Transcript
Speaker: Hey, everyone. Thanks for coming back. It is Mike Potenza for another episode in Becker Accounting Podcast. And my guest this week is someone you may recognize. She's been on the show before and done a podcast with us, but now we're really going to dive into the technicalities of oil and gas.
Speaker: So we have Raina Kordnoy with us from United Energy Corporation. Raina, thank you so much for coming back and being a guest again. Thanks, Mike, for having me. It's my pleasure to be here for episode two on the podcast.
Speaker: Awesome. Awesome. Well, there's a lot that's been going on and I know the industry, it's just always changing and growing and, you know, even your role all the way up to CFO for United Energy right now, there is definitely no dust collecting on you or inside of the industry.
Speaker: So I want to just start off kind of where we left off last episode. Now, your business is oil and gas. You told us that's basically what you grew up with. You eat, you sleep, you drink, nothing but oil and gas.
Speaker: But it seems now that we're at a real um time of an anniversary inside of North Dakota oil and gas. I think you told me was something like 75 years since this industry in North Dakota has really gained prominence. So can you talk to me about the milestone in North Dakota?
Speaker: Yeah, I sure can. So this year we are celebrating the 75th year of oil production, specifically in the state of North Dakota. And I believe that's such a large milestone for this state, because as we mentioned in the last podcast, you know, the the economy in the state is largely farming, ranching and the oil and gas industry. And so oil production brings a great amount of economic development to the state.
Speaker: And, you know, various jobs, a lot of job growth, tax dollars, and even population growth has come to this state due to the oil and gas production. So to see how the technology has changed over the course of that 75 years from when the first well was drilled in April of 1951 And how the production values have grown in the state um with the new technologies that we're utilizing and ultimately making the deployment of capital to drill into the formation more viable has just been incredible to witness.
Speaker: And the state's really proud of the 75th year of oil production. And there is a lot of talk about that right now in the state of North Dakota. Wow. Well, you know I watched this ah show, Landman, where they talk about oil in Texas. you know We might have to do a spinoff series and really dive into the oil and gas in North Dakota. So maybe they're to tap you to like write a screenplay or something. But if we talk about those 75 years,
Speaker: Can you like explain how it's changed over the course of those 75 years or are there any defining eras of oil production in North Dakota and yeah know what's really the timeline of what it looks like today?
Speaker: Yeah. So the first well was drilled in a town called Tioga, North Dakota in April of 1951. And that well would have been a vertical well that was drilled.
Speaker: And the term vertical well will make sense more in a moment here as we ah dive into the technology. But that ultimately put North Dakota on the map for having commercially viable oil reserves.
Speaker: And what is the importance of having commercially viable and oil reserves? It's not inexpensive to drill for oil. So it's one of those things that from a business perspective, it has to be commercially viable for anybody to venture into the business to explore for oil and gas. And so with the successful drill out of that well in 1951, we then knew that North Dakota had commercially viable oil reserves and that put us on the map for um production.
Speaker: ah If we look at that well today, it has produced 585,000 barrels of oil since inception. So that's a pretty remarkable amount of oil that that well has produced. ah Over the years, through many oil booms and oil busts, as we call them, multiple wells have been drilled in the state and technologies have developed that have allowed us to get more oil out of the reserves in the ground.
Speaker: And I would say that one of the most pivotal moments that changed the oil production in the state of North Dakota came in the early 2000s when advances in horizontal drilling and hydraulic fracturing made it possible to access all the oil that was trapped deep in the shale rock of the formation.
Speaker: And so today, i mean, drill four mile laterals and over the course of time, those laterals have lengthened. So when horizontal drilling first started happening, those laterals were maybe a mile long and then they went two miles and three miles and now we're up to four miles and we can do multiple stages of a frack. And so...
Speaker: When I say horizontal drilling, that's the, and like, we've evolved from just a vertical well, straight up and down in the ground, to now we can drill straight up and down and curve and drill horizontally too.
Speaker: And so with a smaller land footprint and a reasonable amount of capital investment, we can get oil production from four miles below the ground where we're drilling today on a platform. So it's pretty remarkable.
Speaker: that That sounds remarkable. I mean, we have some really smart people in this world that can figure that out. I mean, I try to put my hands around it and grasp the concept, but that is just absolutely amazing. Now, I'm going to assume you're normally inside the office. Do you ever get out in the field much and get to see what that looks like at all?
