Provides information on basic operations and common terminology. Includes reference to royalty owners and an introduction to financial products.

TABLE OF CONTENTS

• Index to Exhibits vii
• Foreword ix
• Chapter 1 Oil and Gas Industry Overview 1-1
  • General Description of the Industry 1-2
  • Mineral Interests . 1-2
  • Acquisition Through Mineral Lease 1-2
  • Acquisition in Fee 1-3
  • Property Overview 1-7
  • Types of Ownership Interest 1-8
  • Tract or Parcel 1-8
  • Separate Deposits 1-8
  • Unitization 1-8
  • Accounting Methods 1-9
  • Successful Efforts Method 1-9
  • Full Cost Method 1-11
  • Accounting Records 1-12
• Chapter 2 Oil and Gas Industry Issues
  • Issues Related to an Oil and Gas Entity and Activity
  • Overview 2-1
  • Unproductive Issues 2-1
  • Productive Issues 2-1
  • Unique Issues 2-2
  • Uniform Capitalization Rules 2-4
  • Assistance in IRC Section 263A 2-5
  • General Issues [Non-Oil and Gas] 2-5
• Chapter 3 Oil and Gas Audit Techniques
  • Examination of an Oil and Gas Entity and Activity 3-1
  • Engineering Referral 3-1
  • Initial Interview Questions 3-2
  • Initial Information Document Request 3-3
  • Accounting Methods 3-4
  • Property Definition 3-5
  • Unitization 3-7
  • Areas Typical of an Oil And Gas Entity 3-8
  • Gross Income 3-8
  • Lease Bonus 3-10
  • Delay Rentals 3-11
  • Royalty Income 3-11
  • Advance Royalties 3-11
  • Minimum Royalties 3-12
  • Shut in Royalties 3-12
  • Production Payments 3-12
  • Damages 3-13
  • Shooting Rights 3-13
  • Uniform Capitalization Rules –
  • IRC section 263A 3-16
  • Produced Property 3-16
  • Predevelopment Expenses 3-17
  • Interest Capitalization 3-18
  • Allocation of Indirect Expenses 3-18
  • Conclusion 3-19
  • Auditing Techniques 3-19
  • Leasehold Cost 3-20
  • Geological and Geophysical Costs 3-22
  • Abandonment Cost 3-25
  • Audit Techniques 3-27
  • Lease Operating Expense 3-30
  • Bad Debts (Joint Interest Owners) 3-32
  • Intangible Drilling Cost 3-34
  • Audit Techniques 3-37
  • Lease and Well Equipment 3-39
  • Depletion 3-40
  • Economic Interest 3-41
  • Cost Depletion 3-41
  • Units Sold 3-42
  • Adjusted Basis of Property 3-42
  • Cost Depletion on Wildcat Acreage 3-43
  • Percentage Depletion 3-44
  • Independent Producer 3-44
  • Transfers of Proven Properties 3-44
  • Gross Income from the Property 3-45
  • Net Income of the Property 3-47
  • Expenses of the Property 3-49
  • Overhead Allocation 3-49
  • Audit Techniques 3-50
  • Information Required to Compute
  • Depletion Allowance 3-50
  • Alternative Minimum Tax 3-52
  • Percentage Depletion 3-52
  • Intangible Drilling Costs 3-52
  • Alternative Tax Energy Preference Deduction 3-53
  • Qualified Exploratory Costs 3-53
  • Marginal Production 3-54
  • Phase Out of the Deduction 3-55
  • Audit Techniques 3-55
  • Alternative Tax Energy Preference Deduction 3-57
  • Self-Employment Income 3-57
  • Passive Activity Loss Limitations 3-58
  • Oil and Gas Activities 3-59
  • Portfolio Income 3-59
• Chapter 4 Financial Products Potential Area of Concern Related to Oil and Gas 4-1
  • Energy Markets and the Participants 4-1
  • Cash Market 4-1
  • Forward Market 4-5
  • Futures Market 4-5
  • Options Contracts 4-8
  • Market Participants in Forward and
  • Futures Contracts 4-11
  • Commodity Notional Contracts 4-13
  • Commodity Notional Swap 4-13
  • Use of Commodity Notional Swap to Hedge Risk 4-13
• Glossary G-1
  • Technical References
  • General Counsel Memorandums (GCM) and
  • Court Cases TR-1
  • Revenue Rulings TR-2
  • Assignments, Sales and Exchanges TR-2
  • Capital Expenditures TR-2
  • Definition of Property TR-4
  • Cost Depletion TR-4
  • Depletion, Gross Income, Net Income TR-4
  • Percentage Depletion TR-6
  • Geological and Geophysical Costs TR-6
  • Intangible Drilling and Development Cost TR-6
  • Nonconventional Fuel Credit TR-7
  • Nonrecourse Loan TR-7
  • Partnerships TR-8
  • Sharing Arrangements TR-8
  • Miscellaneous TR-8