FAQs About Oil and Gas Auditing Procedures
How much is this going to cost?
All auditors in the industry use the same day rate for audits in the USA which is recommended by COPAS April 1st annually. Small wells usually require a week per well in addition to some preparation, wrap up and reporting writing time for each well. Of course, the higher the well cost, the more charges we have to acquire and review which takes more time. Reasonable expenses are also charged. Larger wells obviously have many more documents to review, and therefore, it takes more time to locate them; identify, track and review them.
The client's cost is in many cases substantially reduced since all Non-Operators are balloted and encouraged to continue with their fair sharing of costs according to their working interest ownership thus making the cost reasonable for everyone. Normally, operators do not share in any audit costs unless the operator has sophisticated management or a strong non-operator requires the operator to share costs since the operator was the cause of some very confusing or erroneous accounting. A simple example of the calculation of the fair sharing of joint interest audit costs would be: four owners including the operator would have a 25% ownership each (4 X .25 = 100%) resulting in three non-operators owning 75% sharing in 100% of the joint interest audit cost equally.
What is the difference between a CPA and an Oil and Gas Auditor?
CPA’s are trained to audit annual statements. They are not trained in oil field operations. Oil and Gas auditors are trained in oil field operations. They are not trained to audit annual statements.
Do you perform in-house work for operators as well as for Non-Operators?
As long as there is no conflict of interest, we can work independently to help both operators and non-operators.
Most company employees never think of it, but when one operator uses our services and another operator fails to use our services, they are losing double money. On a cumulative basis, it can easily be millions of dollars lost or gained.
We have performed work where the operator wants to make certain everything was perfect before an outside company audited them; they did not want to have any surprises in order to develop a reputation of trust resulting in substantially more investment funds. Our results for them to correct were: 1) these are the items they will find and 2) these are the items they will most likely not find.
What are the controlling documents used by the co-owners for a joint interest property?
The oil and gas industry uses the joint operating agreements (JOA) and the COPAS accounting agreements (COPAS) to allow the co-owners of oil and gas properties to allocate the expenses for and revenues from the exploration, development and operation of the joint interest property. The responsibility of operating the property is assigned to an operator. The other co-owners retain some control only through their right to vote on certain decisions, usually by AFE authorization.
Why do we have a joint operating agreement or COPAS accounting agreement forms at all?
As stated so beautifully by the president of an oil company: "If we did not have these standard agreements, I'd have to hire a team of attorneys for hours to review each and every contract for every well we drill - of which many would end up in litigation due to poor wording or for items we overlooked. With consistent language, I can glance for any changes and can sign the document in seconds!"
We are a non-operator / investor in one or more wells and we have spent a lot of money with an operator. What do you think about doing a joint interest venture audit?
Among so many other reasons, it is always a very good business practice to audit and find out how the operator treated you and your company, especially when the operator has spent large sums of your money. It's also wise to learn whether or not you can invest more money later with them. Trust, but verify.
Are there some reasons you might not want to request a joint interest audit?
Yes, there are some times you do NOT want to audit and we encourage you to not undertake the expense, and instead, do absolutely nothing at all. You can always ask us if there is any doubt.
Do you perform joint interest audits for royalty owners?
Yes. Hopefully, you have a great oil and gas lease to start! Always get help before signing an oil and gas lease.
What if we are down on our luck and cannot pay you?
Call us. We might surprise ourselves on a logical and beneficial solution for you.
Do you think the operator will mind if we conduct a joint venture audit?
The smarter operators are usually conducting their own outside joint interest audits of other companies and fully understand the multiple values they gain. Also, many totally experienced people don't think about the concrete fact that some of our largest recoveries benefit the operator more than anyone else since the operator usually has the largest ownership. Our valuable findings can educate the operator of potential risks that they did not know existed. Operators love our professionalism and results; so, if there is NO conflict of interest, they will ask us to conduct audits for them too. We've had operators stunned on what we have found for them!
Is there any reason to perform an oil and gas audit for expenditures that are under AFE estimated cost?
Yes. Never forget the AFE's (authority for expenditure) line items are only estimates. AFE’s are usually drafted by the operator's staff many times until the most acceptable presentation for any anticipated, potential situation has been addressed. They many times use the same AFE with a different heading for subsequent wells.