Speaker: Any opportunity I have to get out in the field, I really do try to get out there because I'm a firm believer that in order to understand it, sometimes you have to touch it and see it, so to speak.
Speaker: And so if I have the opportunity to get out and see something like that, I try to get out and see that. ah There's obviously a lot of safety regulations and a lot of different items that you have to do in order to be out in one of those situations and make sure everybody involved is safe.
Speaker: But have had the ability to go out and be on a drilling rig and see the whole process in action and also be out on a frat crew. So it's it's pretty remarkable to see what all of the brilliant minds came together and developed so that we can get more oil out of the rock that's, you know, two miles below the surface and four miles, you know, in a different direction as you are. It's just pretty remarkable.
Speaker: Yeah, just amazing to get it and then what we do with it after the fact it is. It's just absolutely amazing. So let's let's talk about um this slogan that as I was doing a little research on this oil and gas in North Dakota, and maybe you can help me explain what this is or explain it to me. Something I came across called Crack the Code 2.0.
Speaker: What exactly is that? And it it seems to be some type of rallying point inside of North Dakota. So what's what's that all about? Crack the Code 2.0. Sounds like someone's trying to you know do some computer engineering or something like that.
Speaker: It does. It kind of, you know, with all the stuff we talk about today with AI, it kind of makes you think that it might have something to do with AI. However, it's the slogan that the industry has kind of, let's say, named.
Speaker: And we know that today we only get about 15% of the oil out of the ground and that 85% of the oil is still in the ground. Those are approximate numbers. But The moral of the story is, is we know that we're only getting a fraction of the oil out of that shale rock that is down there in the reservoir.
Speaker: And so when we say crack the code 2.0, all the brilliant minds are working together to figure out what new technology we can utilize to get even more of the oil that's in those reservoir rocks out of the ground.
Speaker: And so this is the slogan that you're going to frequently hear in our state. And it's basically everybody putting their mind together. all the scientists, all the engineers, all the businesses putting their mind together to get us to that next pivotal moment, similar to horizontal drilling and hydraulic fracturing and getting even more of the oil out of the ground.
Speaker: Interesting. Interesting. And do they have actually like big think tank together where people come and they do this or what does how does the process actually work? We have an organization in the state of North Dakota called the North Dakota Petroleum Council. And then you also have the North Dakota Industrial Commission. And they work alongside, you know, all the independent companies and also the EERC.
Speaker: And I'm not going to remember the name of that slogan, but the EERC is basically a research council here in the state of North Dakota. And so those groups will work together and independently to kind of figure out what that crack the code means for enhanced oil recovery.
Speaker: Excellent. Excellent. Well, you talked also in the very beginning about all the new technology that's out there. And I'm just curious, what's the new technology that's really driving and pushing us into the next chapter? And I guess what you're referring to is this enhanced oil recovery, right? To get that 2.0 with respect to crack the code. and And there was something that I came across called Bakken Boom era. So talk to me about enhanced oil recovery and what the Bakken Boom area era was all about.
Speaker: So enhanced oil recovery is where we do something within the formation to get even more oil out of the ground than that initial well that we drilled. And so one of the new technologies that is being researched in the state of North Dakota right now is to actually CO2.
Speaker: to And inject that into that oil formation and see if by injecting the CO2 in the ground in the oil formation, we can ultimately pressure up that formation again get more oil out of that formation. So without drilling any new wells...
Speaker: Without going into any new spaces, like going into the exact same spaces, exact same locations that we've already drilled, and using this CO2 injection to see if we can drive that formation to produce any more oil.
Speaker: And for a little context, you know, enhanced oil recovery is something that has been done for a number of years. If you look at the history of the formation, it's You know, they would do something called water flooding, you know, in the earlier days, and that would fill the reservoir up and, you know, make more oil float to the top, and they'd be able to produce oil out of the formation then too. So enhanced oil recovery is something that the industry has always looked at.
Speaker: But right now, specifically, the industry is researching the viability of CO2 in that formation and how that changes the viability of the reservoir and if we can get any more production out of the ground.
Speaker: Thanks for that explanation, Raina. That makes sense. But I don't understand the Bach and Boom era. Is that something now that in the current era we are in that we're springboarding off of that? And what exactly was the Bach and Boom era and how does that relate to where we are today?
