Accounting for and Management of Drilling Materials Inventory in Oil and Gas Companies.

1. Inventory Accounting &
I t A ti &
Management for Company X

2. Contents:
 Introduction
 Wh i i
What is inventory and Purpose of inventory
d P f i
 Inventory Recognition.
 Risks associated with inventory.
 Inventory Controls.
 Inventory Cost Structure.
 Reporting requirements for inventory.
 Inventory Audit.
6/7/2012 Hamdy Rashed, CMA, CAPM 2

3. Introduction
This presentation is prepared for justifying the relation‐
ships between Finance and Accounting function and
Supply Chain and Logistics function in order to make
the transactions process between two different functions
goes in harmony to achieve entity’s overall objectives,
and to increase the effectiveness and efficiency of each
y
different function.
This presentation does not cover the initial purchase for
inventory, it covers the inventory management in details
and supply chain in summary.
pp y y
6/7/2012 Hamdy Rashed, CMA, CAPM 3

4. What is inventory
y
 A physical resource of items held in stock with the
intent of using it for drilling wells.
intent of using it for drilling wells
P
Purpose of holding stock.
f h ldi k
 Economies of purchasing (Discount, hedge)
 Transportation savings
 Meet variations in drilling well needs.
g
6/7/2012 Hamdy Rashed, CMA, CAPM 4

5. Recognizing inventory
g g y
 Material in Transit and Incoterms 2000
 FOB
 CIFCFR
 Ex‐Work seller’s premises or buyer’s premises/DDP
6/7/2012 Hamdy Rashed, CMA, CAPM 5

6. Recognizing inventory
g g y
 Inventory owned by Company and held in the
warehouse or site.
warehouse or site
 Consignment held in the warehouse or site.
6/7/2012 Hamdy Rashed, CMA, CAPM 6

7. Risks and Inventory
y
 Risk of transporting stocks
D
Damage
 Risk of holding stock
 Inventory growing at a rate greater than needs.
 Obsolescence
 Missing or stolen materials.
 Damage
 Drilling operation stoppage.
 High purchasing cost.
g p g
6/7/2012 Hamdy Rashed, CMA, CAPM 7

8. Inventory Controls
y
Inventory controls should be designed and evaluated by COSO or
any Internal Controls Framework.
 Procure inventories based on final drilling program and
considering the lead time from requesting the materials and
received them in the entity’s premise
 Maintaining inventory recording system (Inventory receipt and
issuance authorization, documentation, tracking records)
issuance authorization documentation tracking records)
 Potential cost and benefits of large purchases
 Physical count
 Storage safety environment.
6/7/2012 Hamdy Rashed, CMA, CAPM 8

9. Inventory Costing Formula
y g
 FIFO
 Th
The materials that are first‐in are first out
t i l th t fi t i fi t t
 The Drilling well is charged by old inventory price
 Th
The remaining stock on hand is evaluated based on
i i k h d i l d b d
current price.
 Specific Identification.
 For small number of items
 For small movement of items.
6/7/2012 Hamdy Rashed, CMA, CAPM 9

10. Reporting Requirements
p g q
 International Financial Reporting Standards (IFRS).
 Fi
Financial Statements and disclosures.
i l St t t d di l
 Production Sharing Agreement (PSA).( )
 Statement of Expenditures (SOE).
 List of inventory held by the Company.
 Cost Recovery Statements (CRS).
 Joint Operation Agreement (JOA)
J p g (J )
 Joint Interest Billing (JIB).
6/7/2012 Hamdy Rashed, CMA, CAPM 10

11. Reporting Requirements ‐ Cont
p g q
 Internal Reporting.
AAccounting purposes
ti
 Drilling & Management purposes
6/7/2012 Hamdy Rashed, CMA, CAPM 11

12. Audit on Inventory
y
 International Standards on Auditing (ISA)
 Audit samples
 Testing controls
 Substantive test (Analytical procedures
and Test of details)
 Audit Report.
 P d i Sh i A
Production Sharing Agreements and Cost Recovery Audit.
d C R A di
 Audit Samples
 Review the documents approval and calculations
Review the documents, approval and calculations.
 Checking how far from budget.
 Cost Recovery Audit Report
y p
6/7/2012 Hamdy Rashed, CMA, CAPM 12

13. Audit on Inventory ‐ Continued
y
 Joint Operation Agreement and Joint Venture Audit.
 A dit S
Audit Samples
l
 Review the documents .
 Ch ki h f f
Checking how far from budget.
b d
 Checking the existence of inventory
 J i V
Joint Venture Audit Report
A di R
 Audit is checking some financial assertions (e.g.
Existence, ownership, Accuracy and Valuation)
E i hi A d V l i )
6/7/2012 Hamdy Rashed, CMA, CAPM 13

14. Recommendations
1 Keeping drilling materials owned by entity in different
records from consignments, rental materials.
g ,
2 Using consistent stock code over years.
3 Applying FIFO method for evaluating drilling materials in
pp y g g g
agreement with Corporate policy.
4 Recording the drilling materials owned by entity to LLI
then issued from LLI except for consignment and rental
items that should be direct well cost.
5 Establishing new policy or updating the current policy to
cover the physical count, inventory reports, normal and
abnormal inventory variances (shortage or overage) and
how to treat such variances, and safety of the warehouses.
h t t t h i d f t f th h
6/7/2012 Hamdy Rashed, CMA, CAPM 14

15. Recommendations ‐ Continued
6 Coordinating with Drilling management that have clear
drilling plan program to determine the required materials
per well and giving Logistics proper lead time to order and
ll d l d d d
receive the materials.
7 Inventory records and Purchase orders records should have
adequate information and common references between
other records with Finance and our Customs Authority’s
records to have easily and proper reconciliations between
the records.
8 Performing physical count on frequently basis, reconcile it
to the inventory records and adjust the variances obtain the
approval for variances from the proper parties as per the
agreements.
6/7/2012 Hamdy Rashed, CMA, CAPM 15

16. Recommendations ‐ Continued
9 Transferring excess materials between licenses
operated by Corporate rather than purchasing the
t d b C t th th h i th
materials with considering the risk of price
transferring.
t f i
10 Looking at the potential cost and benefit for any
large purchases made, and find ways to save
l h d d f d
money for the entity.
6/7/2012 Hamdy Rashed, CMA, CAPM 16