Audits on Royalties

I would like to start a discussion regarding annual audits. I'd like to hear how others are doing this and what results they are coming up with. Are there records for calibration of the metering? Are the calibration instruments traceable to NIST standards? Are you able to audit transaction records regarding sales? Is there enough information to determine if the company is self dealing by selling low to another of it's divisions or owned companies? Are there time limits? What restrictions are there, if any?  What recommendations do insiders have for us that are new to this? etc. etc. etc. Thank-you in advance for your participation.

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Permalink Reply by JK on July 2, 2011 at 8:59am

Dee, are you talking about the devices that are used for clocking the gas flow from the wells?

One thing we discovered is when the power goes out these meters seem to stop working but yet the gas still flows.  As far as seeing the amount of gas flow, the gas companies are required to report to the GSES and those records are kept there. It's the U.S. Geological Survey folks.  I went this week and the gas company was late in reporting which raised concern there. 

I do not know how or who has the sales records.  Our statements seems to stop there with only reporting the gas volumn we get paid on.

Permalink Reply by Dee on July 2, 2011 at 1:46pm
That is an interesting situation regarding the power being out. How does the company handle that? Do they use the flowrate from when the power is on or is it free gas to them? I wonder if you can require them to place a ups to power the meter. Primarily I am interested in the devices that clock the gas flow. The calibration of instruments is critical to ensuring everyone is being treated fairly. I have been at several different production plants where we had to bi-annually calibrate our metering to NIST standards. The customer had the right to have one of their own technicians monitor the calibration. That would be impractical in our situation, but I will be asking to review the records and procedure used to calibrate it.
Permalink Reply by matthew h mcsparren on July 3, 2011 at 1:58am
I can help with most of your questions, First you can request a witness test of all measurment equipment, But I would recommend hiring a qualified gas consultant to perform the test with the production company. Second all gas measurment equipment is calibrated to AGA spec. Also have battery back up in case the power fails. Third I would find it highly unlikely any production company to sell gas at a low rate just to beat the land owner out of a fair share of the royalty payment. Fourth A production company may not sell gas 24/7 from the well site, they have set contracts with the pipeline company for so many MCF oer day. Hope that helps.
Permalink Reply by bill h on July 3, 2011 at 4:04am
Regarding independent auditing, wouldn't this have to be written up in the original lease?
Permalink Reply by matthew h mcsparren on July 3, 2011 at 4:52am
Ithink
Permalink Reply by Dee on July 3, 2011 at 8:01am

We have a clause in our lease that we can audit each year. I do not expect any problems. They negotiated fairly with us and there have been no surprises.  So I expect the company we leased with is professional and will be on the up and up throughout the years. I just know from my auditing days that being prepared going into an audit, being knowledgeable, having everyone else that is auditing competent, sets everyone up for a win. If others have clauses in their leases and the companies in the region know we are going to be coming in to audit knowing what we are doing, it could save people grief and put any operators that might think of being less than honest, on notice that they will be seeing knowledgeable people coming in looking to ensure they are being treated fairly. I am hoping to increase my knowledge in preparation of our first audit.

Permalink Reply by Dee on July 3, 2011 at 8:07am
I'll have to look up the AGA spec. I am going to request that I be allowed to be present during the calibrations. I have many years of calibration, data acquisition and instrument experience. My statement about the self dealing, was based on an old news story I came across several years ago where a O&G company out west was accused of it. I cannot find the story and do not know if it was ever proved. That is what got me thinking about it as I plan for our first audit. My interest is only in finding out if I can gain access to the names of the companies that the contracted gas is being sold to. It is probably not a typical request. thank-you for your post
Permalink Reply by Robert D. Congdon Jr. MAI, SRA on July 12, 2011 at 5:21am

The question of propert auditing is complex and often frustrating.  Dependent variables include your lease language, the type of meter(s) installed (dual chambered the best), calibrations,and the attitudes of the gas company.  Our research shows a 5-20% loss is not unusual, and that converts to some serious dollars for the landowner. If you ever visit the point of sale meters for pipelines, you will find that they change orifice plates regularly, even simply for changes in weather.  When they are selling, they want the meter right, but when they are buying from the landowner, the maintenance is usually lax or non-existant. In addition to my mineral valuations, I have been working with Delta Engineers for over a year, and we finally have a brochure on this Monitoring Service, available for the asking.

Bob Congdon         rdcongdon@stny.rr.com

Permalink Reply by Co-operative Buyers Association on July 12, 2011 at 11:25am

Is your Monitoring Service brochure available online  ?

Thanks

Permalink Reply by Robert D. Congdon Jr. MAI, SRA on July 13, 2011 at 3:18am

By e mail -  just let me know where to send the pdf

 

Bob Congdon     rdcongdon@stny.rr.com

Permalink Reply by Co-operative Buyers Association on July 13, 2011 at 4:33pm
Permalink Reply by Dee on July 18, 2011 at 1:48pm
Thank-you for replying Robert. The information you emailed looks very interesting. I very well be contacting you at an appropriate time.

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