Speaker: I would say it's definitely a springboard off the Bach and Boom era. So I would say the original Bach and Boom era was when that hydraulic fracturing and horizontal drilling really took effect. And it changed the economics of the oil industry here and made it incredibly economical and also viable to bring the oil and gas reserves out of the ground.
Speaker: I think the hope with this Crack the Code 2.0 is the fact that we will be able to relive that again. We will find a way in this process to get another 10 or 15 percent of those oil and gas reserves out of the ground.
Speaker: When you think about the amount of oil that North Dakota produces in a day, well north of a million barrels a day, if we could increase that, you know, with this new technology by 15, 20 percent because we're able to get another 10 or 15 percent out the ground, it is a drastic, you know, economic impact for the state and also the United States.
Speaker: Yeah, I would think so. I mean, that's a lot more oil to get without a lot of work. That would be amazing. And now, ah believe me, I am in no way, shape or form a chemical engineer. I don't know what your background is in chemistry, but you mentioned that you know you used to to kind of flood these existing wells with water, but now they're doing it with CO2 to get more.
Speaker: do you have any idea you know why carbon dioxide as opposed to some other gas or element? I would say... My fair assessment, and I'm also not a chemical engineer, but my fair assessment is is North Dakota has been doing a lot in the research of injecting CO2 in the ground. And so they're capturing CO2 off of power plants within the state or even ethanol plants within the state. And there's CO2 injection wells.
Speaker: And they pump that CO2 into the ground then into those injection injection formations. And so I think it's a way for the state to... take technology that they've already figured out through these CO2 injection wells and put that CO2 into the oil and gas formation to almost create another economic event rather than the CO2 just sitting in an injection formation.
Speaker: Why not put it into an area where we can get more production out of it? and Now, do we know, does this have any environmental impact by putting CO2 back into the ground or is this just because it's a natural gas that it's it's okay for the environment?
Speaker: There's been quite a few studies on the environmental impact of that. And in the formations that they currently are injecting CO2, there's been no signs that there would be any environmental impact at all in doing so.
Speaker: And there's actually one just west of Bismarck, North Dakota, where I'm add at, an ethanol plant. And I think that it has been in the state of having CO2 injected into that formation for almost two years now, if not a little over that, and no signs of any concerns. There's all kinds of what they call monitoring wells, right?
Speaker: in the area where they inject that CO2 in the formation to make sure that there's no CO2 coming out of that formation rock and that it's all staying within the formation and everything has been going well there. So science is working.
Speaker: Excellent. Excellent. And I'm sure, you know, you, your company, United Energy, you take all precautions whatsoever not to adversely impact the environment from everything that I've been reading. Is that correct?
Speaker: Yes, that's correct. And so a little unique piece about, you know, our company is we would be considered in all of these situations what is considered a non-op working interest owner. So we are not the operator.
Speaker: We partner with people that are the operator and, you know, we we agree to their investment decisions or we elect not to participate. So, you know, if an operator is doing something that we don't agree with, we ultimately have the choice to not participate in that investment.
Speaker: And so in all cases with this specific ten technology, we would just either be participating or not participating in the investment decision. Nowhere in it would we be the operator and be totally responsible for every single thing that's involved in the process. We would be along for the ride, so to speak.
Speaker: Got it. And I think it's great that you know you assess each one of these projects or relationships that you have to make sure, hey, they're doing things the right way and we only want to be part of them or this project as long as they're doing things the way that we feel they should be done. So that's very reassuring to hear that.
Speaker: But now thinking about this enhanced oil recovery, which makes a lot of sense because if we could get another 10, 15, 20% out of the wells where we've already drilled, that would be fantastic. But how does that affect the accounting side of it as far as capitalizing your costs or maybe even the research and development or any asset valuations? Is there any significant impact that you know we should discuss?
Speaker: You know, I think it's going to be a matter of like how these projects work and whether they're successful or not. You know, I definitely feel like we're still in the research and development phase. And so you see a lot of people putting capital towards projects and deploying that capital based on what their budgets are comfortable with. And, you know, those are really big investment decisions.
Speaker: for a company to do because you're investing in something that there's no guarantee it's going to work. I mean, you're you're kind of in that exploration phase.
Speaker: And so I do believe there'll be, you know, some definite accounting things in the future as this progresses and we figure out the science behind it and whether these ideas work or not. I think it'll drastically change your reserve valuations.
