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

Exercise 5

Jones Oil Company operates under a PSC agreement in the South China Sea. Jones has
49% of the working interest, and Sinhai Oil Company (which is owned by the Chinese
government) has 51% of the working interest. The agreement calls for annual gross
production to be split in the following order:
a. VAT equal to 7% of annual gross production
b. Royalty of 13% of annual gross production
c. Cost oil is limited to 62% of annual gross production, with costs to be recovered in
the following order:
1) Operating expenses
2) Exploration expenditures (Jones Oil Company, 100%)
"3) Development costs (Jones Oil Company, 49%, and Sinhai Oil Company, 51%)
d. Annual gross production remaining after cost recovery becomes profit oil and
is split:"
1) The government receives 15% of profit oil.
"2) The remaining 85% is shared by Jones and Sinhai based on their
working interests.
During 2012:
Recoverable operating costs equal $4,000,000.
Unrecovered exploration costs equal $10,000,000.
Unrecovered development costs equal $100,000,000.
The annual gross production for the year is 2,000,000 barrels of oil.
REqUIRED:
a. Assuming the price to be used to convert costs into barrels is $100/bbl, allocate the
production to the parties.
b. Assuming the price to be used to convert costs into barrels is $60/bbl, allocate the
production to the parties."