Typology of costs

An oil and gas company engaged in the exploration, development and production of new oil or natural gas reserves will incur costs that are identified as belonging to one of four categories:

1. Acquisition Costs


Acquisition costs are incurred in the course of acquiring the rights to explore, develop and produce oil or natural gas. They include expenses relating to either purchase or lease the right to extract the oil and gas from a property not owned by the company. Also included in acquisition costs are any lease bonus payments paid to the property owner along with legal expenses, and title search, broker and recording costs. Under both SE and FC accounting methods acquisition costs are capitalized.

2.Exploration Costs 


Typical of exploration, costs are charges relating to the collection and analysis of geophysical and seismic data involved in the initial examination of a targeted area and later used in the decision of whether to drill at that location. Other costs include those associated with drilling a well, which are further considered as being intangible and tangible. Intangible costs in general are those incurred to ready the site prior to the installation of the drilling equipment whereas tangible drilling costs are those incurred to install and operate that equipment.

All intangible costs will be charged to the income statement as part of that period's operating expenses for a company following the SE method. All tangible drilling costs associated with the successful discovery of new reserves will be capitalized while those incurred in an unsuccessful effort are also added to operating expenses for that period. 

For an oil and gas company following the FC method, all exploration costs - including both tangible and intangible drilling costs - are capitalized by being added to the balance sheet as part of long-term assets.

3. Development Costs


Development costs involve the preparation of discovered reserves for production such as those incurred in the construction or improvement of roads to access the well site, with additional drilling or well completion work, and with installing other needed infrastructure to extract (e.g., pumps), gather (pipelines) and store (tanks) the oil or natural gas from the reserves.
Both SE and FC methods allow for the capitalization of all development costs.

4.Production Costs


The costs incurred in extracting oil or natural gas from the reserves are considered production costs. Typical of these costs are wages for workers and electricity for operating well pumps.

Production costs are considered part of periodic operating expenses and are charged directly to the income statement under both accounting methods.

source: Investopedia