Speaker: Ultimately, if we know that we can recover more oil and gas out of those reserves, it changes the economics of your reserves, which drastically change your depletion ratios and those sort of things. And so time will tell on those, but, you know, there'll probably be a lot more capitalized costs when these things go on and we know that they're viable and balance sheets will increase. And, you know, once one project is successful, I think you'll see a lot of operators kind of follow Just like we've seen with hydraulic fra hydraulic fracturing and horizontal drilling.
Speaker: So time will tell. But I mean, as time progresses, it's definitely going to be something that the accountants have to pay attention to. Fair enough. and you know That question kind of is leading us into our next discussion. so We talked about capitalizing in the R&D and asset valuations, but let's talk about you know the crux of the matter. We're we're all accountants, right and that's what we're here to discuss with respect to the oil and gas industry. so If I'm new to oil and gas or even I'm a new CPA and I'm just working starting to work for a firm that deals with oil and gas, what are the accounting issues that someone not in this industry may never encounter?
Speaker: I always say that accounting in the energy industry looks like accounting anywhere else on the surface. I mean, it looks like debits, credits, your generally accepted accounting principles, but so much of your accounting like relies on the economics that are just fundamentally different from most industries that you're in.
Speaker: And, you know, we can all we get in like we can all watch CNBC in the morning and see what the oil price is doing. But that drastically changes a reserve valuation, which ultimately impacts your depletion rate, which impacts your balance sheet. It may trigger you into impairment testing, those kinds of things. And so I always say.
Speaker: That there's so much that we do on a daily basis that's just like everybody else. But there's so much that is driven on a valuation, too. And the valuation is largely dependent on the economics that are going on in the industry at that point in time, which is largely largely driven by your oil and gas prices.
Speaker: Okay, so you're not an operator, but you deal with the operators. Can you talk to me about utilizing successful efforts versus full cost methods and how they choose between one versus the other?
Speaker: Yeah. So successful efforts in full cost accounting methods are the methods that operators and ourselves as a non-op choose between when we're ah going to be accounting for our oil and gas capital costs. And so under the successful efforts method, only costs that lead directly to proved reserves are capitalized.
Speaker: So any costs that are associated with unsuccessful exploration are expensed as they're incurred. And under full cost, all exploration costs, whether they're successful or not, are capitalized into a single cost pool, which is typically by country, state, county, depending how large the operator is.
Speaker: And those costs are written off over time through depletion or a ceiling test um with for impairments and those kinds of things. And so basically... The differentiator between the two is whether you capitalize dry holes or not. And under the successful efforts method, method which you'll see a lot of operators and non-operators use, um any unsuccessful exploration costs are expensed as they're incurred.
Speaker: Excellent. that That does make a lot of sense. Now, you talked about the depletion of these. So as accountants, you know we deal with depreciation and amortization all of the time. But unless we're dealing with you know natural resources you know such as oil and gas, let's say, we're not dealing with depletion on a regular basis. so Are there any wrinkles in the industry that you know new accountants coming into oil and gas should be aware of, especially related to depletion, but also with respect to um anything different with um regard to depreciation or amortization?
Speaker: Yes. So most industries depreciate assets over time as they wear out. And so you buy a compressor or something like that for your business and it's depreciated over the estimated useful life of that asset, which is generally takes it to end of life.
Speaker: And in the oil and gas industry, We actually look at depreciation in a way that we, it's called depletion. And we deplete assets basically at the rate that they're removed from the ground.
Speaker: And so you tie everything back to those oil and gas reserves that I mentioned, and you estimate the life of those reserves. And the life of those reserves depends on the pricing environment and largely the pricing environment, but there can be different things, you know, like you could have some wells within the like formation that just aren't in the best part of the formation. So they have a shorter life. And so...
Speaker: That ah depletion rate is calculated yearly, typically, based on your oil and gas reserves, and then you deplete your assets on your balance sheet over that time period.
Speaker: That's a very unique thing in the oil and gas industry. We refer to it as units of production account accounting, and the expense recognition is actually tied to the volumes produced rather than the life of the asset and time.
Speaker: And of course, that's how we have to do it according to GAAP, right? That is the recommended or required method to do so, correct? Yes, that's correct. Talk to me about um maybe if you have wells and now they're totally depleted, they're dry. Is there any big expense for the asset retirement that you have to deal with on a regular basis or how does that work?
Speaker: Currently in the Bakken formation, we haven't seen a lot of this asset retirement obligation stuff yet, but we do have an asset retirement obligation on our books, and that is also calculated based on the estimated life of those oil and gas reserves that we talked about.
