Malone Petroleum Consulting



Joint Interest Audit is the Correct Name for the Joint Venture Audit

Joint Venture Terminology

Definition: Under international financial reporting standards, there are three types of joint venture:

Jointly controlled operations. There may not be a joint venture legal entity. Instead, the joint venture uses the assets and other resources of the venturers. Each venturer uses its own assets, incurs its own expenses, and raises its own financing. The joint venture agreement states how the revenue and expenses related to the joint venture are to be shared among the venturers.

Jointly controlled asset. Venturers may jointly control or own the assets contributed to or acquired by a joint venture. Each venturer may receive a share of the assets' output and accept a share of the expenses incurred. There may not be a joint venture legal entity.

Jointly controlled entities. This type of joint venture involves a legal entity in which each venturer has an interest. The new legal entity controls the joint venture's assets and liabilities, as well as its revenue and expenses; it can enter into contracts and raise financing. Each venturer is entitled to a share of any output generated by the new entity. A jointly controlled entity maintains its own accounting records and prepares financial statements from those records. If a venturer contributes cash or other assets to a jointly controlled entity, the venturer records this transfer as an investment in the jointly controlled entity.

In all three of these types of joint venture, there are two or more venturers that are bound by a contractual agreement that establishes joint control over the entity with Equal control and management.

As you can see, the term the industry uses is technically wrong: These are not joint venture audits, they are joint interest audits. The use of the wrong term makes the eyes of educated attorneys roll in unison. However, it is difficult to change the entire oil and gas industry's usage of this term.

Definition: According to Black's Law Dictionary

A joint venture requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. Unlike a partnership, a joint venture does not entail a continuing relationship among the parties.

A joint venture is a collaborative effort between two or more persons or organizations for the purpose of adding business expertise for a specific project forming a single subsidiary company developed for the project which usually lasts a year or two and then diminishes. Some companies may lack sufficient capital, technical expertise or resources needed to thrive in a highly competitive environment.

More Joint Interest Audit Terminology

BCP/ACP means BEFORE CASING POINT / AFTER CASING POINT. In this case, the Operator's share of the cost may be carried or shared by the Non-Operators until casing point is reached. This promote rewards the Operator for putting the deal together. Per industry practice, the BCP normally changes to ACP after the log has been completed and a decision is made to either plug or complete the well. Exceptions normally ask the Operator to change the charge from BCP to ACP. It should be kept in mind that BCP/ACP exceptions do not result in full credits to the Non-Operators, but result only in a lower working interest cost for the Non-Operators. These types of exceptions, therefore, can inflate the report results. There are other forms of promotions besides ACP/BCP, e.g., carried through tanks, promotion by the Operator charging 110% vs. 100% costs to the Working Interests, and carrying another working interest in order to obtain a farmout of a lease.

TBD means TO BE DETERMINED and is used in place of amounts: (1) to present items which can not be quantified with a dollar amount and, therefore, can never be treated lightly - sometimes a TBD can be the largest recovery; (2) to present items which are exceptions and must be addressed, but may only require a reply by the Operator; (3) to present miscellaneous items which may fall into gray areas; or (4) to obtain additional information before the item can be properly resolved.

Turnkey or footage contracts are considered by some to limit the available exceptions; however, it can be just the opposite since they can create large dollar exceptions, e.g., the rig contractor should have furnished the surface casing or the logging, which was erroneously charged to the Joint Account. Every well is different and the results are always unknown, until actually reviewed.

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