# Presentation: 018430

## U.S. Department of Energy                                          Financial Reporting System

**U.S. Department of Energy****                                          Financial Reporting System**

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## U.S. Department of Energy                                                              Energy Information Administration

**U.S. Department of Energy****                                                              ****Energy Information**** ****Administration**

**Jon A. Rasmussen, Ph.D.**

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## Financial Reporting

**Financial Reporting**

**Tied to Generally Accepted Accounting Principles (GAAP)**
**Enterprise-based**
**Publicly traded companies**
**Aim is to provide information to investors and the public that allows: **
**Valuation**
**Comparative analysis**
**Time series analysis**

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## Motivations for the U.S. Department of Energy’s Financial Reporting System

**Motivations for the U.S. Department of Energy’s Financial Reporting System**

**Escalating oil prices**
**“****Seven Sisters” controlled nearly 60 percent of the world’s oil supply in the early 1970’s**
**“****Obscene” profits**
**Line-of-business reporting was a recent innovation**

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## Intended Uses

**Intended Uses**

**Monitor competition in energy markets**
**Sources of income and cash earnings**
**Targets of investment**
**Financial performance of energy industries**
**Detailed cost and revenue information**
**Annual report**

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## Emphasis on Major Petroleum Companies

**Emphasis on Major Petroleum Companies**

**In the early 1970’s, 16 of the top 20 oil producing companies were U.S. based or had major U.S. operations**
**Mixed view of the majors’ role in petroleum markets**
**Concern about direction of majors’ investment**

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## Development of Survey Criteria

**Development of Survey Criteria**

**No exact definition of a “major”**
**Criteria should include the top 16**
**Publicly traded U.S. corporations and subsidiaries**
**The oil producer “1-percent rule”**
**Top 50 U.S. oil producers (net ownership basis)**
**One percent or more of total U.S.**
**Production of oil, natural gas, coal, or uranium, or**
**Reserves of oil, natural gas, coal, or uranium, or**
**Refinery capacity of refined product sales volume.**
**Births, deaths, and mergers**
**Phases 2 and 3**

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## The FRS Companies

**The FRS Companies**

**The FRS companies account for more than 80 percent of total U.S. companies’ investment in petroleum and natural gas outside the U.S. **

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## FRS Companies’ Share of U.S. Totals

**FRS Companies’ Share of U.S. Totals**

**	****	****1977****	****	****	****Peak (Year)****	****	****1995**
**Oil****	****	****	****	**
** ****Production****	****56****	****	****59 (1988)****	****	****53****	**
** ****Reserves****	****66****	****	****66 (1977)****	****	****56****	**
**Natural Gas****	****	****	****	**
** ****Production****	****55****	****	****55 (1977)****	****	****45****	**
** ****Reserves****	****57****	****	****57 (1977)****	****	****48****	**
**Coal****	****	****	****	**
** ****Production****	****13****	****	****30 (1988)****	****	****16****	**
**Uranium****	****	****	****	**
**Production****	****48****	****	****48(1977)****	****	****0****	**
**Ref. Capacity****	****82****	****	****82(1977)****	****	****	****66**

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## Development of the Reporting Framework --    Form EIA-28	

**Development of the Reporting Framework --    Form EIA-28****	**

**Based on Generally Accepted Accounting Principles and Finical Accounting Standards**
**Line-of-business framework**
**Financial data must be provided in context of financial statements**
**Operating data reported in order that financial outlays can be related to physical results**
**Designed for minimal slippage**

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## Validation and Confidentiality

**Validation and Confidentiality**

**EIA has an overall confidentiality policy**
**Validation of Form EIA-28 done by public accounting company**
**Reconciliation to companies’ certified financial statements and other required disclosures**
**Computerized edits and audits**
**Reasonableness tests**

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## Income Statements

**Income Statements**

**Line-of-business structure**
**Income statements “roll up” to the consolidated statement of income**
**Transfer pricing issues**
**Some findings**

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## Cash Flow

**Cash Flow**

**Income and cash flow**
**Measuring cash flow**
**The statement of cash flows**
**Some findings**

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## Investment, Assets, and the Balance Sheet

**Investment, Assets, and the Balance Sheet**

**The balance sheet and the links to the income statement**
**Line-of-business reporting and the balance sheet**
**Measuring the investment base**
**Property, plant, and equipment (PP&E)**
**Depreciation**
**Investments and advances to unconsolidated affiliates**
**Capital expenditures**
**Some findings**

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## Other Sources and Uses of Cash

**Other Sources and Uses of Cash**

**Debt, equity, and asset sales**
**Dividends, debt reduction, and stock repurchases**
**Some findings**

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**Use of Complementary Data**

**Reduces respondent burden**
**Comparison of survey group to total industry**
**Comparison of financial performance between groups**
**Some findings**
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## Cost and Value in Oil and Gas Production

