Overlift and underlift

Why do overlift and underlift arise?

Partners in a joint operation each own a share of production and take it in kind. Oil is lifted in cargoes of hundreds of thousands of barrels, and the lifting schedule allocates cargoes in turn. A partner that has just lifted a cargo has taken more than its share to date, an overlift; the others are underlifted until their turn comes. Gas imbalances arise the same way when partners nominate different volumes from a shared pipeline. See joint operating agreements, and for mines, mining joint arrangements.

Which method does IFRS 15 require?

IFRS 15 covers sales to customers. A partner's sales of oil to refiners and traders are revenue when control passes. The imbalance with partners is not a sale to a customer: IFRS 15 excludes non-monetary exchanges between entities in the same line of business made to facilitate sales to customers. So revenue is the barrels each partner sells, the sales method, as the IFRS Interpretations Committee confirmed in March 2019: a joint operator recognises revenue only for the output it has transferred to its customers. The older entitlement method, which recognised revenue on the partner's share of production whatever it sold, cannot be used to measure revenue from contracts with customers, although some companies present an imbalance adjustment as other revenue, separately disclosed.

Overlift and underlift: a year of liftings

A field produces 2,000,000 barrels in a year. Partner A owns 50%, so it is entitled to 1,000,000 barrels, but the lifting schedule gave it an extra cargo: it lifted and sold 1,100,000 barrels at US$ 70. Production cost, including depletion, is US$ 15 a barrel. The other partners are underlifted by 100,000 barrels between them.

At market value, A's gross profit equals the profit on its own entitlement, 1,000,000 x (70 - 15) = 55.0 million, and the extra cargo adds nothing until A settles the imbalance. At cost, A also reports the margin on the extra 100,000 barrels now, 5.5 million, which reverses when the underlifted partners take their oil. The underlifted partners mirror this with an underlift asset, at market value or cost under their own policy.

Cost or market value: which is better?

Both are seen in practice and IFRS does not prescribe either. Market value keeps each partner's profit aligned with its entitlement, so results do not swing with the timing of cargoes; the liability or asset is remeasured each period as prices move. Cost is simpler and avoids recognising price movements on oil the company does not yet hold, but lets profit move with lifting timing. The policy should be applied consistently, and material imbalances disclosed.

Is an underlift asset always recoverable?

Usually, because it is settled by taking oil from future production. It is reviewed if the field is close to the end of its life, if production may stop before the imbalance reverses, or if the overlifted partner is in financial difficulty. Imbalances still open when a field stops producing are normally settled in cash under the joint operating agreement.

How are imbalances presented?

As other receivables or other payables, separately from trade balances with customers, and current if expected to reverse within a year. The adjustment through cost of sales keeps revenue equal to actual sales, which IFRS 15 requires to be disclosed separately from any other revenue. Imbalances also affect the depletion calculation if production rather than sales is used as the numerator, so the two should be consistent. See depletion and units of production.

How does US GAAP compare?

ASC 606 leads to the same answer: revenue on actual sales to customers, with imbalances accounted for separately. Before ASC 606, the entitlement method was common for gas imbalances in the US. See oil and gas accounting.

This guide is general information. It is not tax or legal advice for your situation.