Speaker: And so... We accreting our asset retirement obligation and we're planning for the day that we retire those wells. Here and there, we will deal with an abandoned well, one that's just reached end of life or they've went in to rework the well and the well just can't be brought online for production. And so then that asset will be abandoned.
Speaker: And so it's an ongoing evaluation. It's something that we look at quarterly here. We go through all of our assets, all of our producing wells, and we compare it to the North Dakota Industrial Commission website. We make sure that ah the status that we are showing in our software agrees to the status that the state is showing.
Speaker: So operators have a responsibility to report the status of those wells to the state. And we feel that the state probably has the most accurate data in that since the operators are required to report that. And so we compare our data to that data. And if we need to write off a well and abandon it and, you know, impact our asset retirement obligation, then we do that.
Speaker: But that's also a very unique thing that you are constantly looking at in the oil and gas industry is really looking at your asset retirement obligations, that expected life of those wells in your reserve report, and making sure that all of your information is agreeing to what the operators are reporting to the state.
Speaker: Just one more question on this asset retirement obligation. I know it's not something that's happening on a regular basis, but you might, like you say, have to abandon a well, but you're the non-operator, right? So the actual physical you know closing of the well, retiring of the well, I assume is going to be on the operator and they have the ultimate responsibility, but is that very expensive and how does it tie to your company as the non-operator?
Speaker: The cost of abandoning a well is highly dependent on the operator and the different you know standards that they have in place. But I would say on average, we see an asset retirement abandonment come in at about $250,000 for the well.
Speaker: And they ultimately retire that well, cement in the casing, so we don't have to worry about any ground, you know, oil spills on the ground or anything like that, any back production. And then whatever that pad location is,
Speaker: Completely gets taken back to natural habitat. So they will come in put topsoil in, replant it, do all of those things. And once the grass grows, you would never know that there was an oil site on that location. They completely take it back to what it naturally was. They work with the landowner. Fences need to be redone, those kinds of things. And so...
Speaker: As a non-operator, we will get AFV in the mail for that abandonment, and we will agree to you know pay our fair share of the cost related to abandoning that well, and then the operator will go do the work, and we're we usually get ah some sort of notification letting us know it was complete as well.
Speaker: Excellent. Thank you for that clarification. So you know just thinking about oil and gas and the industry that you're in, and you know i know there's so much stuff that's going on, but talk to me about the concept of joint interest billing and revenue distribution, because I know that's not that straightforward. And understanding you know the working interest versus the royalty interest and how those calculations are performed. Yeah.
Speaker: Yes. So the joint interest billing and revenue distribution, you know, you've heard me talk now throughout this podcast about operators and working interest owners and those sort of things. And so it's very uncommon, if not totally unheard of, for one single person to own 100 percent of a wealth.
Speaker: And so all of these operators go into, you know, these formations and drill, knowing that they had a lot of partners in drilling the well is the moral of the story.
Speaker: And so through that process, they do what's called title work. And in the process of doing the title work, which is a legal process, they will find out who all the owners in the well are. There'll be royalty owners, there'll be mineral owners, there'll be lease owners.
Speaker: And that shows them who they need to bill and also ultimately pay when oil production happens. And so you'll also have landowners that are they sometimes still own the minerals on the well, like on that well. Not always. You know, there are cases where the landowners have sold the land and they've sold the minerals with it. I mean, pretty rare once people knew what those minerals were worth.
Speaker: But ultimately, a joint interest billing goes to anybody that has a working interest in the well along, you know, with the operator. And so those people have to pay their fair share of the costs.
Speaker: based on their respective ownership. And then you have a revenue distribution, which also includes royalty owners. Now, royalty owners don't have any cost that they incur with the well.
Speaker: They just get a royalty from the oil and gas sales on that well. And so those are a lot of times the landowners that were the mineral owners or, you know, different different individuals that bought those minerals over the years. So It can be very complex accounting for operators because there could be 100 owners in that well. There could be 200 owners in that well.
Speaker: So they're taking 100% of the costs and 100% of the revenue and splitting it out based on who has the right to that ownership. Yeah, that does sound like a lot of work.
Speaker: Thank goodness that we have computers, software, and AI who can help us do all of this because I cannot even imagine back in the day when we were still doing things paper and pen, how difficult that must have been. So that's good news to hear. And it's kind of interesting. It's like in you know the music industry, when somebody writes a song, you know who owns a song song? Who owns the publishing rights? Who owns the performance? And all the different hands that have to get fed. And the same thing that's over here.
