• Review your joint interest agreement and the accounting procedure.  While many of the agreements are standard, ensure you are aware of the audit provisions and other pertinent facts such as the allowed overhead allocation method. The more complexities in the agreement, the more likely there could be errors.
• Consider the size of the interest and amounts at stake.  A joint interest audit will likely produce some results for all wells, but only certain wells would be worth the cost.
• Contact other nonoperating joint owners to share the costs.  Unfortunately for the initiator of the joint audit, you don’t receive all the reward for being diligent on your investment. When an error is found in a joint interest audit, the error is corrected and all affected parties receive remedy even if they didn’t help foot the bill for the audit. This should not necessarily prevent you from pursuing the audit assuming you followed the previous two steps.
• Utilize a professional. The individuals who perform a joint interest audit need to have appropriate training and experience resolving the issues typically uncovered in an audit. Many of the large oil and gas companies have a joint interest audit department and conduct most, if not all, of the procedures themselves. If you do not have those resources or lack the expereince to perform a joint interest audit, engaging an independent auditor may be appropriate. 
• Consider the timing of the audit. Attempting a joint interest audit during the first three months of the year may lead to higher fees, less cooperative staff at the operator, and less timely completion of the audit. When beginning the audit process under any timing, you should prepare for an extended timeline due to the various communications between the auditor and the operator from initial testing all the way down the road to multiple discussions over the reported findings before resolution. 
• Open up communications with other nonoperators and the professional performing the audit. You should consult with the other nonoperators, whether they are participating in the audit or not, about specific concerns related to their joint interest billings. You should communicate their concerns and your own to the professional when engaging them to perform the audit. 

We enjoy partnering with our oil and gas clients in all facets of their business needs. We would be happy to discuss joint interest audits or other accounting services with you.

Honesty and Authenticity- communications with employees should show your understanding of the current events and seek input from talented people. Being honest about your concerns and opening communications will help employees see the reality and help them take ownership of the solutions.

Day-to-day Operational Presence- this is not to be confused with micromanagement. This process is more about understanding the impact of the current times at a lower level in order to dissect problems and continue high-level strategy. Top employees will respond to this involvement if it is seen as high-level investigation to make their processes easier and more efficient. These hard times require leadership focus in all facets of the organization.

Optimistic Realism- being either too optimistic or too pessimistic create doubt in employees. Focus on the solutions to the problems and do not dwell in the problems as they appear. Be realistic about performance measures and reward smart solutions and outcomes. Do not give employees a false sense of security or a false sense of insecurity due to business slow downs. You can lose talented employees if they feel uncertainty.

Smart People Decisions- leaders have to make tough personnel decisions in hard times. Be certain changes are made based upon performance and contribution to the company. Develop or better implement performance guidelines to grade your employee group. Hard times are not forgiving to decisions made based on loyalty or politics. Your company cannot afford to keep or hire a liability in this market. You may be able to replace low performers with talented individuals who are currently in an uncertain job or have been laid off due to the current economic climate.

Future Watch- build with the future in mind knowing that the economy will turn around at some point. Can you make key acquisitions now and exploit these when the economy recovers? Use this time to innovate processes, learn new techniques for operations, and look for gaps in your current processes. You can come out on the other side of this economic chasm in much stronger position operationally.

Being a strong leader includes being willing to change current practices. The skills Mark Cook focuses on could help you improve your company for the long term.

• Do you account for oil and gas properties under the full cost method?  You may not be allowed to under IFRS.
• Is your accounting staff sufficient to understand the changes and the impact on your business, and if not, how do I accomplish this? You may be able to hire an accounting firm to consult and evaluate your current accounting compared to IFRS.
• When will this possible conversion be required? By most reports, the switch to IFRS could be as early as 2013.

International standards would have a significant affect particularly on oil and gas companies.

Under current International Financial Reporting Standards (IFRS), oil and gas companies would need to make drastic changes in their accounting methods. In their current form, IFRS does not have specific standards for any individual industries. Based on the conceptual framework, the current standards would not allow full cost accounting for oil and gas properties. The framework allows capitalization of assets when you are able to predict the probable future economic benefits as a consequence of the investment, which may be difficult in exploration when you consider the amount of unproved assets.

The International Accounting Standards Board (IASB) is currently working on a project to better address the complexities of oil and gas. The project is also addressing issues of fair value reporting of reserves on the balance sheet. This project may address the asset issue, but ultimately not address issues such as joint ownership arrangements, which are also integral to oil and gas property accounting.

Check back for periodic updates.

• 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.

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.

Asset retirement obligations (ARO) will certainly be settled at a value that is less than or exceeds the book value of the liability at the date of settlement. Standards are not conclusive on the treatment of this difference.  The options are as follows:

• Resulting gain or loss is shown on the income statement as settlement gain (loss).
• Resulting difference is recorded against accumulated dd&a with no income statement affect.

Disclosure of the method of recording these differences is key to transparency of the financial statements.  Standards do require that amounts paid for settlement should be shown as an operating cash flow.

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.

• 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.