Viewpoints: Presentation of transportation costs (Oil & gas)

Viewpoints: Presentation of transportation costs (Oil & gas)

Examine the circumstances in which transportation costs incurred by a producer of oil and/or gas should be netted from revenue or presented as a separate expense. Developed jointly by Chartered Professional Accountants of Canada (CPA Canada), the Canadian Association of Petroleum Producers (CAPP) and the Explorers and Producers Association of Canada (EPAC), this document discusses the presentation of transportation costs. Specifically, in what circumstances should transportation costs be netted from revenue or presented as a separate expense by a producer?

Oil and gas commodities are often extracted in remote locations and require transportation. Some producers may sell their commodity at the wellhead, processing facility, or pipeline inlet; others may transport or engage a third-party intermediary (i.e., a shipping company) to carry the commodity to the purchaser (i.e., customer).

Transportation costs may be paid by the producer. In other instances, transportation costs may be paid by the purchaser and, in some cases, subsequently reflected as an adjustment or offset to the price paid to the producer. This adjustment is often referred to as a “notional location difference”, which is the difference between the price at the delivery point (i.e., the point where the commodity is transferred to the purchaser) and the market where the product is priced (i.e., a designated market sales hub).

For example, the market sales price for a barrel of crude oil is $50 at location X, a designated market sales hub. The producer produces this particular barrel of crude oil at location A (a location that is not a designated market sales hub). The cost of transporting oil between location A and X is $10. This document will explore circumstances when the producer recognizes $50 of revenue and a transportation expense of $10 within the statement of profit or loss, and circumstances when the producer recognizes $40 of revenue with no associated transportation expense.

To read more, download the whole document here.

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