Oil industry activities are typically hazardous. When exploratory investments succeed, great rewards are achieved. Therefore, abandonment cost is an essential component that must be contemplated in any economic feasibility analysis of oil and gas exploration and production projects. Such costs are extremely high and in some cases they can exceed the investments to build infrastructure and install equipments necessary for production. The main goal of this study is to investigate both the theoretical framework and the existing standards used by oil companies to recognize abandonment costs in their books in order to give a proper understanding on the accounting information produced by these companies. Abandonment costs valuation must be taken into consideration as part of the capitalized cost of assets (oil wells, equipments and facilities) giving rise to a liability account conveying the amount related to future obligations of dismantlement, removal and restoration of oil fields. Such practice has been implemented by SFAS 143 in order to provide uniformity to information released by oil industry companies.
Abandonment Cost; E& P; Oil and Gas Accounting; SFAS 143
