Malone Petroleum Consulting



The operator should not make a profit on the Non-Operators

The operator should not make a profit on the Non-Operators

As we understand, John Jolly was a highly-respected, former executive director for COPAS who honorably supported COPAS' originally-intended, "neither-gain-nor-lose principle" which was ethically and logically established by the original members of COPAS. John Jolly wrote: "It has always been the intent of the Operating Agreement that the Operator should not make a profit or conversely suffer a loss just by the fact that he is the Operator of the joint operations."

The Joint Operating Agreement (JOA), which overrides any COPAS language, says the parties are to share costs in their respective shares (1989 JOA Ill.B). The operator has to allocate the "entire cost" of reworking, sidetracking, deepening, re-completing and plugging back wells on an actual cost basis to the consenting parties (Vl.B). The JOA says each party "shall be liable only for its proportionate share of the costs of developing and operating the Contract Area." (Vl.A)

COPAS bulletin #16 Overhead - Joint Operations said on page 22, "The object of both Parties is for the Operator to recover his Overhead cost. The Operator is not expected to under-recover this cost nor over-recover an objective."

The foreword to Copas Bulletin No. 5, which covered the first 1962 Copas form said that "all costs, subject to special provisions, shall be shared in the proportion to the interest of each respective party . . ."

The interpretation #23 on equipment pricing, said: "A basic concept of Joint Operations is that the Operator should neither gain nor lose economically from being the Operator of a joint property."

One thing to never forget is: Many oil and gas operators in the 1980's were buying tubulars for less than 50% in Texas and were charging it to the investors at 100% Eastern mill, thus making a significant profit. For many years COPAS did absolutely nothing to stop this practice; however, we know of very few lawsuits since we understand that operators, if pressured, backed down on the overcharges. The memory of this prior, profitable event tempts any normal, profit-oriented entity to want to take, or not take, steps which can significantly affect their profits and bottom line. Major oil companies kindly and wisely allow one or more employees almost open schedule and travel expense to contribute to COPAS. Our major concern is COPAS has been making significant changes in all their documents. For instance, I solely developed, as a one person committee, the extraordinary COPAS bulletin #4 which was issued and was a very valuable presentation of all prior COPAS accounting procedures for preservation of the very COPAS foundation and history which would be a convenient and easy reference for all the oil and gas companies and investors who still remained in these agreements after many years. Tragically, without my knowledge, the bulletin was removed. Future oil and gas accountants will never get a glimpse these educational, groundwork agreements for the rest of their career. Another bulletin that I solely developed, as a one person committee, was the most valuable and original COPAS index which was and is critically needed and still remains in place. I coordinated with one Canadian member and helped the highly respected Canadian Society also develop their first publication index. The COPAS director personally told me he was very upset when the COPAS bulletins were renamed and replaced! There is a risk and probability that the whole bottom line temptation is: If you cannot change the contract, then you can always go through the back door and push hard with the right timing to get a vote to eventually change the interpretations to your company's advantage. However, the contract remains the contract. Common sense and common law immediately tell you that a contract CANNOT be changed by a very limited number of self-serving, voting members of any organization to change the intent and terms of any and/or all of thousands of past, present and future contracts for the thousands of independent oil and gas companies and investors. COPAS existence and history was always based on ethics and fairness - I have always loved and enjoyed COPAS, but now I'm concerned that it has become a political arena - even to the extent of the Oklahoma City Accountant's society fighting and dividing in half as a matter of fairness, integrity and principles. Also, I understand they are attempting to change the bylaws to allow them to expel or refuse membership for those who might have differing, professional viewpoints. When you think about it, this could only be exerted on small individuals or independents - it will be a cold day down hole (known for very high temperatures) if that could be done to any major oil company. We all should be allowed to disagree but still remain friends. In fact, I presented a proposed interpretation to the joint interest committee which was defeated 100%; so, I simply took it to the audit committee and made a speech; it was readily accepted and the interpretation was published and we all remained independent thinking friends. It should also be mentioned the requirements to join COPAS used to be very strict when they only wanted documented expertise - years ago I submitted for membership a CPA and a Chartered Accountant both who had many years of experience and who worked for me and they were both denied membership due to not meeting the existing requirements and qualifications! Today, almost any inexperienced and uneducated person can become a voting member. In the old days, it took me almost two years just be observed and accepted to the hallowed Houston joint interest committee - I just kept my mouth shut and learned plenty; now, you can just turn in your name with no qualifications or experience and be accepted.

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