JVViews: May 2015 Issue
Editor's Note
Lucky Number 13 - An Introduction to 13th Month Adjustments
The Benefits of Volunteerism
Early Morning Session - Wednesday, April 29th
April Luncheon Review: Knowledge is Power — Become a Proud Energy Citizen
May Luncheon — The Impact of Technology in Oil & Gas
Bouncing Back From A Layoff!
New Volunteer Opportunities are Available!
eStudies and Web Based Learning
JV Rep Tool + Role Opportunities
Looking for a New Opportunity?
PJVA Linkedin Group
Editor's Note
"It was the best of times, it was the worst of times…" – A Tale of Two Cities (1859), a novel by Charles Dickens. This is also a fitting opening line to the story of the Alberta oil and gas industry this past year, with the significant decrease in commodity prices and now the dramatic changeover in provincial government. Where will it all take us? Only time will tell, but the industry is nothing if not resilient.
Our ongoing series of JV education articles takes us this month to An Introduction to 13th Month Adjustments. We hope you enjoy it. And for anyone who has thought about (or who actually is) volunteering with the PJVA, the article on The Benefits of Volunteerism will be of interest as well.
Lucky Number 13 - An Introduction to 13th Month Adjustments
Previously we wrote about the Joint Account, capital costs, fixed and variable operating costs, and managing the joint account for and with your partners. Moving forward on that subject, it's important to look back after a year of operations on what "actual" costs were levied against the production received for that year. This is also an opportune time to review forecasts and review and supplement any outstanding AFEs (what you spent, actually.)
You've heard the terms "throughput adjustment" or "equalization" or "EQ's" and for most JV or Land people, we cringe at the thought of the seemingly complex process dubbed "the 13th Month Adjustment"! Really though, the process is a look back at an Operator's accounts once a fiscal year cycle (or twelve months) has ended. It's a process done pursuant to terms found in most agreements, to review and correct the difference between the estimated (or forecasted) costs and throughput volumes, against the actual costs and throughput.
The process is performed by the Operator's joint venture accounting team, on the Operating Costs and/or Facility fee income for the joint account under a certain Joint Venture based on the terms in the governing agreement. This process is known as an equalization or a 13th Month Adjustment. Talk to any accountant, and it's truly a complicated, but very a necessary step!
The Operator initially pays all costs incurred for the joint account. He then bills the other Owners and they reimburse the Operator for their share of the capital costs and fixed operating costs in proportion to each Owner's facility participation (ownership). Usually, the Owners' share of variable operating costs is billed monthly based on the Operator's estimate of each Owner's yearly volume of production through the Plant or Facilities. This goes on each month, for a calendar year. Similarly, processing fees will be charged to third party users based on total facility estimated costs and throughputs for the year.
Once the year-end review is done, it may be that the Operator either owes the other producers money or vice versa (it's like doing your taxes!). This is why it's so important to follow your costs and throughputs regularly to try and charge appropriate throughput costs to your partners and processing fees to third parties, in order to minimize the difference between the estimated costs and the actual costs.
Doing 13th Month Adjustments is often a time consuming exercise, and as a result many companies are often behind in their 13th Month process, but it is still very important to complete so there are no "unwelcome surprises" after year end.
Advantages of 13th Month Adjustments:
- The third party or another owner may have audit rights, and completing a 13th Month, where required by contract, will help both the Operator and other producers understand if additional charges should be billed or credits provided to correct the prior year.
- Unless there is a take-or-pay arrangement in place, a third party producer or other owner would pay only those costs attributed the Operator's actual costs and the producer's actual throughput. If the Operator's costs are low, this is great, he has not undercharged! If it's a turnaround year, the Operator may be at a loss until the extra costs can be recovered.
- Often times, if you are a third party producer with an all-in fixed fee per e3m3, you are not at risk of paying more costs, should the Operator be found to have undercharged its operating costs. In this case, the Operator would need to provide a revised Exhibit "C" to capture increased fees going forward and provide same to a third party on 30 days' notice.
- Provided a 13th Month adjustment is done on time, the Operator will be in a better position to understand what a property is actually costing.
Potential disadvantages of 13th Month Adjustments:
- They are not often done on time.
- Depending on the complexity of the property, this concentrated and exhaustive process can consume a lot of an accountant's time – sometimes for several months.
- If a producer is paying a two part fee, comprised of a fixed capital component per e3m3 and a flow through operating cost (based on the Operator's actuals), the producer may end up with a fee that does not support continued production because their property is no longer economic. In this case, as a third party, you may be at risk should there be large expenses incurred by the Operator in any year.
- Any credits due back from the Operator to a producer may be months or, in some cases, years after the actual production year ended. By this time, in some cases, the producer has sold its interest in the wells or the whole area. Depending upon the terms in a Purchase and Sale Agreement, any credit or debit would become subject to that Purchase and Sale Agreement.
- Errors can occur in the 13th Month process leading to a slew of additional issues for the owners to review and resolve.
