A SIMULATION STUDY OF THE FULL COST AND SUCCESSFUL EFFORTS METHODS OF ACCOUNTING IN THE PETROLEUM INDUSTRY.

Abstract

The primary purpose of this study is to develop a realistic model of an oil company which can be used to evaluate alternative systems of petroleum accounting. The model is used to simulate several accounting variables produced by the full cost and successful efforts methods of accounting. The simulated accounting variables are net operating income, net oil properties, operating expenses and return on investment. This study also evaluates the oil company models used in prior petroleum accounting research. There are currently two systems of petroleum accounting (full cost accounting and successful efforts accounting) that are generally accepted. The full cost method basically requires the capitalization of all exploration and development costs while the successful efforts method does not permit the capitalization of either geological survey costs or the costs of dry exploratory wells. A petroleum accounting model should satisfy three requirements. The model should incorporate all significant revenues and expenditures. The values of these revenues and expenditures should be realistic and the timing of the business transactions must be realistic. Earlier accounting studies employed deterministic and stochastic models which failed to satisfy one or more of the three requirements of a petroleum accounting model. Because there are many significant differences between these models and the oil companies which they claim to represent, the findings of these studies cannot be considered to be realistic. The model developed for this study represents the exploration, development and production activities of an oil company. Multinomial probability distributions are used to model exploratory drilling success. A binomial distribution is used to model development drilling success. Exponential decline curves are used to represent oil production. The model displays the type of behavior that is predicted by the economic theory of exhaustible resources and it satisfies the three modeling requirements stated previously.