Using Joint Interest and Revenue Audits to Identify Potential Cost Recovery Opportunities for the Joint Venture

In this low-price commodity cycle for crude oil and natural gas, managing the expense side of the ledger is critical to success. For example, based on inflation and the advent of complex horizontal fracturing techniques, industrial technological advances have caused the average well cost to increase nearly eightfold since 1960.

Given the higher cost environment, oil and gas partnerships will continue to see an increase in non-operators exercising Joint Operating Agreement (JOA) audit rights under the applicable accounting procedure to help uncover key cost recovery opportunities.

Non-operators experience concerns with the high cost of operations and well economics on an ongoing basis. While non-operating partners can seek recourse to recover some costs inappropriately charged in a joint interest billing (JIB) arrangement, most JOAs require non-operators to pay their bills without contest, since their right to contest charges are established in the JOAs accounting procedure, which imposes a two-year limit on that opportunity. That means non-operating partners who exercise joint interest audit rights in 2017 have a look back window to 2015 for identifying potential recoveries related to erroneously-billed expenses during that time. When operators inappropriately bill out non-operators the only way to identify and resolve these issues is through exercising the right to audit in accordance with the JOA. Each JOA has unique requirements, so it is important to evaluate the established agreement between the non-operator and operator in order to gain a clear understanding of the audit rights and obligations set forth by each specific agreement.

On the other hand, operators can demonstrate good accounting practices to non-operating partners by engaging in a proactive review of equipment allocations, reconciliations, vendor audits, billing procedures, and overhead. This allows operators to make timely corrections to JIB in advance of an audit, and raises the odds that these items will cleanly pass the audit test. By accurately tracking and reporting costs, operators can help their joint venture partners by increasing confidence in day-to-day accounting practices. Ultimately, operators that improve their billing methodologies through the use of industry best practices and professional guidance will reduce the potential for costly settlements and litigation concerns.

Please contact us for more information on joint interest and revenue audits, contract compliance concerns, or guidance on any other business accounting issues.

April 18, 2017