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

Model Form Interpretations 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

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 Gone! • AFE • Equalized Freight • Agreed Interest Rate • Excluded Amount • Environmental Project • Railway Receiving Point • HSE • Operations Site • Payroll Burden

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 3 rd 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 operations – 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 optional? • III.2.C – Exclude well containment costs? If so, by specific vendor, type of 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