- Because the Joint Account is auditable by the other Owners, and in some cases third parties (albeit limited audit rights), the Operator may need to increase staff to tackle this obligation following the end of the fiscal year-end.
This obligation is no standard day-to-day task. Therefore, fixed fees, reviewed annually and processing agreement exhibits revised annually, is worth considering as an alternate way to handle your accounting obligations. The fixed fee process is a review which should be done around the same time that you prepare forecasts or budgets for the upcoming year. Looking back at average operating costs and throughput volumes over 3 or 4 years and looking forward at work to be done, in addition to the activity in the area, should provide you with a relatively safe degree of confidence in fees to be charged. Sure, there is risk – it is part of this industry, but if followed properly, the risk can be reduced because you would have more confidence in your area, and depend less on the fallout from the 13th Month Adjustment or an audit.
Also, when acquiring or divesting of assets, ensure that you understand which party (the Purchaser or the Vendor) will be responsible for any accounting adjustments post sale. A recommendation is to ensure that the Vendor is up-to-date on all audit obligations and accounting matters. If not, at least ensure that the parties are clear on matters that evolve at or after the closing date.
Exposure to uncertainty constitutes a risk for an Operator and its partners – so, thank gosh for our accountants! A recommendation, however, is not to leave your actual numbers to chance. Understand your property, your partners, and your area and review your fees annually.
Joint Venture is an investment undertaken by two or more parties where they agree to jointly develop and produce oil and gas properties. Joint exploration or marketing activities are generally not included.
Joint Account is the account set up which shows the charges paid and credits received as a result of Joint Operations, to be shared by the Owners in accordance with the terms of this Agreement.
Joint Operations are the activities resulting in Capital Costs and Operating Costs and all other activities undertaken in connection with the Facility, where such activities are conducted for the Joint Account under the terms of the CO&O Agreement.
Allocation of Costs is a process of assigning operating costs to facility owners in proportion to their ownership share in the facility.
Operating Costs are all costs and expenses, except Capital Costs, incurred in connection with the testing, operation, repair and maintenance of the Facility.
Fixed Operating Costs are those that that do not vary with production or throughput volume, such as, but not limited to, property taxes, insurance and surface lease rentals.
Variable Operating Costs are those Operating Costs that remain after excluding Fixed Operating Costs and that vary with throughput volume of Inlet Substances.
Tracey Moore-Lewis (Education Director – PJVA)
Grant Feddema (Marketing Director – PJVA)
Kent Black (Publicity Director – PJVA)
The Benefits of Volunteerism
It's the necessity of our era. Government cutbacks force various groups to garner support through the good nature of volunteers. Then there's the various associations who take it upon themselves to provide services for little or no fees. The only way to do this is through utilizing volunteers.
The PJVA is one of those associations. Our association can only survive through the generous time and effort of volunteers. From the people who help organize our pre-Stampede breakfast to the board of directors, we all volunteer to help make our association successful.
My personal journey with volunteering with the PJVA started around 12-14 years ago. We were tasked with determining if the PJVA should invest in developing a certificate program. As you are all aware our decision was yes. With the aging population at the time, we were going to be in dire straits in a few years if we didn't do something to bring younger people into the JV industry. With no recognized courses to help those personnel doing the hiring, it was difficult to determine which candidate was better qualified for the position. Now we have two certificates to help in this regard.
I had the honor of working with some of the most illustrious joint venture people at the time. I found it somewhat unnerving to be working alongside some of the true legends of JV. I felt I had nothing to offer. But I was told that my input and my understanding of what was actually discussed and decided was extremely valuable. As a result of that little conversation I continued on, and on, and on. Since then I have been involved in helping develop and teach a number of sections within our courses, have been on model agreement taskforces, the agreement steering committee, and most recently on the board of directors.
How have I benefited from all of the sweat equity? Obviously just helping our association continue and prosper warms my heart. Knowing that I have tried to fill the very large shoes of those who have done this before me is rewarding. The extensive network I have built as a result of the time spent on all of this work is invaluable. Seeing students that I taught develop into the industry leaders of tomorrow has been the most gratifying experience to date. It's almost like a parent watching their child develop into a fine upstanding, valuable part of society.
With all that being said, what is the point of this rambling tome? Obviously, it's to get you to consider volunteering your time to the PJVA. There are going to be numerous opportunities to help out in the coming years. Next year I'm hoping each of the directors will utilize at least two volunteers to help out with their portfolio. It might be reviewing the Daily Oil Bulletin© for luncheon topics, or helping with the on-going maintenance of our certificate program courses. Whatever it is that you do it will be something that the board of directors as a whole, and the specific director that you help out will be gratefully acknowledged and appreciated.
As a board of directors one of our most difficult issues is succession planning. When we have a number of directors leaving the board, either due to coming to the end of their maximum six year stint (stale-dated) or for other reasons, we have a tough time coming up with names of people to contact as replacements. If we have volunteers in every portfolio, succession planning becomes a non-issue; those volunteers become the natural successor to the out-going directors.
