Allocation of Costs Between Petroleum Liquids and Gases

Petroleum producers have been engaged for many years in supplying several different types of materials from the leases they operate. Some leases produce crude oil and casing-head gas, others produce gas-well gas and condensate, and still others produce all four of these materials. Therefore, the problem of allocating costs between these intermingled products is not a new one. While in some fields gas has been the dominant product, most producers have been interested principally in oil. Consequently, little has been done about the cost allocation problem by oil producing companies. For accounting purposes, these companies have generally considered gas a by-product, and whatever realization was obtained from it was accounted for as a reduction of producing costs, which were all considered to be applicable to crude oil. The inadequacy of this procedure under present day conditions, and the need for a more realistic approach to the problem of accounting for costs, can probably be illustrated best by a brief review of the growing importance of gas in the economic structure of the industry. Need for Allocation Known natural gas reserves in the United States approximately doubled during the 10 years ending with 1952, rising to a total of nearly 200 trillion cu ft at the beginning of 1953. In terms of heat value the 200 trillion cu ft of gas is approximately equal to the combined heat content of the 28 billion bbls of crude oil and the 5 billion bbls of condensate in reserve at the beginning of 1953. However, the heat units produced in the form of oil in 1952 were almost twice as great as those produced in the form of gas - a good indication that there is much more room for expansion in production of gas than for crude oil. The rapid growth in demand for gas since the end of World War II has brought about a substantial increase in the wellhead price, despite increasing reserves. In the Southwest, for instance, the price doubled in the period from 1943 to 1951, rising to an average of approximately 5.6 cents a thousand in the latter year. Marketed production of gas in the United States had increased to a rate of about 7.5 trillion cu ft in 1951 and over 8 trillion in 1952. The increase in demand thus indicated has been close to 12 per cent a year since 1946, more than twice as great as the rate of increase in demand for crude oil.