Summary: Current accounting in the oil and natural gas industry is characterized by the use of two basic accounting concepts known as the successful efforts concept and the full-cost concept. The accounting practices used by the Shell Oil Company, which uses the successful efforts concept, and by the Houston Oil and Minerals Corporation, which uses full-cost accounting, were examined.
Shell records revenue separately for each product produced at the wellhead. Shell does not segregate costs for wellhead products. Direct costs are added to the allocated costs attributed to crude oil to establish a corporate crude oil inventory value. A study conducted by Shell indicated that the use of a full-cost accounting system would reflect increases in net income with corresponding decreases in expenses as well as decreases in the rate of return on stockholders' equity and increases in net capital assets. Houston Oil and Minerals Corporation records revenues separately for oil, gas, and natural gas liquids produced at the wellhead, but does not allocate costs to wellhead products. Expenses other than those in the cost pools appear as period costs on the income statement. No attempt is made to allocate costs to corporate inventory. A change to successful efforts accounting would be expected to decrease Houston Oil and Minerals' net income. The exploration and production costs bear no relationship to the prices charged by either company for oil or gas.