Is there any reason to perform a joint interest audit when turnkey or footage contracts have been used by the Operator?
Yes. 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. The results of the accounting are always unknown, until actually reviewed.
What about doing a joint interest audit on production volumes and revenue payments?
Revenue is feast or famine, and most auditors and investors don't and won't understand it since they don't want to lose face by spending money to audit thereby ending up with poor or no results at all. Some oil and gas companies will fight you if you ask to audit revenue. Some operators illegally claim that Non-Operators have no right to audit revenue.
Why should I choose your joint interest audit firm over another?
You certainly can, but none have months of work experience and hands-on, oil field training directly in the oilfield. Most don't have months of in-house training in almost every oil and gas department. No one has been on the COPAS audit committee or joint interest committee as long as we have. We might also be the longest on the revenue committee member, too.
As a non-operator and investor, what do you need from us initially for a joint venture audit?
Some clients give us only the name of the operator and names of the wells. Other clients send us a ton of information which is very helpful. You can never give us too much information.
The other items we would like to see are: your working interest ownership, total $ expenditures and/or revenues, status and location of the properties.
We need all the contracts, e.g., the joint operating agreement (JOA) and attachments. The most important document is: any letter and/or exploration agreement since they can override the JOA. It is important to provide us the joint interest billing (JIB) information so we can reconcile to the JADE (joint audit data exchange) database we receive from the Operator. Once we have reconciled the database to the JIB’s, we can rely on a simple, organized database instead just of a big stack of unorganized paper.
When you do a joint venture audit, do you also audit prospect costs?
Absolutely, we review prospect costs if you were charged them. Most auditors never think of this area. The prospect charges are usually charged by the operator before any of the wells are drilled. There are some operators who illegally will not allow prospect charges to be audited.
Do we need to provide our own auditor when someone else ballots us for a joint venture audit?
In most cases, you should always try to provide your own auditor for a joint interest audit, especially when a lot of money is involved. Often companies and public auditors mistakenly use the audit function as a training ground. We have seen millions of dollars in exceptions overlooked by greenhorns having minimum or absolutely no experience. Some of our largest exceptions have been after experienced auditors had signed off and the investor wants a second opinion. It takes many years before the light turns on.
There is always a risk that one Non-Operator has an advantageous situation over another Non-Operator; so, it is wise to have your own representative there instead of reliance on the other Non-Operator's representative whose allegiances are first to his client. The other Non-Operator risks never knowing what might have transpired. On one job, I arrived a full week early and had already written up a two million dollar exception which the operator readily agreed to on location. Then the very experienced lead auditor arrived, and I gave them another exception that they refused to put into the report since they thought I was mistaken. So, I simply went back to my office; wrote up an additional report and submitted it to the operator. My client immediately received a check for exactly one million dollars. If I had not been there, my client would never have received that big check.
Do you need any help from us?
We invite our clients to participate in any part of the audit they wish. Usually our clients are very busy with a heavy work load, and this would be a total disruption for them. This is what we do best, and we have been doing it right for many years - we can take any joint interest audit of any size from cradle to grave for you. Our job is always to make this exercise as easy as possible with minimum or no interruption to our valued and respected client, as well as, the operator.
What is the timing on scheduling a joint interest audit?
If it is a major oil company, you need to book your audits very early since the available space fills up quickly due to their high volume.
Some companies claim they are booked up, but when you look around once you are at their audit location, there are unused desks, especially during holiday periods.
Your contract allows you the absolute right to audit; therefore, you cannot be refused your audit rights for any reason what-so-ever. If an operator refuses to accommodate your right to audit based on their own self-imposed limitations, they must comply with your contractual right to audit at their earliest available date - even if it requires extending the 24 month limitation in order for them to honor their contract.
How does the 24 month limit work when a Non-Operator wants to do a joint interest audit on properties operated by an operator?
You have only 24 months to audit per the COPAS accounting agreement then you have lost your contractual audit rights. The challenge is that the 24 month limit can expire long before the non-operators have enough information as to the success or failure of the project to suspect something is wrong in the accounting or operations. On occasion, we have had operators to allow us to audit past the 24 months limit, but those are only the much better and more honest operators showing and proving complete respect to their valued investors.
What is your thinking on a joint interest audit or a joint venture audit of payouts?
