Seismic Costs in Upstream Industry
Various costs are incurred in the Oil & Gas Upstream industry in order to create or built an asset which appears to be a proven or
sometimes unproven reserve leads to even a dry hole.
The most notable expenses that are incurred in the Upstream Industry are as follows:
- Pre Licensing Cost
- Licensing Cost
- Acquisition Expenditure
- Geological & Geophysical Seismic
- Exploration Expenditure
- Appraisal Drilling
- Development Expenditure
- Production Expenditure
Now let’s focus on knowing what is seismic:
- Literally Seismic pertaining to, of the nature of, or caused by an earthquake or vibration of the earth, whether
due to natural or artificial causes.
- Seismic data is an image of the earth below the surface of the ground. It shows different rock formations as
layers of reflectors.
- Seismic data is collected in the field,processed in a technology center using the computer and interpreted by a geophysicist.
Now the real question comes how to treat the seismic cost in the books of accounts:-
Seismic expenditures are generally categorized as exploration costs and are expensed as incurred.
- There are chances that this cost appears to lead a proven reserve or unproven reserve.
- If proven reserve are found then this is called Development Seismic.
- It could be a situation that risk/reward bonus are declared for the case being fall under proven reserve.
- When a seismic program encompasses areas with both proved & unproved reserves, the costs are proportionally
allocated across the areas based on the decision.
- The proven reserve is capitalized while the unproven reserve is considered as expensed.
- As seismic costs are related to geological & geophysical and also drilling the rock formations etc.It is apparent that external vendors services are used in these cases by the upstream companies.That being said, external vendors and upstream companies will have the contractual obligation as well with the schedule of delivery and the invoice payment obligation.
- Sometimes even payment obligated to seismic vendor as work is performed, regardless of data delivery schedule.
- Seismic costs are accrued as vendor performs work as per the contract and need to be treated accordingly.
How do we use SAP in order to record the seismic costs:-
- We can create the Functional Area called ‘Seismic’ and assign this to the respective cost objects like cost center, work order
- Also these costs can be recorded in the WBS and then settle to AUC for the seismic costs that are treated as proven reserve
and unproven reserve can be treated as expensed and charged to the P/L.
Which module in SAP are needed:-
- Financial Accounting (FI)
- Controlling (CO)
- Material Management (MM)
- Joint Venture Accounting (JVA)
- Project Systems (PS)