**Cost and Value in Oil and Gas Production**

**The development of financial and operating data disclosures for oil and gas producers was a key development in the late 1970’s.**
**Why single out oil and gas producers?**

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## Setting and Issues I

**Setting and Issues I**

**The value of an oil-producing company is primarily a function of the company’s reserve quantities and the price of oil.**
**For financial reporting purposes generally, assets on the balance sheet are carried at original cost adjusted for depreciation.**
**Oil reserves for the most part are not purchased and their original cost consists mainly of the costs of lease acquisitions and drilling**

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## Settings and Issues II

**Settings and Issues II**

**Original cost provides a reasonable estimate of asset value when oil prices are stable, as they were until late 1973.**
**With rising or volatile oil prices, the value of reserves and, thus shareholder value, is fluctuating.**
**Fluctuations in reserve value are not reflected in financial statements, which are based on original costs.**
**Oil prices began rising sharply in late 1973**

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## Valuing Reserves

**Valuing Reserves**

**The prime movers in developing special reporting standards for oil and gas producers were the pillars of financial reporting in the United States :**
**The Securities and Exchange Commission (Federal government)**
**AICPA (professional association), and**
**The Financial Accounting Standards Board (corporate self-regulating body).**
**Other stakeholders were involved, including the Department of Energy and its Financial Reporting System.**

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## Two Opposing Points of View:

**Two Opposing Points of View:**

**Keep the status quo and do nothing, or**
**Disclose only the value of oil and gas producers’ reserves.**
**Value of reserves = present value of future net cash flows yielded by production from the reserves.**

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## Estimating the Value of Reserves I

**Estimating the Value of Reserves I**

**To make an estimate of the value of reserves one needs:**
**1.  A credible estimate of reserves**
**2.  Future production path**
**3.  Future oil prices**
**4.  Future cost of extraction (lifting costs)**
**5.  Future cost of developing undeveloped reserves**
**6.  Future tax payments**
**7.  Salvage value after abandonment**
**8.  Discount rate/cost of capital**

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## Estimating the Value of Reserves II

**Estimating the Value of Reserves II**

**Difficulties include**
**Uncertainties about future values,**
**subjectivity,**
**potential misrepresentation, and**
**comparability with other industries’ financial statements.**

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## Required Disclosures for Valuing Reserves

**Required Disclosures for Valuing Reserves**

**Final standards were a set of required disclosures that allow investors to make their own evaluations of the value of a company’s oil and gas reserves *****plus***** a standardized computation of the estimated present value of net cash flows from future production of reserves.**

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## Required Oil and Gas Disclosures

**Required Oil and Gas Disclosures**

**Reserve quantities**
**Capitalized costs**
**Costs incurred**
**Results of operations**
**Standardized measure of discounted future net cash flows**
**Wells drilled**
**Oil and gas acreage**
**Average prices and lifting costs**

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## Additional FRS Requirements

**Additional FRS Requirements**

**Exact and detailed geographic separation of reserves, costs incurred (exploration and development expenditures), and lifting costs.**
**Functional detail on expenditures and lifting costs.**

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## Some Findings

**Some Findings**

**The course of finding costs over time.**
**Low finding costs -- the key to survival.**

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## Uses and Abuses of Financial Information

**Uses and Abuses of Financial Information**

**One main use of FRS data is to prevent abuses.**
***Performance Profiles of Major Energy Producers is *****published annually by***** *****the***** *****Energy Information Administration (EIA):**
**Presents the latest FRS data**
**Addresses legislatively specified topics,**
**Presents analyses and interpretations of financial performance of  the major energy companies in relation to:**
**Energy market developments,**
**Capital market developments,**
**Changes in financial reporting practices, and**
**Changes in government policy.**

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## Uses of Financial Information

**Uses of Financial Information**

**The FRS data, often in combination with complementary data, are used to produce one-time analytic reports.  Some reports are in response to outside requests; others represent timely analysis of energy market developments by EIA staff.**
**Recent topics include:**
**Financial aspects of 1996 U.S. gasoline price run ups,**
**Volatility of U.S. refining profitability;**
**Financial impacts of environmental requirements,**
**The role of  major energy companies and independents in the U.S. oil and gas production; and**
**Technical journal articles.**

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## Categories of Customers

**Categories of Customers**

**Commercial**
**Energy companies**
**Consulting firms**
**Investment community**
**Data resellers**
**Government**
**EIA**
**DOE**
**Federal agencies**
**Congressional staff**
**State and local governments**
**Educational and Institutional**
**Industry trade associations**
**Academics/doctoral candidates**
**Public interest groups/special interest groups**
**Interested Citizens**

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## Popular Categories of Information

**Popular Categories of Information**

**Benchmarking and comparative cost analysis**
**Line of business rates of return**
**Regional finding costs and lifting costs**
**Targets of investment**
**Financial performance of U.S. petroleum refining**

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## Summary

**Summary**

**Reiterate key goals**
**Thanks**

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