Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright

Exercise 6

Session Gas Company owns a 33.3% working interest in a lease in West Texas. Roger
Williams, a local farmer, owns a 1/8 royalty interest in the lease. Session is the operator,
and its partners, Rocky Energy and Asteroid Petroleum, each own 33.3% of the
working interest. Session analyzed the prospects for the lease and proposed drilling a
gas well. Asteroid agreed, but Rocky decided to go nonconsent. Session and Asteroid
both agreed to proportionately carry Rocky's working interest. The joint operating
agreement stipulates that a 150% drilling and completion cost penalty will be assessed
on any partner choosing not to participate in drilling the well.
On July 1, 2014, the Gusher No. 2 was drilled and completed at a total cost of
$300,000. The following information is available concerning production and sales.
Assume each company contracts to sell its gas for $6.00/Mcf. REqUIRED: Ignoring severance tax:
a. Determine when Rocky will reach payout if payout is calculated based on the
quantity actually sold. Hint: Session and Asteroid would have to compute
payout separately.
b. Determine when Rocky will reach payout if payout is calculated using the amount
to which each partner is entitled.