Question 3 - How do your auditors validate that your working interests are accurate in all your cost centers?

This is the third question in the list of ten questions to ask your auditor if you are a Canadian based oil and gas company. The original post can be found here.

The third question is "How do your auditors validate that your working interests are accurate in all your cost centers?"

The importance behind this is to ensure that you are getting the revenue that you are entitled to and paying the expenses that you are suppose to.

Working Interest example:

If you were to take the average oil well which produces 40 barrels of oil a day and look at the forecasted price for oil over the next few years, which is close to $90 per BOE, then the average well would produce $1.3M in revenue per year.

For examples sake, if the working interest is 50% or 50/50 with ABC Co, then your yearly revenue would be $657,000. If, by human error, you were to hit the next digit down on your keyboard, a 4 instead of a 5, you enter your working interest as 40% of the revenue against total production on the well, then the new amount is $525,600 in revenue. That 10% difference in working interest actually has the impact of reducing your revenue by 20% since you would be out $131,400 on $657,000. 20% out on revenue on any well is significant.

29,000 BOED is the average production a TSX listed company with production between 1,000 and 100,000 BOED. Of this 30%,on average, is oil production, or 8,700 BOED. If there were a 10% error rate on the wells and a 10% error rate on the working interests entered (assume entered lower) then this will potentially cost a company $2.9M in revenue per year.

If your auditor is not authenticating your your working interests or royalty rates against their cost centers, then you could potentially be missing revenue.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company.