Malone Petroleum Consulting



Exceptions and Discounts in an Oil and Gas Interest Report

Oil and Gas Audit Report

Per Joint Interest protocol, a formal report, copies of all review memos with detailed schedules, references, and copies of related documents to support exceptions will be provided to the Operator's representative during and/or after reviews to enable the retrace of proposed exceptions for the timely adjustment of the joint interest account, unless temporarily delayed by personal client review.

Although a Non-Operator might not be in all wells within a report, he is greatly encouraged to read the report in its entirety. The total information can give the reader a more significant understanding of the items which may pertain to their current and future investments. The Non-Operator is encouraged to share some of the information, as a by-product of this report, we developed with other departments, e.g., Engineering, since many times there is limited information available on outside operated properties.

Operators receive free review services, and in some cases receive most of the benefits and recoveries when the Operator has the largest working interest, e.g., contractor's responsibility, duplicate payments, vendor overcharges, coding errors to the wrong working interests, and other items which can and do occur. Only when credits are unusually large or important to the Operator, we request the Operator to consider, per the COPAS Accounting Agreement, crediting the Joint Account with the Operator's fair share of beneficial review costs, especially since the overall intent of the operating agreement is to equally share costs according to the working interest percentages.

In some cases, there are exceptions which we do not write since they would: be considered by some to be immaterial, have resulted in costs exceeding potential benefits, and/or have caused undue extra work on the part of the Operator.

One of the intents of our review is to clear up open and unresolved questions or problems and to give the Non-Operators the necessary assurances concerning their investments in a fair and professional manner, so they may continue to make additional investments with the Operator which will result in profits for all parties.

The exceptions that are included in the reports, in most cases, reflect common occurrences normally observed when reviewing the records of other operators. Large dollar amounts or quantities of exceptions are not considered a reflection against any operator; it is a representation of the exceedingly complex nature of oil and gas industry activities, combined with years of experience, expertise and tedious review procedures.

Although recoveries normally exceed review expenses in an active review program, the objective should not necessarily be limited to obtain recoveries of money from the Operator. More importantly, valuable information can be made available to the investors about the Operator; the investor can better determine which Operators are making the best attempt to deal fairly with the investors.

It should be noted that standard oil and gas industry practice and procedures bear a significant relevance to our overall review scope. Also, if a contractual clause is found to be contradictory and/or to the disadvantage of the client Non-Operator and/or the Operator, information which we consider to be most essential and beneficial will be reported in either a direct formal exception or included in the body of a letter. In many cases, this indicates a need for an extended investigation in the oil field and/or a review of the vendor(s) to assure the results of the joint account as a whole are fairly presented. Vendor reviews help keep honest vendors honest.

Substantial discounts have been available from most vendors since early 1982 in order to be more competitive. Discount information can be difficult to obtain since the Operator can only compare discounts within their own company; whereas we are able to document these discounts for the same, or like, vendors in different companies. Discounts are not limited by the size of the vendor or Operator. The final result can mean that the drilling of every future well can be for less than price list costs. Operators who pay invoices late, will receive fewer discounts from vendors - Operators may take a temporary interest gain, but will no longer receive favorable discounts from some vendors on future wells drilled.

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