Joint Interest Audits
What is a Joint Venture?
In its simplest form, a joint venture is formed when parties want to combine assets or share the risks of exploring or developing prospect, a lease, or an entire area or region. Forming a joint venture oftentimes allows the parties to combine their technical, operational, or financial expertise to more efficiently and effectively develop the prospect, area, or region. The parties negotiate a Joint Operating Agreement (JOA) which sets out each party’s responsibilities under the contract and allows for the efficient development and operation of the joint property. One party is designated as the “operator,” with the other party or parties individually and collectively referred to as “non-operators.” The operator is responsible for conducting operations and paying the joint venture’s costs and accounting for each party’s production, either through an allocation of production volumes or remitting proceeds to the non-operators. The parties usually share expenses based on their proportionate “working interests” and share revenues based on their proportionate “net revenue interests.”
What is a Joint Interest audit?
A joint interest audit is a review of the charges and credits on the joint interest billings (JIB) to a non-operator for its working interest share of a venture's costs to determine if the charges and credits are in compliance with the provisions of the governing agreements, many times the JOA and attached Accounting Procedure ("Exhibit C"); the audit is usually performed by one or more non-operators or a contract firm, such as Martindale, on a non-operator's behalf.
Why Conduct a Joint Interest Audit?
Many projects entail spending significant amounts of money, from several million to several billion dollars. Non-operators and operator alike understand a joint interest audit is simply a necessary business practice to help safeguard a non-operator's assets. COPAS Accounting Guideline 19 (Expenditure Audit Protocols) discusses that aspect in describing two reasons a non-operator would conduct a joint interest audit.
A. Assist in the safeguarding of assets by verifying and authenticating Joint Account transactions
B. Review compliance with the provisions of operating and other agreements (if applicable)
"Recovery of cost overcharges" is the most common expression for why audits are conducted, but there are non-financial aspects that also play a role. Wanting to understand an operator's accounting, wanting to learn more about the operations conducted and underway, and being required by corporate, trust, regulatory, or other requirement to conduct periodic reviews are a few other reasons to conduct a joint interest audit.
In some cases, a non-operator is unable to get an operator to satisfactorily explain certain aspects of joint interest accounting; in those cases, a joint interest audit allows a non-operator to ask the operator questions and get a detailed review of how an operator is accounting for operations. In other cases, a operator may create JIBs that are summarized at a high level to where a non-operator is unable to understand the nature of costs billed. A joint interest audit allows a non-operator access to the detailed electronic accounting records so all JIB charges can be better understood.
Does a Joint Interest Audit Require Specialized Knowledge and Expertise?
Without question, the skill and knowledge required to conduct an effective joint interest audit is parallel to that required by a CPA to conduct a financial audit of a firm's balance sheet or income statement. The exploration agreement, participating agreement, JOA, accounting procedure, farm-out agreement, project team agreement, and the myriad other agreements governing joint interest accounting contain not only specialized defined terms, but many terms of art that require many years of experience and expertise to understand and master. The upstream and midstream segments of our industry are complex operations, not only operationally, but from an accounting perspective. A successful joint interest audit cannot be effected by anyone who is considered an "auditor" any more so than anyone titled an "engineer" could perform the specialized analyses and painstaking work an experienced drilling engineer performs because the skill sets and levels of knowledge are far different.
Put another way, joint interest accounting is not financial accounting. It is a completely different field, a highly specialized field just as is financial accounting. Almost all joint interest accounting is dictated by executed agreements that will mostly follow or refer to COPAS accounting standards and provisions. It is simply not possible to conduct an efficient and effective joint interest audit without this specialized COPAS knowledge and experience, or significant, active, and ongoing knowledge of COPAS, its agreements and their intents, as well as ongoing experience with COPAS documents.
Why Martindale?
Martindale has performed thousands of these joint interest audits and has an employee-based staff ready to assist on your project. Our employees have between one and 44 years of industry experience; they are capable of understanding even the most complex JOAs and other agreements and applying those provisions to the costs billed by the operator. They have the requisite COPAS experience. The expertise, experience, and consistency you get with Martindale, our senior management have all been with the firm for more than 26 years, ensures the best results for your joint interest audit, whether it be of a single well, a large unit, a complex waterflood or enhanced recovery, or a large-scale joint venture covering multiple counties, parishes, or states.
We are an employee-based firm, not a loose affiliation of contractors who come and go; with our seasoned and long-tenured staff you receive long-term and consistent service and results because our staff has a vested interest in delivering ongoing superior results and maintaining the history and results-based culture of Martindale. Our employees have careers with Martindale, so they are constantly striving for success and staying educated on the various and ever-changing contractual provisions agreed to by operators and non-operators.
