In the environment of oil and gas operations where the revenue and expense decks keep growing, how do you know if the operator is giving you your fair share? Joint operating agreements generally have an audit provision. Whether or not you should invest in the cost of a joint interest audit depends on several factors including:

• Do I have a large interest in this well?
• Do the joint interest billings look unusual or not provide detail?
• Are the costs well over budgeted or reasonable amounts?
• Are there several wells in the same area that have similar names but different ownership percentages?
• Are there carried interest provisions in the agreement?
• Is the overhead based on actual costs rather than an agreed upon rate?

The number of transactions processed by the operator can lead to data entry or allocation errors. While many of the occurrences mentioned could happen within normal operations, they could also be erroneous charges or calculations.

The scope of a joint interest audit can include expenditure testing, payout recalculation for carried interests, revenue allocation, overhead charge analysis, review of classification of expenditures as direct costs versus overhead, and more.

You may not have the resources to provide the time necessary to perform and follow-up on a joint interest audit. A consultant can be hired to perform these services for you. While you incur the cost of a joint interest audit, the returns often exceed the cost.

Feel free to contact us if you would be interested in pursuing a joint interest audit or have any questions concerning the audit process.

Accounting standards require that the fair value of a liability for an asset retirement obligation (ARO) be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. With rising costs and environmental concerns in the oil and gas industry, estimates of plugging and abandonment could become more significant than in the past. The important components of calculating the asset retirement obligation for an individual well are shown in the following example:

Example:

The asset and liability are recorded at $25,675 at the spud date. The accretion expense and related liability are recorded monthly for the life of the well. Salvage value of the asset is also not allowed to be netted for purposes of determining estimated costs.

See accounting statement for illustrative examples of calculating the asset retirement obligation.  More on settling AROs to come. Read the rest of this entry »

The Financial Accounting Standards Board (FASB) revised the business combination rules effective for periods beginning after December 15, 2008.  For calendar year entities, any purchase transaction in 2009 will be accounted for under FASB Statement 141(R).

Under current practice, business combinations are accounted for under a cost-accumulation approach, which focuses on the costs paid to acquire the business.  The new standard uses a fair value approach based on marketplace information and exit prices to value assets and liabilities of the acquired business.  In addition, the new standard revises the guidance on accounting for contingencies, restructuring costs, and transaction costs among others.

The new method of recognition could lead to very different results in reporting business combinations:

• actual gain might be recorded on purchase
• subsequent adjustments due to changes in fair value flow through the income statement
• recognition of goodwill attributable to the noncontrolling interest
• retroactive recording of adjustments made during the measurement period to the transaction date

If you have questions on a transaction, let us know.  How will the new rules change the way you consider business combinations?  Give us your thoughts in a comment.

Having that “bad apple” in your workplace can be very distracting if not destructive.  So in response, candidates are run through an exhaustive process of evaluation.  This process may not be the most productive method for measuring an employee’s emotional intelligence.  Many people in the oil and gas industry have the luxury of hiring people they have worked with in the past.  This cuts out a lot of the guess work involved in determining how your employees will interact.  If you don’t have this familiarity with prospective employees, consider the following:

• Is the candidate self-aware and self regulated – you cannot have a loose cannon who does not understand how to control anger or anxiety.
• Is the candidate able to read others and see others’ reactions to their behavior – this can be defined as a social “radar”.
• Can the candidate learn from mistakes made – this is the best way to judge how a person responds to adversity.

Here is a short list of effective questions to detect the prospect’s emotional intelligence:

• Tell me about a conflict you had with a peer or supervisor, and how it started and became resolved?
• Tell me about a time you said or did something that had a negative impact on a peer, supervisor, or customer. How did you know the impact was negative?
• Tell me about a situation when you discovered that you were on the wrong track.  How did you recognize this, what did you do, and what did you learn?

If this approach interests you, see Adele Lynn’s book The EQ Interview: Finding Employees with High Emotional Intelligence.

According to the most recent Short-Term Energy Outlook, the Energy Information Administration (EIA) projects an average oil price of $51 per barrel for 2009, down from the 2008 average of $100.  The price of natural gas is projected to average $6.25 per Mcf in 2009, down from its average price of $9.17 in 2008.

Where do you think we’ll be a year from now?  Post your prediction as a comment.

According to a report in the Wall Street Journal (subscription required), President-elect Obama is considering appointing and Energy “Czar” to coordinate U.S. policies on climate change, as well as dependence on foreign oil.

One of the great challenges the new administration faces as it relates to energy is how to coordinate and manage the long list of agencies and departments who have a hand in setting energy policy, including the Interior Department, Transportation Department, and the Environmental Protection Agency to name a few.

Is an Energy “Czar” the answer?  Give us your thoughts in a comment.

Oil and gas companies operate in a high risk environment to say the least.  But one risk you may have overlooked is the challenge created by a rapidly changing workforce, and specifically the shortage of skilled engineers. 

According to a report by the National Petroleum Council, a majority of the energy workforce in the United States is eligible to retire over the next 10 years.  Did you catch that. . . a majority.

The void left as the skilled workforce retires could limit the number of projects a company can effectively manage.  In addition, the resulting talent shortage may lead to a significant increase in labor costs as competition intensifies to fill those positions.

Have you started planning for the workforce transition in your company?  The time to start is now – before it’s too late.