Joint interest billing is the mechanism for the operator to report joint account charges for a well or facility to the working interest owners in the oil and gas industry. Companies can come together to form a joint venture (with one or more partners) so as to share the risk of capital ventures, such as laying pipelines or drilling wells.
In such arrangements, it falls to the accountants for the operator to calculate the costs that are to be shared by each company according to their working interest ownership. Accountants for these partners have the responsibility of charging each company according to the terms that were initially agreed upon when the joint operating agreement was established.
Described below are some of the specific areas of joint interest billing (JIB) as they relate to oil and gas accounting.
Authorization for Expenditures
Authorization for expenditures (AFEs) represents the total estimated cost of drilling and completing a new well or production facility. Before any work at all is begun on a new well or facility an operator will prepare an AFE and send it to each of the non-operating partners for approval.
AFE cost estimates help to monitor costs that arise during development and provides good visibility into how accurate estimates were, as well as how close actual costs were to those estimates.
Most JIB accountants make use of advanced oil and gas software in order to be as accurate as possible with AFE estimating and preparation as sometimes supplemental AFEs are required
Recommended Read TR-39, Oil and Gas Accounting and Finance Publications Reference Catalog
When it comes to calculating and allocating overhead, it’s important that partners be billed accurately for those expenses covered by overhead. There are many allocation methodologies to consider when allocating overhead.
MFI-45, Offshore Marine and Aircraft Allocations is an excellent COPAS publication to review when evaluating allocation methodologies. The publication has an offshore slant, but many of the examples contained in that publication could be applied to onshore wells and/or facilities.
Once the allocation methodology is determined a sophisticated oil and gas software system can apply it accordingly.
Maximizing Billing to Partners
In order to prepare a joint venture billing, an oil and gas accountant must refer to the original operating agreement signed by all parties. This is generally the Joint Operating Agreement (JOA).
COPAS has a Model Form Accounting Procedure that speaks to the chargeability of various items that is an exhibit within the JOA. If all records have not been maintained faithfully and accurately, it is possible that charges could go unbilled, and those would represent losses to the operator.
All shared costs must be billed accurately, and to do this, invoices must be prepared and delivered to the appropriate partners. Again, this is where a good software system can make a big difference because it will integrate with the accounts payable system to ensure accuracy and timeliness when preparing invoices.
Cost Center Allocations
Allocating by cost center is a different kind of challenge for oil and gas accountants because it takes place at a level higher than the source of the costs incurred: the oil well itself.
For instance, in the case of a compressor that is tasked with servicing 25 different wells, there would be costs associated with running the compressor, as well as costs associated with servicing each of the 25 wells.
When doing cost center allocations, you could keep track of costs at the compressor itself, and have those costs allocated back to your specific well. JIB accountants must have the ability to allocate costs based on production, because that allows a company to receive volume benefits, as opposed to making manual allocations.
When you can make use of solid cost center allocations, it reduces the level of redundancy in accounting and provides for easy allocation of costs.
Producing lease operating statements
Lease operating statements (LOS) are documents that detail expenses and profits for each operating well or section of property. These documents can be used to evaluate the overall health and profitability of any operating site, and that makes them very important to all financial backers.
In order to produce one of these detailed statements, a JIB accountant would have to review invoices from each level comprising the overall structure of the company. For example, the district, the field, and of course, the well itself.
A knowledgeable and experienced JIB accountant will have the ability to pinpoint any inaccuracies or inconsistencies among all listed expenses and thus, obtain an accurate picture of how profitable an operating site is.
It will sometimes be necessary to do reporting by exception or error exception assessments in order to compare costs over a given time frame, usually some number of months.
This task is made somewhat easier by making use of a software system that has been specifically customized to be used with oil and gas applications. Inconsistencies will be identified and pointed out by the software, making the accountant’s job much easier.
Recommended Read Understanding Upstream, Midstream, and Downstream Oil and Gas Activities
Joint interest billing for oil and gas
There’s no question that the joint interest billing process for the oil and gas industry can become somewhat complicated, especially when a number of partners are involved. However, it is the best way to identify all costs and expenses that must be shared by partners.
The JIB accountants and the software systems they use to conduct their daily tasks are essential for maintaining accurate records of the financial responsibilities of each partner in an oil and gas venture and for ensuring that those costs and expenses are fairly allocated to member partners.
Gain a competitive advantage in the oil and gas industry by joining COPAS
COPAS is the Council of Petroleum Accountants Societies. Members of COPAS are at the forefront of driving change and innovations that shape accounting in the petroleum industry.
By becoming members of COPAS, petroleum accountants societies gain leverage in the industry, increased knowledge and insight, and a platform to collaborate with like-minded professionals. By joining COPAS, you can outpace the rest and learn more about our industry’s best accounting practices, standards, and guidelines.
In addition, our Accredited Petroleum Accountant® (APA®) program was established in 1996 to certify accountants within the oil and gas industry. It ensures that petroleum accountants are proficient in the basic elements of knowledge that are essential to oil and gas accounting.
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