Underlift position
/What is an Underlift Position?
An underlift position arises when an organization owns a partial interest in a producing property and does not take its entire share of the oil and gas that is produced in a period. In this situation, there is an imbalance in the apportionment of oil and gas produced, so the firm recognizes revenue based on its ownership share of production in the period, as well as a receivable for any oil and gas shortfall (an underlift position) or a payable for any oil and gas overage (an overlift position). For crude oil imbalances, this receivable or payable can be recorded at the related production costs, market value, or the actual sales proceeds received. For gas imbalances, the SEC has stated that the receivable or payable can be recorded at the lower of the contract price, the current market value, or the price in effect at the time of production.
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Example of an Underlift Position
Two companies, Company A (60%) and Company B (40%), are joint venture partners in an offshore oil field. In January, the total production from the field is 1,000,000 barrels of oil (bbl). Based on their ownership interests, the companies are entitled to:
Company A: 60% × 1,000,000 = 600,000 bbl
Company B: 40% × 1,000,000 = 400,000 bbl
Actual lifting activity in January is as follows:
Company A lifts 550,000 bbl (instead of 600,000) → Underlift of 50,000 bbl
Company B lifts 450,000 bbl (instead of 400,000) → Overlift of 50,000 bbl
The accounting treatment of these underlift and overlift positions is as follows:
Company A (Underlift Position): Since Company A has taken 50,000 bbl less than its entitlement, it records the underlift as an asset (Receivable). If the oil price is $80 per barrel, the underlift value is:
50,000 bbl × $80 = $4,000,000
Accordingly, Company A records a $4,000,000 receivable for an underlift asset, as well as $4,000,000 in offsetting revenue. This means Company A still recognizes revenue based on its entitlement, even though it physically lifted less oil.
Company B (Overlift Position): Company B took 50,000 bbl more than its entitlement, so it records an overlift liability (Payable) of $4,000,000, and an offsetting debit of $4,000,000 to its revenue account that reduces its recognized revenue. In essence, Company B defers revenue recognition for the extra barrels until it balances out in future liftings.
Resolution of Underlift and Overlift:
In future months, Company A will lift more oil to make up for the underlift, and Company B will lift less to balance out its overlift. Over time, these adjustments ensure that each partner receives its fair share of production.