Speaker: I mean, I myself would love to have a royalty interest share. If you have any extras laying around, you dont please let me know. That would be great. But so to your point, there's so many different people that ah have rights to payments, but obviously are responsible for certain expenses and things like that.
Speaker: How does this all tie into taxation, right? I'm sure there must be state level taxation on this. Is there a massive amount of federal tax or most of it in the state? Can you talk to me about the tax on the whole process?
Speaker: Yeah, so North Dakota is unique from other states is my understanding of it. And I haven't done a lot of research in other states because I haven't had to. But in the state of North Dakota, the operators and any of the non-operated working interest owners, they don't have to worry about a property tax in regards to those oil and gas assets. However, the state has two different taxes. It's called a gross production tax and then also an extraction tax.
Speaker: And there There are different um price trigger points, and those are negotiated in legislation all the time, and so they kind of change. But the moral of the story is the base tax in the state of North Dakota is 10%. But if there's an extended period of time where the oil prices are high, the price trigger will go into effect, and there's an additional percentage of tax that's taxed on oil and gas production. Okay.
Speaker: Moral of the story is there's basically a 10% tax on the value of the oil that's coming out of the ground in the state of North Dakota, and that's remitted to the state. And if you do any research on the state of North Dakota, you'll understand that we have a legacy fund, which when I looked at it recently, it was worth right around $14 billion. dollars And so the majority of that legacy fund has, if not all of it, has come from oil and gas production and the taxes on that production in the state.
Speaker: And there's different investment criteria with that money. But the overall i arching idea is that the state of North Dakota will always have this legacy fund to fall back on to help fund different things in the state in the time that we don't have oil and gas production or that the oil and gas production isn't as lucrative as it is today for the state of North Dakota. So.
Speaker: The state of North Dakota has built up a $14 billion dollars rainy day fund, so to speak, with the taxes on that oil and gas production. And you'll see them deploy some of that in different ways approved by the state, you know, in new research like enhanced oil recovery or those kinds of things.
Speaker: Or, you know, a piece of it will go to local infrastructure or schools and education and those kinds of things. I know they used some of those funds ah in the early 2000s when the original Bakken boom really happened and all of those people were moving to the state.
Speaker: And obviously those schools in those small towns, they were used to having five or six students. And now they suddenly had 40 students in a class. And so obviously the schools had to add on and get more space and develop. And so some of those legacy funds, you know, were used for things like that, too.
Speaker: So. It's a little bit easier taxation, I've heard, than in other states because it's just simple. 5% for gross production, 5% for extraction tax.
Speaker: But that is how the state recoups their funds for that oil and gas production. So that's very interesting about the reserves and the rainy day fund. It's always good to have a reserve fund. We all know that, even our own personal lives. But the thing is, when we talk about reserves, I know in the industry, there's something known as ASC 932 and reserve reporting. If I'm a new CPA coming into the oil and gas industry, explain to me what ASC 932 is and the reserve reserve reporting and how that really intersects with the financial statements.
Speaker: Yes. I'm glad that we got to this question today because this is probably one of my most favorite things in my job and overall the accounting and the oil and gas industry. And everyone goes, oil and gas reserves, what's so unique about them? And why do you care? You're a CPA.
Speaker: Well, the reality of it is a CPAs do care because the value of it ends up in our financial statements and our depletion and all of those things that we discussed earlier. But What's so exciting about it is I tell people, imagine that you're running a company whose entire value sits under the ground, miles beneath the surface, and you can't actually see it.
Speaker: But you have to estimate it and you have to put a value to it. And so AOC 932 is the accounting playbook specifically for oil and gas. And it's the standard that governs how companies disclose what they own beneath the ground.
Speaker: And this is where oil and gas is so different from a lot of other companies when you talk to your peers is because we don't have a warehouse that we can go in and count our inventory. Our inventory is based on a geology and engineering estimate that And that's what our inventory for production is for years to come.
Speaker: And so that's where ASC 932 truly helps us. It sets out how we value those assets underneath the ground, how we work with the engineers and determine which assets we can put in our oil and gas reserve valuations based on the timeline of when that production will come online.
Speaker: It tells us the pricing models to use. We all know that the oil and gas prices are extremely volatile based on what's going on in the economic and economics and world at the time.
