levin70

What Devon's Huge Write-Down Means for Natural Gas

H.J.

I can understand why you might think from one perspective that successful efforts is more conservative in that it forces you to take writedowns up front. But that isn't necessarily "conservative". I guess its how you look at it.

The full cost method is actually only allowed for US Public Companies, as the method was developed by the SEC in the 70's in response to criticisms of successful effort. Only SEC Registrants may use it. Private companies must use successful efforts.

Full cost method is the "easy button" of methods. One cost pool you re-measure for impairment on a quarterly basis. Once costs go into the full cost pool, you don't need to distinguish costs for wells/fields from each other. A lot less manpower/horsepower is needed on the accounting side for the full cost method. There are also major differences before you get to the point of drilling that differentiate the two methods. Pre-drill costs like seismic and other mapping costs are expensed immediately under successful efforts, while they are capitalized under full cost (one of the major gripes that led to full cost method)

Btw - no full cost method under IFRS, just a modified version of the successful efforts method.

Hope this helps

Kind Regards

What Devon's Huge Write-Down Means for Natural Gas

It has been noted that Anadarko (APC) uses "successful efforts" accounting as opposed to full-cost accounting. The former method is more conservative and hence, APC was not required to absorb significant impairment charges for their 4th Quarter results.

I just want to respond to this comment. For full disclosure I am a partner at a CPA firm and I have a number of O&G Clients.

One method is not "more conservative than another".

Under successful efforts accounting, the unit of measure is generally at the field level. Thus costs to explore and develop a field are accumulated and tested for impairment as one unit. If a field is a failure, its costs are impaired. This generally leads to more numerous, but smaller impairments when prices decline, as fields with more expensive costs impair first, while older fields that were less costsly are not impaired, except in the case of the very big majors where their largest fields are of course massive.

Under full cost accounting, the unit of measure is an entire country. Thus, as long as you have existing production in that country, a field failure just goes into the pool and isn't impaired. The entire coutnry is tested for impairment. This leads to a buildup of non performing costs that are not impaired during the good times (existing fields cover the newer field failures). Thus, instead of smaller more numerous write downs during periods of falling prices, older fields with lower production costs offset both dead fields and newer fields that are more costly, thus full cost generally results in large writedowns later in the cycle at tipping points where the lower cost older fields no longer can support the higher cost newer fields and dead fields.

At the end of the day, over the entire economic lifespan, you get to the same place, it just takes different routes.

Hope this helps

Kind Regards