It can take more than two years for a well to pay out which means there will be many arguments and litigation concerns in the oil and gas industry on joint venture audit rights that extend past the usual, contractual 24 month limit. Also, most of the costs are in the drilling and completion phases. For both of these reasons, you had best get in and perform an initial joint venture audit to nail down both issues and to assure yourself that any payout calculations have even started by the operator. If they have even started the payout, the documentation will be easily and timely available for the operator to provide to the non-operator so that you can make certain the largest calculations, which will significantly delay the payout, have been performed correctly. You can easily tell in advance if the well is a good producer with a probable successful payout in order to make a decision to protect your interest.
Do you still review contracts free of charge to protect us before they are signed?
Yes. We had rather help you prevent mistakes and unnecessary risks in advance instead of try to clean up a mess after it's too late - after all, you signed the contract. We could have very easily prevented Anadarko's loss on the BP blowout that occurred in the Gulf of Mexico.
Why are you well known in the oil and gas industry as a very powerful and highly respected oil and gas auditor?
We have decades of oil and gas experience and training. Our objectives are fair play and fair compliance with the language of the controlling contractual language. Some operators are extremely good at making valid sounding excuses when replying to our report; however, the contract is the contract.
We get a question occasionally from concerned and conscientious operators seeking expert advice wanting to know exactly what they can charge or allocate on their joint interest billings.
We always tell them we are comfortable with what they elect to do as long as it is in conformance with the contract and it is fair to both themselves and the non-operators. This eliminates most questions.
Do you conduct vendor audits or service company audits?
Yes, we conduct vendor audits; however, we consider them to be very sensitive and they should be handled with due care since service companies are critical to the operator's future needs. Also, there are times when there is a dispute between an oil company and a vendor or service company who will have to come to us for their rescue when they feel an operator is not being reasonable or has made an unreasonable claim or when the operator's accounting for a claim makes absolutely no sense at all to them.
What do I do if the operator refuses to grant credit on good exceptions in a joint interest audit report?
Invest with a more ethical operator.
Is it possible for you to miss any exceptions when you are performing a joint venture audit?
Think about when they move that pea under three shells under your nose while you are intensely watching at the carnival, but you are very unlikely to guess where the pea is. Now, move forward to where we are expected to examine two year old invoices which are based on what happened in the oil field 100 miles away from the nearest town where chewing-tobacco vendors have unlimited genius and imaginations while we were sitting in church on that day.
Are you ever asked to re-do a joint interest audit which was already done by another competing joint interest auditing firm?
Oh yes - and with fantastic results. That's why we have been called the auditor's auditor.
How long have you been doing joint venture auditing?
If there is an oil and gas lawsuit - how much do you charge?
Our fees are simply based on the client's ability to pay. Some clients have been unfairly economically destroyed by some other party and that very much goes against our grain. If that poor underdog cannot pay us, we will do our best to help them. Right is right. Wrong is wrong.
We do not take our responsibility lightly. As far as we know, we have always represented the white hats - once we had an attorney for a black hat to call us to become there expert witness; after hearing the initial facts, we told the attorney that their client was a crook and we would not represent them. Their attorney asked us whether or not his client should have the right to a fair trial. After some quick thinking, we told him we would take the case just to see and learn how the black hats work. The black hat won because they did their homework. If you are wearing a black hat, please do NOT call us, as we value our reputation. In fact, if you ever hear any negatives on us; call us to personally verify your information. We enjoy arbitration and mediation since it is very interesting and potentially beneficial for all parties. You need to make certain that the parties there have the actual authority to make binding decisions.
What do you think about stealing in the oil and gas industry?
If someone steals a single candy bar from a store, the authorities will take them straight to jail in a blinding flash. If someone steals a $50 million property, they are fairly safe - after all, it's not a criminal matter - it's ONLY a civil matter. Then, the thief takes your stolen property; gets a loan on it and uses your asset to pay for their legal fees to fight you for years; if he loses, he appeals; if he loses, he claims bankruptcy. As a recent example of our justice system, party (A) stole a very expensive asset off the oil and gas property of party (B). The guilty thief was sued, but the thief had an attorney who was able to get a multi-million dollar judgment for the thief. This forced the party who sued for the return their own property to go into bankruptcy - and they still lost the stolen property. It is a tragedy when the law knowingly and legally helps someone steal.
