Accounting for oil producers;

              4 HASKINS & SELLS January
Accounting for Oil Producers
By PAGE LAWRENCE, Manager, Kansas City Office
MA N has, through all the ages, in his
constant search for hidden treas­ures,
dug deeply into the earth. Petro­leum,
one of the most valuable of the
treasures of the earth's storehouse, has been
known to man since before recorded his­tory.
Its wonders are described in the
most ancient legends. It has been said
that the Arabs carried the liquid treasure
from the famous springs of Hit on the River
Euphrates to their imperial city, and with
it lighted the lamp of Aladdin.
The accountant must apply the princi­ples
of accountancy in recording the values
of many undertakings. To do this success­fully,
he must know the physical aspects of
the operation. It is indeed a stupendous
task which confronts the accountant to
know something of the physical com­ponents
of all the operations of our com­mercial
world. He succeeds by applying
general principles to particular problems.
The production of crude petroleum is a
mining operation, and as such comes under
the established procedure for recording the
accountability for wasting assets or values.
It is recognized that, in particular, mining
accounts must serve three purposes:
Record development, which is really con­struction,
record production, and costs of
operation.
By applying, therefore, the principles,
which we have learned by experience and
training, governing the requirement of
establishing a true cost to make, we find
that the accounting requirements of an oil
producer contain no profound and un­known
theories of accountability, and that
during development the accounts should
be so drawn as to establish the equation:
Material + Labor + Burden = Cost of De­velopment.
The product comes from the well ready
for delivery or sale. Thus the producer's
accounts recording cost to operate are
simple and will be so drawn as to establish
costs of "lifting" and careful statistical
records of oil produced and sold.
Before income and excess profits taxes
became such an important factor to the
business world, it was considered unneces­sary
to carefully detail the construction
costs of the oil producer. He was content
if he knew the unitemized cost of a lease
or well, against which he figured that the
production from the well would, in a certain
period, "pay out" the investment, and this
returned, the oil producer operated there­after
on "velvet." The producer's desire
to establish comprehensive and accurate
records, both as to development and pro­duction,
and the necessity of compliance
with the federal income tax law and
regulations of the United States Bureau of
Internal Revenue, have influenced the
accounting methods of the oil producers.
And notable improvements have been
made in records, both accounting and geo­logical,
in recent years.
In many States especial laws are found
in the statutes giving rights to mining cor­porations
in the manner of payment for
capital stock. The legal fiction allowing a
prospector to value the "hole in the ground"
for any desired sum necessary to make his
company's capital stock full paid and non­assessable,
although such value be imme­diately
contradicted by the donation to
the company of shares to be sold, in most
cases, at a discount, has been used in the
formation of corporations for the produc­tion
of petroleum.
It is important that the auditor and
accountant should fully set forth the exact
particulars of method of capital stock issue
and payment. The records and entries