Martindale is authoritative on COPAS issues. Most of our employees are engaged and active members, participating in local and national meeting and education offerings. Several teach webinars and in-person educational classes for COPAS. And, many of our employees have participated on multiple COPAS document drafting teams, including model form accounting procedures, with Mike Cougevan having been a lead or member of more than 16 COPAS document drafting teams.
Our clients range all the way from multi-national oil companies, majors, and large independents, to governmental agencies, banks, ranches, family businesses, and individuals. We understand each entity's perspectives and concerns.
Onshore
Operational and accounting dynamics can vary greatly among the many domestic basins and shale plays. Over the course of thousands of audits, our team has developed a deep understanding of operations ranging from a single-well vertical to the complex development and operation of thousand-well shale plays. In addition, we have an advanced understanding of the wide variety of agreements in effect, from the most basic model form to the hundreds-of-pages-long complex agreements with new and unique provisions.
Offshore and Deepwater
Offshore operations are not just a concept to the Martindale team; our folks have direct and hands-on experience that is invaluable to understand offshore operations. An effective audit is predicated on being able to understand the operational and accounting dynamics of boats and helicopters, labor allocations, rig moves, and shorebase allocations; the Martindale team has that requisite understanding.
Our team also has extensive deepwater experience, including participating in the development of the industry's model form accounting procedures. As the complex deepwater issues have arisen in the industry over the years, Martindale has provided input to the industry from a non-operator and contract compliance standpoint, with the viewpoint not only of equity, but of ensuring an operator's ability to properly account for operations and a non-operator's ability to be able to efficiently audit the costs charged.
Revenue Audits
What is a revenue audit?
A revenue audit is performed to determine if working interest, net profits, royalty, or overriding royalty interest revenues are properly paid under the applicable agreement(s), such as a Joint Operating Agreement (JOA), marketing agreements, farmout agreement, net profits lease, or oil and gas lease.
Complex gathering systems, processing plants, midstream operations, and oftentimes numerous intermediaries and operator-affiliated parties, paired with increasingly complicated contract provisions, require specific expertise to conduct a proper and thorough revenue audit.
Most times it is impossible to decipher the sales volumes, prices paid, deductions taken, or even the net revenue interest from revenue remittances, much less make sure they are correct.
- Why do the volumes on my remittance not tie to the state reported production volumes?
- Why is the price received so different from NYMEX or WTI Cushing?
- Is the “gross price” on my remittance really the “gross price” or is it net of embedded deductions?
- What kinds of deductions are being taken out and why? My agreement says “no deductions.”
- Are taxes properly calculated?
Determining if you were credited the proper oil and/or gas volumes, if contractual prices were received, or if all deductions are allowed under your specific contract, most often requires an in-depth revenue audit. Martindale has performed thousands of these audits and has an employee-based staff with the expertise to handle your project. Our staff has seen and worked through almost all the revenue accounting systems and revenue accounting methods used by most operators and oil and gas accounting companies.
The Council of Petroleum Accountants Societies (COPAS) created Accounting Guideline 21 (Revenue Audit Protocols) to assist operators and working interest, royalty, or other owners in navigating the steps for a successful revenue audit. Several Martindale employees were on the team that drafted the latest version of AG-21, so we know how the process is intended to work and can guide you through the steps for a successful revenue audit.
Common revenue and revenue-related concerns for non-operators and royalty owners include:
- Non-arm’s length sales to affiliates
- Weighted Averages Sales Prices (WASP)
- Fuel, flare, and lost and unaccounted for gas volumes
- Sales volumes compared to state or Federal reports
- Shrink volumes
- Affiliate gathering deductions
- Affiliate processing deductions
- Marketing deductions
- Weighted average deduction pools
- Gross proceeds provisions
- Highest price provisions
- Fixed recoveries vs actual recoveries for NGLs
- Payout calculations
- Net Profits provisions and calculations
- Gas plant proceeds and volumes
- Percent of Proceeds (POP agreements)
- Proceeds owed to bank trust departments
- Royalties owed to state and Federal governments
- Gas balancing
- Allocation methods for residue, NGLs, and oil sales
Vendor Risk Management
What is a Vendor Compliance Review?
Evaluating the relationship between your company and your vendors is a critical step in the Vendor Management process. Prudent operators will exercise their rights to evaluate that relationship through a Vendor Compliance Review to determine whether the vendor is in compliance with the terms and conditions of the applicable Master Service Agreement (MSA). These reviews can result in both monetary and non-monetary findings and answer the following questions:
- Are services billed reflective of actual services rendered?
- Were materials billed at the delivered quantities?
- Are prices compliant with governing purchase orders, work orders, or other pricing agreements?
- Are vendors aware of company policies and procedures or are conflicts of interest present?
- Does the vendor carry insurance, per stipulations in the MSA?
- Are proper controls in place to detect and prevent future overbillings and fraud?
What is Vendor Risk Management?