Do you ever do an audit for the operator?
Yes, the operator wants the audit done in advance to their very-important investor’s audit since he wants to know exactly where they stand and if there is anything embarrassing that can be corrected to save face.
What if I have refused to pay my joint interest billings because I fully believe they are not right; however, the operator has refused to allow me to conduct a joint venture audit unless I pay the bills first?
You have the legal right to an accounting based on common law and common sense. You can bet the operator does not pay their own bills while wearing a blindfold. Also, you risk not getting your money back at all if you pay in advance. If you have an audit and the exceptions are wrongfully denied, your only remaining hope is to sue for recovery of the funds extracted from you. Nobody in their right mind pays their credit card bill until they have reviewed it for accuracy.
Do you require a contract prior to performing a joint interest audit for your client?
No. We work strictly on trust. We find almost all of our clients are very honest and become our good friends. Our overall objective is to have our treasured clients as friends for life. It mutually benefits us all to have an expert in one's back pocket when one needs to ask important questions at no charge. As an example of our needing an expert, we have furnished all of these questions and answers to operator guru friends for constructive criticism. We would rather be saved by criticism than ruined by praise.
Can you explain 'before casing point' and 'after casing point' when drilling a well?
The Operator's share of the drilling cost may be carried or shared by the Non-Operators until casing point is reached. This rewards the Operator for putting the deal together. Per industry practice, the before casing point (BCP) normally changes to after casing point (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.
What is COPAS?
The Council of Petroleum Accountants Societies, Inc. (COPAS) was formed in 1961 by a very limited number of oil and gas companies in an effort to replace the numerous accounting procedures with a single, standardized accounting procedure. This procedure is usually attached to the standardized joint operating agreement, authored by the American Association of Professional Landmen (AAPL). It is signed by the operator and the non-operators who are drilling, completing and operating oil and gas wells.
What does TBD mean in a joint interest audit report?
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.
What do you think about joint operating agreement non-consents?
We do not like non-consents since it can be a very cruel method used by some operators to force investors out of a well permanently or keep them out for an unfair, extended period of time and to steal their ownership. For instance, some non-consent penalties are unrealistically exorbitant or there is an unethical "in-or-out" phrase that is some times used on unsophisticated investors which means the first time the investor does not pay up, in advance, for some illogical work that the operator is planning, the investor will have lost their total investment in a well which would include the original millions of dollars required to drill and complete the well. Then there are more endless games where the operator might not somehow give the investor notice (sending the notice to an old address, etc.) or the notice has a very short timing - not giving enough time for the investor to scramble for the demanded money. Then, to add insult to injury, the operator might not even do the work at all - or spend much less money than originally estimated.
Do you ever act as the coordinator hosting a joint venture audit for oil and gas companies who are operators?
We will work as hosts for joint interest audits where we absolutely do not have a conflict of interest. Some of our very best friends are highly respected executives in oil and gas companies. This also allows us to be mentors for each other when we might truly need an expert second opinion.
Years ago you were going to write a book on this area of expertise - why haven't you done it yet?
We did not want educate and to bring all of our competition up to speed free of charge. One of our single exceptions could easily mean $100,000. We'll try to complete the book right before we retire. For instance, as of today, this is the only question and answer series for Non-Operators that we know of that is in existence. It would not surprise us to see others follow our example and come up to speed with us in this area of expertise.
What are some of the items you review on a joint interest audit?
3. Company reports
4. Consultants reports
5. Contracts, e.g., drilling
6. COPAS accounting agreements
7. COPAS bulletins
8. COPAS interpretations
9. Correspondence files
10. Daily drilling reports
11. Fairness & intent
12. Government reports
13. Letter Agreements
15. Mud Engineer's reports
16. O&G industry practice
17. Operating agreement & attachments
18. Operator reports
19. Prudent operator evaluation
20. Purchase/service orders
21. Tour reports
22. Unit agreement
23. Well and lease inventories
24. Well files
Do you perform acquisition due diligence on the purchase of oil and gas properties?
Yes, that is one of our favorite areas since we can make money for our client. We had to kill one acquisition of oil and gas properties due to fraud, but the buyer went ahead and re-negotiated and bought the properties just to get rid of a crooked operator.
We understand you are an expert on well blow out insurance claims and hurricane insurance claims?
