How are oil reserves accounted for on an oil company's balance sheet?

By Chizoba Morah AAA
A:

Oil reserves are estimated quantities of crude oil that have a high degree of certainty, usually 90%, of existence and exploitability. In other words, they are estimated quantities of crude oil that oil companies believe exist in a particular location and can be exploited. According to the Securities Exchange and Commission (SEC), oil companies are required to report these reserves to investors through supplemental information to the financial statements. It is important to note oil still in the ground is not considered an asset until it is extracted/produced. Once the oil is produced, oil companies generally list what isn't sold as products and merchandise inventory.

Oil companies can value their reserves by finding their net present value less extraction costs (also known in the industry as "lifting costs"). Depending on the method of accounting for exploration, full cost versus successful efforts, certain costs of finding reserves are capitalized. Only if the cost is capitalized is that cost considered an asset that is depreciated over time. It is important to note that before the companies can list oil reserves through supplemental information to the financial statements, the SEC requires them to prove their claims and file appropriate documents with the SEC.

To learn more, see our Oil And Gas Industry Primer.

This question was answered by Chizoba Morah.

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