Why is accounting important for oil and gas companies?

Accounting tracks costs, revenue, and assets in exploration, production, and refining. It ensures transparency and compliance with UAE laws.

What are the main challenges in oil and gas accounting?

Challenges include high capital costs, lease complexities, asset impairment, and compliance with IFRS standards.

How does IFRS 16 impact oil and gas leases?

IFRS 16 requires firms to record leases as right-of-use assets, which changes how service contracts and leases are reported.

What services does Mubarak Al Ketbi (MAK) Auditing provide for oil and gas firms?

We offer auditing, accounting, VAT consultancy, CFO support, and financial advisory tailored to the oil and gas sector.

Can proper accounting improve oil and gas profitability?

Yes, accurate accounting improves financial decisions, reduces risks, and supports growth with better control of costs and assets.

Key Accounting Considerations for Oil and Gas Companies

Introduction

The oil and gas industry plays a vital role in the UAE economy. It contributes to high revenues and strong per capita income. The wealth from oil and gas is invested in many other industries, creating growth in infrastructure and attracting foreign investors. Over time, the share of oil and gas in GDP decreases, but its impact spreads into other fields.

The UAE oil and gas market expects massive investments to expand refining capacity. These investments make the industry stronger compared to alternative energy sources. Accounting in oil and gas companies is complex because it covers acquisition, exploration, development, and production. Costs are high in exploration and production. Transportation through tankers and pipelines also adds expenses. To manage these costs, many producers sign long-term contracts, especially for offshore projects.

The oil and gas industry is also influenced by:

Commodity prices
Currency fluctuations
Interest rate risks
Political developments

Before making accounting decisions, companies must analyze these external factors.

Activities in the Oil and Gas Sector

The industry divides into three segments:

Upstream – Exploration and drilling for oil and gas resources
Midstream – Transporting and processing extracted resources
Downstream – Refining raw materials into usable products

These three stages together form the backbone of oil and gas operations. Each stage requires specific accounting considerations.

Accounting Aspects for Oil and Gas Companies

Revenue Recognition

Revenue is recognized through a structured process:

Identify contracts and performance obligations
Assign transaction prices to obligations
Recognize revenue when obligations are fulfilled

This process ensures clarity and transparency in financial reporting.

Inventory

Companies must calculate inventory using FIFO or weighted average rules. This ensures accurate valuation for reporting purposes.

Exploration and Evaluation Assets

Costs linked to exploration and evaluation are recorded as company assets. These expenditures are related to searching for and evaluating new resources.

Asset Impairment

An asset is impaired when its value on paper is greater than its recoverable amount. Oil and gas firms must frequently assess assets to check for impairment.

Depletion, Depreciation & Amortization

Depletion – Reduction of natural resources as they’re extracted
Depreciation – Allocation of costs of material assets over their useful life
Amortization – Deduction of capital expenses over time

These methods ensure assets are recorded fairly in financial reports.

Key Accounting Considerations

Embedded Lease

Service contracts may include embedded leases. Under IFRS 16, companies must record such leases as right-of-use assets. Oil and gas firms should review all agreements to identify these hidden leases.

Leased Assets

Oil rigs and other equipment are often leased through bundled contracts. These agreements include labor and other services. Companies must separate lease elements from service costs to comply with IFRS 16.

Equipment Lease in Joint Ventures

Oil companies often share equipment through joint ventures. Firms must decide whether to record these leases on a gross or net basis. This ensures proper reporting and compliance.

License Renewal

Oil and gas firms frequently renew or terminate leases. Economic shifts or new business goals influence these decisions. Triggering events may require reassessing a lease’s classification or revaluating its right-of-use asset and liability. Firms must create processes to reassess leases whenever conditions change.

Challenges Faced by Oil and Gas Companies

High capital costs for exploration and production
Global competition with alternative energy sources
Frequent policy changes in UAE regulations
Complex lease agreements under IFRS standards

To overcome these, oil and gas firms require expert accounting support.

Role of Mubarak Al Ketbi (MAK) Auditing in Oil and Gas Accounting

Mubarak Al Ketbi (MAK) Auditing provides specialized accounting and advisory services for oil and gas companies. Our certified professionals understand industry complexities and deliver customized solutions.

We help companies with:

Accounting and bookkeeping
VAT and tax consultancy
CFO services
Management accounting
Internal and external auditing

Our team ensures compliance with IFRS, supports efficient operations, and strengthens financial performance. With in-depth experience, we design tax-effective measures and strategic plans that help oil and gas companies grow.

What Can Help

Mubarak Al Ketbi (MAK) Auditing supports oil and gas companies with expert accounting and advisory services. We make sure your business stays compliant, cost-efficient, and profitable. Remember, “Every cloud has a silver lining” — with the right accounting partner, even challenges in oil and gas can turn into opportunities.