Yes, that is another couple of our favorite areas - so far, every time, without fail, after a claim is made, we come in and significantly increase the claim.
If we see there is a question and answer you should add to this list, do we tell you?
If you see the slightest error, please forgive us and let us know so we can correct it.
What do you recommend for accounting allocations?
Allocations are sometimes necessary and convenient for the operator. Each allocation is for a specific and different purpose. Therefore, we recommend they are reasonably and fairly simplified for understanding, implementation and subsequent maintenance. A simple paragraph or page can be written to explain the logic and the process for later use when the logic and understanding is needed for both any new operator employees and any inquiring non-operators or joint venture auditors who can receive it by e-mail with an approved, attached and consistent explanation already prepared in advance.
What if we are in a very large drilling program? Should we wait or proceed with a joint interest audit or a joint venture audit?
You want to perform a joint venture audit as early as possible in order to determine the culture, attitude and mind set of the Operator and the operator employees. Hopefully, your company has done research before they even signed any documents. With an initial joint venture audit, you can make an informed decision on how you wish to proceed with the remainder of the wells to be drilled. If the project is large enough, we suggest you rotate your own consultants in and out of the project. You do not want to start auditing too early or prematurely since you want to at least wait until some of the wells have been drilled, completed and are producing. Absolutely, do not hesitate to do a joint venture audit if there are a bunch of wells sitting and waiting to be hooked up at a later, unknown date. That is an old red flag.
What is your opinion on boat and helicopter allocations?
These charges are enormous, and therefore, only actual charges to your location should be allowed to be charged. Mass allocations observably and obviously tend to be very sloppy and inaccurate and beg for field-wide, creative application. These are to the distinct advantage of the Operator and to the disadvantage of the Non-Operator.
Where on the Internet can I find out more information related to your services?
You will probably find more valuable information on this website than the entire web combined.
If our audit rights are refused, should we call you for help?
Absolutely. More than once at the end of the year I have seen this happen. They lie to you and tell you they are booked and will not let you audit, but their audit desks are empty. This is pure theft and breaks one of the Bible’s Ten Commandments.
I understand that you like to handle the operator’s reply to the audit report for free.
Yes. We like to do this since we have had operators many times in the past bypass us and tell investors that some of our good exceptions are wrong when they are not wrong at all.
Why are tiny oil companies easy to audit and majors are nightmare to audit?
Major oil companies usually require needless travel expenses and weeks of lost time at the their investors’ expense. The computer has almost eliminated joint venture audit travel expenses. Tiny oil companies with a total of a dozen of personnel can easily give you a storage device with everything you need – you don’t even have to be at their location. Major oil companies with tons of brains and thousands of personnel fail in this area.
How can you tell if an Operator has good ethics?
We have an old rule, the more difficult the audit, the more likely the operator’s ethics are lower and the investors risks are higher.
Why do Operators grant credit to your joint venture audit report exceptions?
Because they want to keep an honest reputation and/or they want your future investment money. Only the smarter Operators have figured out that outside, independent audits are very valuable to them because it can make employees in their field operations think twice before accepting irresistible kickbacks costing their company millions of dollars.
Is it true that Operators can benefit the most from your audit services?
Yes. They get the audit done free of charge. They have the largest working interest and get the largest share of some of the exceptions like duplicate charges.
What if we eliminate joint venture audits all together?
We will be glad to do that if everyone agrees to not speed on the highways any longer.
Is it true that you have seen highly experienced audit gurus walk out of an audit at a major oil company?
Yes, they don’t like the many road blocks that are an insult to their intelligence. For instance, a big, thick, 3-ring binder is presented while telling them to waste their valuable audit days reviewing it before asking the operator any questions like, "Where are the documents?"
Is it true that some operators will try to limit your required and necessary audit time?
Some unethical operators will try to do it as a means to shorten the audit and lessen the findings thus absolutely cheating the investors.
When you issue your oil and gas audit report, does the investor have any input as to what it contains?
Knowledgeable, intelligent and experienced non-operators at times want to add their own items and wording into our report. If it is fair, ethical, legal and honest, it should go into the report.
Who are the top experts for joint venture audits?
1. Al McClellan, deceased
2. H. R. Fox, Jr., retired
3. Robert P. Malone, Malone Petroleum Consulting