Managing vendor risk can differ based on the size of you company, the sophistication of controls in place, the reliance on third-party verification, etc. A Vendor Risk Evaluation begins with interviews with key personnel in the procure-to-pay process, evaluation of Vendor Management controls, as well as targeted testing to determine your company’s risk level. An Evaluation may also include a review of vendor onboarding procedures and controls, purchase order controls and verification, your vendor oversight process, and your company’s ethics and hotline program. Overall, the objective of a Vendor Risk Evaluation is to enhance or establish your control environment to mitigate future overbillings and reduce your fraud exposure profile.
What is Martindale’s approach?
Martindale takes a risk-based approach to Vendor Compliance Reviews. We begin by evaluating your MSAs, rate sheets, and billing detail to gain an understanding of the potential risk areas. This process is followed by stakeholder interviews with key company employees to gain a better understanding of what services or goods the vendor provides, as well as any potential relationship issues. Finally, we schedule time to talk through processes and policies with your vendor. In sum, this information is analyzed to identify the areas of highest risks.
The heart of our review is fieldwork. During this stage, our goal is to review, identify, and validate Vendor Compliance with the following:
- Company’s Policies and Procedures
- Executed Contracts and Agreements
- Executed Rate Sheets and Billing Best Practices
Communication is key to our relationship. It is imperative that Clients are in the know when it comes to our budget, our progress, and any potential findings. In fact, if we identify areas of attention, you are the first to know.
Drawing on our deep vendor-risk experience and expertise, we conclude our work with an actionable report that provides stakeholders with findings and potential recommendations and action plans.
What sets Martindale apart?
There are many models and strategies out there when hiring a third-party to conduct vendor compliance reviews.
Martindale separates ourselves apart from other firms by focusing on key principles:
- We seek to identify the root cause or underlying issue that causes an overbilling or control weakness and present solutions to resolve the issue going forward.
- We treat our projects as if they are our own. We understand vendors play an important role in your operations and we approach each project respecting the relationship between the operator and vendor. We bring professionalism and are discreet when necessary.
Construction
Midstream companies contracting for the construction of pipelines, facilities, and plants have relied on Martindale for many years to conduct thorough and professional reviews of all types of construction projects. Upstream operators know they can count on us to analyze platform and facilities construction costs with the same level of detail and expertise as they receive on joint venture and revenue audits. These firms realize that oil and gas-related audits are what Martindale does, so we have been able to develop an unsurpassed expertise in understanding the operational and logistical aspects of construction projects and the terminologies used in our industry.
Combine that industry knowledge with our experience in contract and vendor audits, it is no wonder that companies remain confident that Martindale will continue to deliver outstanding results in audits of major construction projects. You can become more comfortable with your project costs by contacting Martindale and discussing an audit of your construction project.
Gas Plant
Settlements to producers for processing gas are complex. Whether you are an interest owner in the plant or simply have your gas processed for a fee, Martindale can maximize your revenue through a thorough and complete analysis of processing and allocation procedures used by a plant operator. We will ensure that all deductions for fuel, flare, and shrinkage due to extraction of liquids comply with the terms of your processing agreement, as does the operator’s basis for allocating recovered natural gas liquids and residue gas.
Many factors are involved in the determination of a fair share of liquids contained in an owner's gas and the allocation of extracted liquids, and Martindale has encountered and effectively dealt with all of them. Through the application of our contractual and operational knowledge and experience, we can ensure that you receive the natural gas liquids and residue gas to which you are entitled. If you don’t take action, will you even or ever know if the plant operator is retaining natural gas liquids and residue gas to which you are entitled?
Royalty Audits
With the complexities and intricacies of today’s lease agreements, it can be very difficult for operators to correctly account for revenue payments to royalty owners, especially when the lease agreements have differing valuation and volume clauses then a typical Joint Operating Agreement. Martindale has represented royalty owners ranging from entire states and large trusts to small farmers and everything in between.
If you feel like you are in the dark regarding your royalty payments or just have some simple “industry standard” questions, Martindale can help whether it is a desk audit of lease agreements and royalty payments to determine if exposures of incorrect payments exist or an extensive audit of an operator’s allocations of large fields or gathering systems.
Our royalty audits focus on volumes, pricing, appropriate deductions, allocations, and distributions to ensure remittances are in compliance with lease provisions.
International
The differences between domestic and international agreements are significant, requiring experience and expertise to understand the additional and unique complexities. Reviews of international projects require a thorough understanding of the relationships of the parties and the unique terminologies and provisions contained in international operating agreements and accounting procedures. Martindale has analyzed a wide variety of agreements and developed the experience necessary to protect your interests by leading or assisting in more than a dozen international audits in Norway, Brazil, Australia, Egypt, Ghana, Vietnam, Indonesia, Barbados, and Canada, with many projects involving foreign governments as a party to the agreements. Our passports are ready and our immunizations current; the Martindale staff is ready to show you that our expertise and resources allow us to deliver unmatched results on your international reviews.
