What is a Joint Venture?
In its simplest form, a joint venture is formed when parties want to combine assets or share the risks of exploring or developing prospect, a lease, or an entire area or region. Forming a joint venture oftentimes allows the parties to combine their technical, operational, or financial expertise to more efficiently and effectively develop the prospect, area, or region. The parties negotiate a Joint Operating Agreement (JOA) which sets out each party’s responsibilities under the contract and allows for the efficient development and operation of the joint property. One party is designated as the “operator,” with the other party or parties individually and collectively referred to as “non-operators.” The operator is responsible for conducting operations and paying the joint venture’s costs and accounting for each party’s production, either through an allocation of production volumes or remitting proceeds to the non-operators. The parties usually share expenses based on their proportionate “working interests” and share revenues based on their proportionate “net revenue interests.”
What is a Joint Interest audit?
A joint interest audit is a review of the charges and credits on the joint interest billings (JIB) to a non-operator for its working interest share of a venture's costs to determine if the charges and credits are in compliance with the provisions of the governing agreements, many times the JOA and attached Accounting Procedure ("Exhibit C"); the audit is usually performed by one or more non-operators or a contract firm, such as Martindale, on a non-operator's behalf.
Why Conduct a Joint Interest Audit?
Many projects entail spending significant amounts of money, from several million to several billion dollars. Non-operators and operator alike understand a joint interest audit is simply a necessary business practice to help safeguard a non-operator's assets. COPAS Accounting Guideline 19 (Expenditure Audit Protocols) discusses that aspect in describing two reasons a non-operator would conduct a joint interest audit.
A. Assist in the safeguarding of assets by verifying and authenticating Joint Account transactions
B. Review compliance with the provisions of operating and other agreements (if applicable)
"Recovery of cost overcharges" is the most common expression for why audits are conducted, but there are non-financial aspects that also play a role. Wanting to understand an operator's accounting, wanting to learn more about the operations conducted and underway, and being required by corporate, trust, regulatory, or other requirement to conduct periodic reviews are a few other reasons to conduct a joint interest audit.
In some cases, a non-operator is unable to get an operator to satisfactorily explain certain aspects of joint interest accounting; in those cases, a joint interest audit allows a non-operator to ask the operator questions and get a detailed review of how an operator is accounting for operations. In other cases, a operator may create JIBs that are summarized at a high level to where a non-operator is unable to understand the nature of costs billed. A joint interest audit allows a non-operator access to the detailed electronic accounting records so all JIB charges can be better understood.
Does a Joint Interest Audit Require Specialized Knowledge and Expertise?
Without question, the skill and knowledge required to conduct an effective joint interest audit is parallel to that required by a CPA to conduct a financial audit of a firm's balance sheet or income statement. The exploration agreement, participating agreement, JOA, accounting procedure, farm-out agreement, project team agreement, and the myriad other agreements governing joint interest accounting contain not only specialized defined terms, but many terms of art that require many years of experience and expertise to understand and master. The upstream and midstream segments of our industry are complex operations, not only operationally, but from an accounting perspective. A successful joint interest audit cannot be effected by anyone who is considered an "auditor" any more so than anyone titled an "engineer" could perform the specialized analyses and painstaking work an experienced drilling engineer performs because the skill sets and levels of knowledge are far different.
Put another way, joint interest accounting is not financial accounting. It is a completely different field, a highly specialized field just as is financial accounting. Almost all joint interest accounting is dictated by executed agreements that will mostly follow or refer to COPAS accounting standards and provisions. It is simply not possible to conduct an efficient and effective joint interest audit without this specialized COPAS knowledge and experience, or significant, active, and ongoing knowledge of COPAS, its agreements and their intents, as well as ongoing experience with COPAS documents.
Why Martindale?
Martindale has performed thousands of these joint interest audits and has an employee-based staff ready to assist on your project. Our employees have between one and 44 years of industry experience; they are capable of understanding even the most complex JOAs and other agreements and applying those provisions to the costs billed by the operator. They have the requisite COPAS experience. The expertise, experience, and consistency you get with Martindale, our senior management have all been with the firm for more than 26 years, ensures the best results for your joint interest audit, whether it be of a single well, a large unit, a complex waterflood or enhanced recovery, or a large-scale joint venture covering multiple counties, parishes, or states.
We are an employee-based firm, not a loose affiliation of contractors who come and go; with our seasoned and long-tenured staff you receive long-term and consistent service and results because our staff has a vested interest in delivering ongoing superior results and maintaining the history and results-based culture of Martindale. Our employees have careers with Martindale, so they are constantly striving for success and staying educated on the various and ever-changing contractual provisions agreed to by operators and non-operators.
Martindale is authoritative on COPAS issues. Most of our employees are engaged and active members, participating in local and national meeting and education offerings. Several teach webinars and in-person educational classes for COPAS. And, many of our employees have participated on multiple COPAS document drafting teams, including model form accounting procedures, with Mike Cougevan having been a lead or member of more than 16 COPAS document drafting teams.
Our clients range all the way from multi-national oil companies, majors, and large independents, to governmental agencies, banks, ranches, family businesses, and individuals. We understand each entity's perspectives and concerns.
Onshore
Operational and accounting dynamics can vary greatly among the many domestic basins and shale plays. Over the course of thousands of audits, our team has developed a deep understanding of operations ranging from a single-well vertical to the complex development and operation of thousand-well shale plays. In addition, we have an advanced understanding of the wide variety of agreements in effect, from the most basic model form to the hundreds-of-pages-long complex agreements with new and unique provisions.
Offshore and Deepwater
Offshore operations are not just a concept to the Martindale team; our folks have direct and hands-on experience that is invaluable to understand offshore operations. An effective audit is predicated on being able to understand the operational and accounting dynamics of boats and helicopters, labor allocations, rig moves, and shorebase allocations; the Martindale team has that requisite understanding.
Our team also has extensive deepwater experience, including participating in the development of the industry's model form accounting procedures. As the complex deepwater issues have arisen in the industry over the years, Martindale has provided input to the industry from a non-operator and contract compliance standpoint, with the viewpoint not only of equity, but of ensuring an operator's ability to properly account for operations and a non-operator's ability to be able to efficiently audit the costs charged.