation (E&E) Expenditures:
- Expenditures incurred in connection with exploration and evaluation before technical feasibility and commercial viability are demonstrable.
- Activities include recording property additions and acquisitions, calculating DD&A, assessing impairment, evaluating reserves, recording dry hole costs, wells in progress, and workover costs, and disposing of oil and gas properties.
- PFRS 6 - Exploration for and Evaluation of Mineral Resources outlines accounting for E&E expenditures using either the full cost method or the successful efforts method.
Mineral Interest:
- Each owner of an oil and gas mineral interest has a proportionate share in the asset and liabilities.
- Oil and gas transaction allocations are based on ownership interests.
- Auditors review supporting documents for asset fair value less cost to sell and disclosures related to impairment.

Tax:
- Certain tax benefits may be available, especially for service contractors on behalf of the government.
- Auditors discuss benefit claims with management and legal counsel and review supporting documents.
Joint Arrangements:
- Joint ventures and other similar arrangements are commonly used for risk and cost-sharing.
- Auditors review agreements to classify joint operations or joint ventures.
Decommissioning Cost:
- Restoration costs are required by contract, regulation, or environmental policies.
- Auditors verify that decommissioning costs are properly recorded and accrued.