Speaker: And so it tells us the pricing to use in those models. And it also just gives us an overarching set of guidelines to follow as we value something that we physically can't see.
Speaker: So it's extremely helpful that that's out there for all of us. And I always say, ultimately, reserve reporting is where geology and engineering meet accounting, and we ultimately all meet storytelling.
Speaker: And the story changes every single year, depending on the economics at the time. I can only imagine, right? I can only imagine. And, you know, so much of the industry is when you're trying to budget and figure out what your production levels are going to be and how you're going to account for that. it It just seems to me so different than your traditional like retail industry, let's say. It's something that... um I assume takes a while to get used to. Like yourself, when you started in it and having to understand ASC 932 and all the different nuances of it, was there a big learning curve for you or is it like anything else if you do it every day that you kind of pick it up pretty quickly?
Speaker: I would say it's like anything else where if you immerse yourself in it and you're doing it every day, you pick up on it really quickly. But I had some really good mentors along the way, and they really helped me understand that codification and also understand the fundamentals of why it's easy to read something and apply it.
Speaker: But if you don't fully understand the full picture and the why, sometimes it can be a really hard thing to grasp. And so thankful for the mentors I had along the way that were willing to explain the why and put me in touch with other people in the industry who were working on these things so I could fully understand the why and see how it impacted them.
Speaker: That was very helpful in me understanding that whole concept and ultimately get comfortable speaking to engineers. And engineers speak in a totally different way than we do. And you have to work hand in hand with those engineers during this whole process.
Speaker: So understanding the engineering speak was just as much of a learning curve of understanding the why when i first stepped into this. That is a great call out, Raina. I think something most successful people share is that they all could point to some mentor or mentors over the course of their career that really helped them get to where they need to be or helped them in their transition into their new role. So I'm glad to hear in your industry as well that people do this and you have access to mentors. It's always so important.
Speaker: And I'd like to ask a high level question with respect to your industry, oil and gas. What if I'm coming into this industry are some things that I should be aware of with respect to maybe the biggest accounting challenges or even regulatory challenges that you have to wrestle with on a regular basis? Is it related to commodity price volatility or ESG reporting or maybe something else? What are your thoughts on that?
Speaker: I think one of the most common things that we deal with on the industry level and is current, even in current times, is commodity price volatility. And i think over the course of 2026, we've seen what commodity prices can do just on world events and how one day you might be making investment decisions based on $55 oil.
Speaker: But in the near term, you're making investment decisions based on something different. And so I think it's important in our industry to, i mean, you need to plan for a range of pricing in a short period of time.
Speaker: And so, you know, in our organization, we always say don't over leverage yourself, um stick to your knitting and stay to your core business and don't make a decision based on $100 oil because it might not be here tomorrow.
Speaker: And so, you know, our biggest thing is just sticking to our core and making sure that we're never over leveraged and that we can plan for good times and bad times.
Speaker: Another unique thing that I think anybody in the industry is really dealing with is yeah ESG reporting. And I say that it's unique because we're all learning what every state wants as we go.
Speaker: And so right now, our organization is working with California reporting and also evaluating the reporting we may have to do in New York. But I think it's one of the biggest challenges that we're dealing with right now just because it's new and we don't know what we don't know.
Speaker: And we're trying to understand the laws and they're all fairly new and some of them aren't even finalized yet. So it's just a really big shuffle to try to figure out what we need to do with the ESG reporting.
Speaker: And then another challenge that I think everybody kind of faces is having the right talent in the right places and developing that talent because we all feel like everything is changing so fast and we need all the help that we can get. So ah talent acquisition, developing that talent, and then also retaining the talent for years to come.
Speaker: So speaking of talent, let's say that I'm a young accounting student. I'm just graduating. I'm getting ready to take my CPA exam. Maybe I just passed it and I'm looking for my first job.
Speaker: Talk to me about a career in oil and gas. Are there opportunities there? Is it growing the industry? Is it contracting? Is it something that a young accountant should look to get into?
Speaker: I would tell a young accountant that there are a lot of opportunities in oil and gas if you're interested in the energy space for sure. And recently I actually was on a flight for work and i ended up talking to the girl next to me and here she was a young CPA and she was trying to figure out how to get into the energy space.
Speaker: Like she really wanted to get involved in the energy space, but she felt like you almost needed to know somebody or be able to kind of open that door because it was a really hard space to get into.
