3. Auditing
• Sample on a Test Basis
• Royalty Formula = Sales Volume x Allocation (Allocation
= Working Interest x Tract Allocation) x Price x Royalty
Rate
• Products = Oil, Condensate, Unprocessed Gas,
Processed Gas (Residue and Liquids (or NGLs)), CO2,
Solids (Coal, Potash, Salt, etc.)
• Prepare a PSSC for each workpaper prepared, including:
– Purpose
– Background
– Source
– Scope
– Procedures
– Conclusion
4. Auditing
• Sales
– Arm’s-Length (AL) vs. Non-Arm’s-Length (NAL)
• Arm’s-Length = Not Related
• Non-Arm’s-Length = Related
– Straight Sales
– Pooling
– POP (Percent of Proceeds)
– Keep Whole (Processing costs MMBtu of Liquids x residue price,
reporting 07 value less value of shrink)
• Allowances
– AL vs. NAL
– Transportation
– Processing
5. Auditing – Pre-Audit
• Contact Company to set field work dates
• Mail Engagement Letter
• Review Prior Audit Files
• Determine the Lease Universe (and Applicable
Agreements)
– Select Sample of properties, products and months
• Include properties that touch all gas plants
• Include properties that touch all products
• Include test months that may contain errors.
6. Auditing – Pre-Audit
• Prepare the Audit Planning Memorandum (be
prepared to explain to your supervisor the
properties, products and test months selected
and why each were selected.
• Prepare the Scope Letter based on the
properties selected and included in the Audit
Planning Memorandum
• Compare OGOR reporting to the 2014 reporting
– Are there multiple reporters and/or payors?
• Prepare for the Entrance Conference
7. Auditing – Fieldwork – Review
• Dress appropriately – Business ware should be worn at
all times in the companies offices (you are representing
the State)
• Conduct the entrance conference
– Include why you are there and what you will be reviewing
– Include the audit process
• Review their documents
• Determine if the correct royalties were paid
• Issue Letter
• Response due within 30 days
• Demand Letter – to the MMS
• Right to Appeal
– Discuss companies work schedules and their preferences to
your work schedules.
8. Auditing – Fieldwork – Review
• Begin your review of the documents provided for
each property.
– Make sure you have all of the following
documentation:
• Oil
– Production Reports
– Oil statements
– Check detail
– Contracts
» What type of sales?
» Are they AL or NAL?
– Regulations (make sure you have the applicable year’s
regulations)
– Applicable price postings
9. Auditing – Fieldwork – Review
• Gas
– Statements
– Contracts
» What type of sales?
» Are they AL or NAL?
– Production Reports
– Regulations (make sure you have the applicable year’s
regulations)
– Applicable Price Postings
• Transportation Agreements
– Who is the transporter?
– Where is the product moved to?
» Refinery
» Plant
– Who owns the Transportation System?
10. Auditing – Fieldwork – Review
• Processing
– Who owns the Plant?
» Is processing AL or NAL?
» If AL, do you have the actual cost information?
» If NAL, do you have the processing agreement?
– Is the gas processed or unprocessed?
– If the gas is processed – what processing charges are
incurred?
11. Auditing – Fieldwork – Property
Analysis – Oil
• Following the Audit Program, conduct the
analysis for Oil Volumes for each test
month and property (separate properties).
– Compare Oil from the statements or check
detail to the volumes reported on the 2014
reports.
– Compare Oil from the statements or check
detail to the volumes sold reported on the
OGOR reports.
12. Auditing – Fieldwork – Property
Analysis – Oil
• Following the Audit Program and applying
the contract terms, conduct the analysis
for Oil Prices for each test month and
property (separate properties if they have
different contracts)
• Conduct the analysis for the sales value
and royalties due.
• Compare royalties due to the royalties
paid.
