Audit Rights Denied
The Joint Operating Agreement is used by the Operator and Non-Operators to contractually control the operations related to the drilling, completing and producing oil and gas wells in the United States of America. The COPAS accounting agreement is attached to the Joint Operating Agreement.
The COPAS accounting agreement logically grants the very necessary audit rights for the Non-Operators. Audit rights are very critical since the Operator, controlling all the invoicing, has an understandable conflict of interest when interpreting the contract and invoicing the Non-Operators for millions of dollars they deem to be billable. This is especially true in grey areas which might have escaped the contractual language.
We have personally witnessed multiple violations of the Non-Operator’s audit rights, especially when the audit is being scheduled in the last six months of the contractually- available audit period. The Operator will tell the Non-Operators that they do not have any room to conduct the audit; therefore, they will not be allowed to exercise their contractual audit rights - plus the operator might be even more aggressive and refuse to extend the audit rights period. This is a breach of contract. We have also noted that when audit rights were refused on this very weak excuse and the audit is finally allowed, we find that there are many audit desks that are empty. The result: the Operator has absolutely lied when they said they were booked up when they were not booked up. Another strategy is for the operator to book up the end of the year first to make sure there are no openings. That frees up a lot of time early in the year. Also, the Operator has an obligation to adequately staff up for audits; otherwise they fail to fulfill their contractual obligation. The Operator can intentionally understaff this timely and contractually required function. This is another breach of contract. The refusal to allow an audit and the longer an audit is stalled gives the Operator free use of the Non-Operator’s money. Operators assume that most investors will not get an attorney involved. In summary, this practice of refusing contractual audit rights is unashamed stealing and the breaking of one of the Bible’s ten commandments.
Below is an extract of the audit language that is usually in the COPAS accounting agreements.
A Non-Operator, upon notice in writing to Operator and all other Non-Operators, shall have the right to audit Operator’s accounts and records relating to the accounting hereunder for any calendar year within the twenty-four (24) month period following the end of such calendar year; provided, however, the making of an audit shall not extend the time for the taking of written exception to and the adjustments of accounts as provided for in Paragraph 6 of this Section I. Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner which will result in a minimum of inconvenience to the Operator.