SE vs FC (Part II)

The successful efforts method is directed by FAS 19 Financial Accounting and Reporting by Oil and Gas Producing Companies and the full cost method  by SEC Regulation S-X Rule 4-10 Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975 and various SEC Staff views.

In the full cost procedure almost all costs are capitalized. Those costs are amortized on a unit of production basis over total proved oil and gas reserves for the cost center. This cost center might be a geographical area or a specific group of oil wells. So in this process of accounting, all costs are amortized on the basis of the reserves discovered inside the cost center provided that it doesn't exceed the ceiling.

In the successful effort approach if no proved reserves are found, the costs of drilling and all the direct costs associated are charged to expense at the time that the determination is made.