20xx Model Form Accounting Procedure January 2019 Objectives - - PowerPoint PPT Presentation

20xx Model Form Accounting Procedure

January 2019

Objectives

• Describe changes to accounting procedure form
• Develop consensus on improvements to the 2005

model form AP

Project Scope

• Successor to 2005 AP

–Onshore –Offshore Shelf

• Develop accompanying MFI

Team Members

• Jeff Alcott, Consultant, New Orleans
• Larea Arnett, ExxonMobil, Houston
• Phil Braaten, Encana, Colorado
• Karla Bower, ConocoPhillips, Houston
• Kristen Fennema, Cimarex, Tulsa
• Dawn Ferik, HighPoint Resources, Colorado
• Roger Gann, Martindale Consultants, Oklahoma City
• Catherine Nichols, Newfield Exploration, Houston
• Penny Parten, Atlantic Operating, Midland
• Carole Tear, Chesapeake, OKC*

Model Form JOAs

• For new JOAs, AP most likely to be used with:

–AAPL 610-1989, 1989H & 2015 –AAPL 710-2002 (offshore shelf) –RMMLF Form 2 (federal exploratory units)

Our Approach

• 2005 Model Form AP + DWAP elements
• Update, clarify, debug
• Align w/ model form JOAs
• Secondary goal

–Style improvements –Concise –Clear

MFIs incorporated in 2005 AP by reference:

• 37 – Incentive Pay
• 35 – Training Costs
• 27 – Employee Benefits
• 49 – Award Payments
• 44 – Communication & Field Prod. Control
• 47 – Overhead Adjustment
• 38 – Materials Manual

Model Form Interpretations

Incorporating MFIs – Benefits

• Clarification
• Agreement adapts to changing conditions
• New editions typically elaborate on prior version, bring

them up to current state

–Not intended to change the agreements

Incorporating MFIs – Concerns

• Most recent edition?

–Parties don’t know, can’t control their contract terms & conditions

• Meeting of the minds?
• May be against company policy
• Edition in effect as of JOA effective date?

–Impossible to account for different JOAs if subject to different array of editions, esp. where allocations involved –MFI can’t interpret agreement that didn’t exist when MFI developed

• Barrier to industry acceptance

Section I – General Provisions

Definitions

New

• AFE
• Agreed Interest Rate
• Environmental Project
• HSE
• Operations Site
• Payroll Burden

Gone!

• Equalized Freight
• Excluded Amount
• Railway Receiving Point

Section I

• I.3 – Thirty days to pay cash calls, bills

–Consistent with AAPL 610-2015 JOA & RMMLF JOA

• I.4 – Added provision re adjustment period for long-

lead and reallocated costs

–Environmental studies, well pads, facilities, etc.

• I.6 – Clarified & simplified voting

Section II – Direct Charges

Technical Labor

• Onsite tech labor is direct charge
• Tech labor for Environmental Project is direct charge

–Onsite & Offsite –Comparable to MCO & Catastrophe projects, but current model forms don’t address

Services

• Tried to simplify
• Avoid do-loop with Section III (OH)

–Services excludes those covered by OH –OH excludes costs under Section II

• Incidental costs incurred by third-party provider that

are integral part of providing the service are chargeable

Affiliates

• Variety of affiliate types – frac equipment, workover

equipment, sand, water, operating company, technical services, communications, etc.

• Different practices for charging
• Commercial rates not always available
• One size does not fit all affiliates

Affiliate Concerns – Non-Operator

• Lack of transparency

–Overhead included in rates –Profit? –Not allowed to audit

• Ensuring third-party services passed through affiliate

charged at cost, not marked-up

• Commercial rates not always available or not

comparable

Affiliate Concerns – Operator

• Unrealistic to negotiate numerous service agreements
• Non-operator might not negotiate in good faith
• Difficulty administering different rates/terms for different

WIOs/properties

• Commercial rates may not be representative
• Providing benefits – scarce resources, technology – while

assuming risk

• Non-operator not paying more than if used 3rd party
• Operator could still lose $

Affiliates

Two methods of charging

• A. Affiliate charges treated same as if provided by

Operator

• Actual costs – same as company labor, facilities, etc.
• Right to audit
• Approval not required
• B. This method essentially same as 2005 AP
• Approval required if exceeds thresholds
• B applies if won’t allow audits under A
• Commercial rate limit applies

Abandonment & Reclamation

• 2005 AP: “Costs incurred for abandonment and

reclamation of the Joint Property, including costs required by lease agreements or by Laws.”

• DWAP -
• Abandonment & reclamation costs consist of labor,

materials, transportation, etc.

Section III – Overhead

Overhead Provisions

• Overhead is reimbursement for costs incurred
• Tech labor election – offsite only
• Warehousing operations – operator warehouse
• perations

–Does not apply to joint warehouse operations

• Wells capable of producing but SI due to overproduced

allowable or failure of purchaser/transporter to take product are eligible for producing OH

–Oil and Gas wells –Does not apply to DUCs

Environmental Projects

• Project to investigate and remediate environmental

conditions, or prevent environmental claims

• Necessary & proper, direct benefit of Joint Operations
• Excludes routine operations such as exploration,

appraisal, development, production, maintenance, repair, major construction projects, or catastrophe projects

• AP addresses accounting for authorized Env. Project
• JOA addresses authority to conduct Env. Project

Environmental Projects

• Current APs do not address environmental costs that

aren’t part of HSE costs for drilling, producing, major construction and catastrophe projects

• Require tech labor, permitting, legal, procurement,

project management, etc.

• Tech labor billed direct
• Added separate OH provision for Env. Projects

Section IV – Material Purchases, Transfers & Dispositions

Transfer Pricing

• CEPS
• Price paid in the area for like Material during last 12

months

• Agreed upon price
• Vendor quote
• Weighted average price

Materials

• Defined term includes consumables

–Water, diesel, sand, mud, etc.

• Technically should be repriced when moved
• Consumables should move quickly, so covered with

historical pricing?

Transfer Pricing

• 2005 AP – Unused A & B condition material to be

credited at same price when charged to joint account

–Unintended consequences in volatile markets –Operator keeps gain in rising market –Operator bears entire loss in falling market

• No incentive to dispose
• 20xx AP – Joint Account shares gains & losses

Questions to Consider

• I.5.E – Keep or delete?
• II.2 – ROW agents – chargeable?
• II.7 – Right level of checks & balances for all parties?
• II.7.B – Thresholds on a per-well basis vs. total joint account charge
• II.14 – Approval of other charges – materiality threshold or make it
• ptional?
• III.2.C – Exclude well containment costs? If so, by specific vendor, type
• f vendor, dollar amount, other filter?
• III.3 – Keep Env. Projects OH separate or merge w/ Catastrophe?
• IV – Any transfer pricing issues with consumables that we need to

address?

• Send comments to APTeam@copas.org
• Due March 1