Speaker: And I kind of understand where she's coming from. So what I would tell a young CPA is don't be afraid to knock on the door. If you see somebody at an event or something that's involved in the energy space,
Speaker: Go up and say hi. think most everyone in the energy space is excited to tell their story. And we're always excited when somebody's kind of interested in our industry, because frequently we're framed as bad guys with ESG and all those environmental things. And so...
Speaker: When somebody actually wants to know what's going on in our space, we're usually really excited to tell the story. And so i would tell people if you're interested in getting in the space, there is a lot of opportunity.
Speaker: The sky is the limit. And the space is constantly evolving to meet the demands of every single person in the United States and across the globe. So the opportunities are endless. Don't be afraid to reach out to somebody. Find somebody on LinkedIn that you know is in the industry.
Speaker: Send them a message. Most people are very willing to open that door and have that conversation. And we need the talent. So we're looking for young, talented individuals in this space for sure.
Speaker: And I've gotten to say, I've had the opportunity to meet Raina at some conferences and you are not a bad guy. So I will personally vouch for you that you are not a bad guy. That's for sure. Do you do a lot of traveling for your job?
Speaker: I do. And i feel like every time that I think that the traveling is going to be a lull, it picks back up. But there's a lot of industry events that I travel to. And then I'm also very involved with the AICPA and our state board.
Speaker: And so I do quite a bit of traveling for both of those things. And in my role, I manage our banking relationships. So that adds some travel as well of visiting the banks and doing those things and introducing the different teams to the banks as needed. So quite a bit of travel in my role.
Speaker: But I always say I hope the travel slows down, but we'll see if it does. A true story. Raina and I wanted to get together to kind of talk about you know things in the podcast and stuff, and we couldn't find any time. We actually had to meet. She's flying into New York. I'm flying out of New York. We got a half an hour in the airport together and got to talk. So it happens. It happens. But that's what we do, right? It's kind of the nature of the beast, but it's great stuff. So,
Speaker: I don't want to take up too much more of your time, Ray. I really appreciate all the time you've given so far. But if you could, you know, kind of look in that crystal ball and think about maybe 10 years down the road, 15 years down the road.
Speaker: Tell me, what do you see that the role of accountants will play in oil and gas and energy? Will it be growing? Do do you have any insights that you can share with us on your perspective?
Speaker: I think accountants will drastically play play a big role in how the the space evolves. You know, we mentioned Crack the Code 2.0 earlier. And as we know, as there's any new development in a space, there's a lot of either new tax regulations that come around it or accounting regulations on how to account for those things on your balance sheet.
Speaker: And so obviously accounting people are going to have to have a seat at the table. To develop the regulations around the different things related to enhanced oil recovery and especially if enhanced oil recovery and the science behind that really takes off.
Speaker: I think you'll see a some things that have to be discussed in the tax regulations and those things to make that sort of stuff work. So I think accountants will drastically have a role in it. um Another thing is, is just as businesses evolve and grow, they need our guidance. They need our expertise.
Speaker: They need to understand the full picture of how to deploy capital and when it makes sense to deploy capital and when it doesn't make sense to deploy capital. So I think we'll consistently have a seat at the table to discuss those things.
Speaker: and be a strategic part of the direction that all of these organizations go. So I think it's important to remind ourselves that we should have a strategic seat at the table as well.
Speaker: Well, I know that you um really love the oil and gas industry and you found your niche and you know you've told me that you can't imagine yourself anywhere else. So I appreciate you sharing all of these great insights with me and with our audience. And I really can't thank you enough for taking the time out of your schedule to come and to talk about the oil and gas industry. So thank you. And hopefully you'll come back and be a guest again at another time in the future.
Speaker: Yes, think we have a few other things we can talk about. So I look forward to coming back and i appreciate your time today as well, Mike. It was great. Well, it's my pleasure. And yes, oil and gas, there is definitely a lot to talk about. So I look forward to the next time we can do it. And I just like to thank everybody out there for listening to this podcast with myself and with Raina. I think it was great. And we learned a lot of useful information.
Speaker: And I want to make sure that everyone is aware you can earn CPE credit just for listening to this podcast. All you need to do is visit the link in the show notes to get your credit.
Speaker: And great news, if you're already a Prime CPE subscriber, you can earn CPE at no extra cost. Just log in to finalize your credits.
Speaker: Thank you again, Raina. I really appreciate it. Thanks to the audience. And I look forward to seeing you in another podcast in the future.
