Oil Ass

Oil Ass
Direct Financing vs. Sales-Type Leases
What Are the Advantages & Disadvantages of Capitalizing ...
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Oil company assets are classified in three main divisions: upstream, midstream and downstream. Upstream operations are the exploration for oil and gas and the appraisal, development and production of any discovery, and most oil companies do not own equipment for upstream activities; they hire contractors to perform services such as geophysical surveys, well drilling and geological and environmental studies. Midstream assets are linked to the initial processing, storage and transportation of oil and gas. Crude oil refining into products such as gasoline, kerosene and diesel is a downstream activity, as is the product distribution to and marketing by a retail network.
The United States is the only country in which private individuals can own the mineral rights to subsurface oil and gas. The sale, lease and exploitation of these oil and gas assets are private business matters subject to taxation, which is why the U.S. has numerous small oil companies working overwhelmingly in the upstream sector. The federal government owns mineral rights beneath the Outer Continental Shelf (OCS). In all other countries the state -- namely, the crown estate in the case of a monarchy like Britain and British Commonwealth countries like Canada -- or the treasury in the case of a republic, owns all of the oil and gas mineral rights.
In the United States, oil and gas mineral rights are upstream assets that can be traded. An exploration lease (also called license and concession) is granted by a mineral rights owner or a government to an oil company over a specific area and for a fixed period. In return, the company performs exploration work such as geophysical surveys and drilling. This lease or license is also an asset than can be traded in whole or in part.
Discovered oil or gas reserves in the ground are the main upstream assets. Reserves are classified as proved, probable or possible depending on the certainty with which their size has been estimated. Outside of the United States, small companies -- including U.S. companies -- specialize in acquiring a lease or license to explore an area and then sell a large share of it to a larger oil company. In return, the buyer finances the smaller company's work obligations on the license.
Midstream assets include initial processing, storage and transportation facilities. The initial processing usually involves the stripping out of natural gas from crude oil at plants close to the oil field. Storage tanks for oil or gas can be located on land or at sea. Offshore storage tanks can be concrete storage tanks resting on the sea floor or large floating tankers moored to the sea floor. Transportation facilities are pipelines, trucks, barges and tankers carrying crude oil and gas from producing fields and initial processing plants to oil refineries.
Larger oil companies that have diversified into other energy sectors such as electricity may own power generation plants that also classify as midstream assets. Small companies are rarely involved in midstream activities other than holding a small percentage -- 2 to 10 percent -- interest in pipelines connected to their upstream assets.
Downstream assets are oil refineries and associated storage facilities for refined products and the refined product distribution and marketing networks. Such networks are pipelines, trucks, tankers or barges that carry the refined products and the retail network of gas stations where they are sold. Many oil companies also have gas assets. These are natural gas liquefaction plants, natural gas pipelines and gas distribution pipelines to domestic, commercial and industrial end users. Small oil companies mostly hold franchises on gas stations or own local bottled gas distribution networks.
Asset valuation in the oil industry depends on several factors. The values of oil and gas reserves in the ground depends on the capital investment and operating costs required to produce them, as well as prevailing oil and gas prices. A heavy, high-sulfur crude oil is less valuable than a sweet (low-sulfur), light crude because the latter is easier to process. The United States allows oil companies to value their oil and gas inventories with the last in first out (LIFO) method. This assumes that the last oil and gas produced is the first to be sold. The difference between the acquisition price and the sale price may generate either a taxable profit or loss for the company.
Based in London, Maria Kielmas worked in earthquake engineering and international petroleum exploration before entering journalism in 1986. She has written for the "Financial Times," "Barron's," "Christian Science Monitor," and "Rheinischer Merkur" as well as specialist publications on the energy and financial industries and the European, Middle Eastern, African, Asian and Latin American regions. She has a Bachelor of Science in physics and geology from Manchester University and a Master of Science in marine geotechnics from the University of Wales School of Ocean Sciences.
When growing your small business, you may need to invest in assets to aid your day-to-day operations. Leases provide a way for you to use or acquire equipment without having to buy the asset outright. Capital leases come in two categories: direct financing and sales type leases. Familiarize yourself with both to see which one works best for your small business.
Capital leases come in two forms: direct financing and sales-type leases. A capital lease allows the lessee to enjoy some of the benefits of ownership, such as claiming depreciation each year and deducting the interest component of the lease payments. However, leasing typically ends up more expensive for small businesses in the long run due to the lease charges added to the cost of the asset.
According to the Financial Accounting Standards Board, a lease qualifies as a capital lease if it meets one of four criteria at its inception. A capital lease must transfer ownership of the property to the lessee by the end of the lease term and have a “bargain purchase option” in which the lessee may pay for the asset at a reduced price, a lease term equal to 75 percent or more of the estimated economic life of the asset, or a present value of the lease at the beginning that exceeds 90 percent of the fair value of the asset.
In a direct-finance lease, the carrying amount of the lease equals the fair market value of the leased asset. Therefore, the transaction does not result in a gain or loss, only interest revenue for the lessor. The lessor records the entry as a sale, removing the asset from its books and creating a receivable for the interest payments. The lessor determines the interest rate by calculating the internal rate of return for the asset.
In contrast to a direct-finance lease, a sales-type lease provides the dealer with a profit on the sale of the asset in addition to interest revenue earned. The profit derives from the difference between the fair value of the asset, or selling price, and the carrying value of the asset sold. The lessor uses the same accounting treatment as a direct-finance lease; however, profit is recognized at the inception of the lease.
Which lease type works the best for you will depend on the nature of your small business. Companies that engage in direct financing often acquire assets with a plan to use the equipment to generate enough income to cover the lease payments as well as turn a profit. This allows small businesses to quickly earn income without having to make a large upfront investment.
Sales-type leases work well if your small business utilizes rapidly evolving technology or equipment. These leases reduce the risk of having large inventories of obsolete assets at their end of their useful life. If your small business uses a lot of computer equipment, consider a sales-type lease.
John DuBois is a copywriter based in Portland, Ore. He earned a B.A. in history from Colorado State University and an M.S. in organization and management from Capella University.
Hemera Technologies/AbleStock.com/Getty Images
© 2019 www.azcentral.com. All rights reserved.

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