Oil & Gas Software for Midstream and Upstream Accounting

With combined annual revenue exceeding $244 billion, the oil and gas industry is one of the largest and most heavily regulated U.S. sectors. Oil and gas operators often struggle to navigate the financial management landscape as they face challenges ranging from risk management and regulatory compliance to financial reporting. All these challenges can impact operational efficiency, strategic decision-making, and profitability.

Many oil and gas companies are now embracing innovative tools and technologies to update their financial operations. These innovations modernize accounting practices, enabling them to achieve long-term success and remain profitable in the highly competitive oil and gas industry.

For example, PakEnergy’s cloud-based, fully automated oil and gas accounting solutions are invaluable tools for oil and gas accountants. They streamline financial management tasks and optimize financial reporting efficiency and accuracy. Is PakEnergy’s robust ERP accounting platform right for you? First, it’s time to explore key oil and gas accounting principles, practices, and fundamentals.

Is There a Standard Definition of Best Practices?

All publicly-traded oil and gas companies must follow strict accounting rules and procedures set forth by U.S. Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) oversees GAAP policies and procedures, which encompasses a broad range of principles, standards, and guidelines. Oil and gas company accounting practices must be GAAP-compliant, ensuring accuracy, transparency, and consistency in financial disclosures.

The Fundamental Principles of Oil and Gas Accounting

Under GAAP guidelines, oil and gas accountants must prioritize these accounting principles:  

Revenue Recognition Principle

This principle specifies how and when to identify revenue directly from the sale of goods or services, including recognition criteria, measurement, and disclosure in financial reporting.

Matching Principle

Operating expenses should be recognized in the period they are incurred, helping to match associated costs with recognized income. This process enables companies to accurately track and report profits.

Historical Cost Principle

Operators should document asset acquisition costs, including purchase dates and amounts, as this helps ensure financial disclosure accuracy.

Full Disclosure Principle

Financial statements should include all applicable information, including supplementary disclosures, notes, and other relevant information, to support informed stakeholder decisions.

Conservatism Principle

When in doubt, accountants should use prudent measures that minimize the likelihood of overstating income and assets, enabling them to err on the side of caution in financial reporting.

Consistency Principle

Companies should maintain the same accounting methods and principles for subsequent reporting periods, as consistency helps breed verifiability in financial disclosure. 

Materiality Principle

Any information that influences the business decisions of end-users is considered material, especially if its omission or misstatement could cause problems.

Entity Concept

A business entity’s financial activities shouldn’t overlap with those of its owners, separating personal and business transactions.  

Assumption of Ongoing Concern

Financial statements should be prepared under the assumption the entity will continue operating for the foreseeable future, impacting the valuation of assets and liabilities.

Hierarchy of Accounting Principles

When discovered, accountants should follow a pecking order to select the most appropriate guiding principle for resolving oil and gas account discrepancies.

Major Fields of Oil and Gas Accounting

Oil and gas accounting encompasses these different operational aspects:

Revenue Tracking

Production-sharing contracts, AFE agreements, and royalty payments can complicate revenue tracking. Oil and gas accountants must manage these contracts efficiently, ensuring accuracy in financial reporting.

Exploration and Development

Surveying, drilling, and seismic testing cost money, making it essential for upstream operators to quantify and report exploration and development expenses.

Joint Ventures

Collaborative projects are common in the oil and gas industry, often involving multiple stakeholders. Accountants must accurately track each stakeholder’s expenses, revenues, and other financial considerations.

Proven Reserves

Upstream operators must account for known reserves while leveraging factors such as existing market conditions and operational costs.

Depreciation, Depletion, and Amortization (DD&A)

Oil and gas accountants should split acquisition and development costs evenly as companies extract petroleum over the reserve’s lifecycle.

Hedging Transactions

Due to price volatility, oil and gas operators often engage in hedging activities to minimize exposure to financial risks. Responsible financial reporting must reflect hedging transactions.

Financial Reporting Standards

Oil and gas companies must comply with strict Federal tax reporting and regulatory requirements, using GAAP-compliant accounting methods that mirror industry standards and best practices. Because requirements may vary by jurisdiction, any effective oil and gas financial management strategy must be fluid and adaptable.

Upstream, Midstream, and Downstream Accounting Services: What’s the Difference?

In lockstep with operations, there are three main fields in oil and gas accounting:

Upstream Accounting Field

• Exploration, drilling, and production activities
• Costs associated with discovering and extracting energy reserves
• Reserve estimation and depletion

Midstream Accounting Field

• Financial activities relevant to oil and gas transportation and storage facilities
• Accounting for pipeline operations, transportation costs, and storage costs

Downstream Accounting Field

• Refining, distribution, and marketing of oil and gas products
• Accounting for refining costs, inventory valuation, and sales revenue

Differences Between Successful Efforts and Full Cost Accounting

In oil and gas accounting, Full Cost Accounting capitalizes all costs associated with finding and developing petroleum reserves, regardless of the outcome. Conversely, Successful Efforts Accounting only capitalizes costs for productive fields, expensing costs resulting from unsuccessful exploration projects.

Key differences between these oil and gas accounting methods include:

• Depreciation and Impairment: With full cost disclosure, one depletion and impairment amount is calculated for the full cost pool. Under successful efforts, each field's depletion and impairment calculation is performed separately.
• Financial Disclosure Statements: Either method can significantly impact financial reports, notably the balance sheet and income statement.
• Transparency and Reporting: Perspectives vary on which method more accurately represents a company’s earnings and cash flow.
• Regulatory Requirements: Different regulatory bodies or jurisdictions may have different requirements that mandate the method of choice. 

When reflecting industry requirements and best practices, upstream and midstream oil and gas accounting plays a pivotal role in supporting a company’s operations and profitability. As an essential part of an effective financial management strategy, accounting for oil and gas enables operators to make informed strategic decisions based on accurate, transparent, regulatory- compliant financial reports.

Achieve Excellence Across All Financial Operations with PakEnergy’s Automated Accounting Solutions for Oil and Gas

Whether your operations are upstream or midstream, PakEnergy’s cloud-based ERP platform can help you achieve operational excellence, streamlining accounting activities and integrating financial workflows.

Designed for oil and gas operators by oil and gas operators, our robust yet scalable platform seamlessly adapts to your organization’s needs, with features that empower you to manage financial data and generate reports with unprecedented speed, efficiency, and accuracy— ultimately ensuring compliance with industry best practices and regulatory requirements.

Want to learn more about PakEnergy’s state-of-the-art Accounting Solutions? Contact us today to schedule your no-charge demo!