A unitization is the pooling of assets by several parties in an oil and gas producing area in order to form a single operating unit, in exchange for receiving an interest in that unit. These arrangements are entered into to achieve operating efficiencies across the producing area, or because unitization is required by the government. Participation in the unit is typically proportionate to the oil and gas reserves being contributed to the unit by each of the entities.
Since the stages of development across the entities may differ when the unitization is enacted, the entities may pay or receive cash to equalize the contribution of wells and other assets with the ownership interests in reserves. When this happens, the recipients of cash treat the event as a cost recovery, while the payers of cash record it as an investment in wells and other assets. Thus, the cost of an entity’s interest in the assets of the unit is the cost of all assets contributed, plus or minus any cash paid or received.