For those of you who have put your names in to volunteer pool and haven't been contacted we apologize and will do our best to contact you and get you involved. Try contacting Scott Wolfson via e-mail at swolfson@arcresources.com, or via our PJVA website at https://pjva.ca/about/getinvolved.php .
In closing, I want to thank all of our current volunteers and thank our future volunteers in advance. I'm sure that with the energy and enthusiasm that the next generation of joint venture professionals is showing, the future of our association looks very bright indeed.
Marcel Savoie
Vice-President
Early Morning Session - Wednesday, April 29th
The Early Morning Session held on April 29th focused on issues related to A & D transactions.
Lorie Caron (Group Lead, JI Administration, Encana Services Company Ltd.) and Robyn Lewis (Joint Venture Specialist, Crescent Point Energy Corp.) moderated the session, both having experienced one or more of these issues over the years working on Joint Venture Acquisitions & Divestitures.
Some of the issues discussed at length were:
- Should unexecuted agreements (CO & O or service) be assigned in an A & D transaction? Can they legally be assigned? Does the fact that adherence to one or more of the clauses in an unexecuted agreement constitute governance under that agreement, therefore requiring an assignment?
Writer's Note: In terms of the above issue, from your company's perspective, if you are unsure how to handle an unexecuted agreement, request advice from legal counsel!
- Is it necessary to assign 100% facilities or joint facilities with no governing agreement (i.e., AFE only) or would the general conveyance and the schedule of facilities attached to the purchase and sale agreement be sufficient to properly transfer ownership?
- Should the current operator of a unit or facility (the Vendor) issue a mail ballot resigning as Operator, considering that their role as operator ceases once their ownership transfers?
- Are there issues with the timing of sending these mail ballots to owners at closing of the transaction leaving the issue of who operates during the 15 day voting period? Would it not be better to issue the mail ballots in advance of closing?
Other issues discussed were the handling of AFE's and mail ballots throughout the timeline of an A & D transaction, JV effective dates vs. Land binding dates and how these dates are treated by Accounting, the effect of ROFR's on JV agreements and, finally, the ongoing debate about whether non-consent to an assignment of a service agreement is an issue. The majority in attendance say "No".
The questions, comments and discussion around each of the issues raised were valuable. Thank you to everyone who attended and shared their views on these topics.
May EMS
The next EMS will be held on Wednesday, May 27th where we will discuss Equalizations. Lorie Lindberg will moderate the session. Lorie has many years of industry experience and specializes in the areas of Equalizations and Revenue and Production Accounting. Lorie will take us through the equalization process with a view to joint venture and will field our questions. We look forward to seeing you in May.
June's EMS will mark my last as Director of the Portfolio. I will be retiring from the PJVA Board but will remain on numerous committees. It has been a great time working with PJVA and look forward to other rewarding activities.April Luncheon Review: Knowledge is Power — Become a Proud Energy Citizen
PJVA’s April 16th luncheon featured Alishia Klein, Communications Coordinator, Public Affairs, CNRL. Alishia provided her insights on the importance of becoming a 'Proud Energy Citizen' — being knowledgeable about the issues that face our sector and ensuring that we are starting conversations to advocate for our industry and the benefits it brings to everyday life.
Alishia began by telling her story of growing up as an avid outdoorswoman and what led to her current job role at CNRL. She talked fondly of fishing trips with her family in B.C., drawing contrast to the moral dilemma that she experienced when she joined the Oil and Gas sector. She realized the key was to continue educating herself about the facts, discuss the issues with peers, family and friends and form her own opinions to truly find out what she supported.
Alishia's reflections emphasized that there's a need for all of us to engage with the people around us to educate and draw attention to the great benefits our industry brings to people's lives. However, before starting such conversations, we must first educate ourselves on the issues and continue to learn and engage through professional groups and associations, social media and industry media. Knowledge is power and in order to change the public's perceptions, we must become proud energy citizens.
Alishia touched on a lot of good information and kept the room very engaged. If you would like to view Alishia's presentation, the PowerPoint slides will be available on the PJVA website.
May Luncheon — The Impact of Technology in Oil & Gas
PJVA is proud to present our May 21st luncheon on "The Impact of Technology in Oil & Gas" presented by Chad Lundberg of Crescent Point.
Join us as Chad walks through the changes in technology for Oil & Gas and its impact on the way we do business today. Evolution in drilling and completion technology has expanded the opportunities for development in many ways. Chad will walk through some of the major developments and how it has impacted the business.
Bouncing Back From A Layoff!
Have you lost your job recently? CAPPA is holding a special event focused on supporting unemployed CAPPA members and industry non-members to get back into the workforce.
Wednesday, June 17, 2015
Calgary Public Library, Downtown Branch
Click here for more information
Pub Networking Night
Join us for the last Pub Networking Night of the season. We already have 30 people signed up for the Barley Mill event. So come and connect with industry and/or provide feedback to the Board on PJVA activities.
New Volunteer Opportunities are Available!
Check out what's needed for Social events, Marketing and the Early Morning Discussions.
eStudies and Web Based Learning
PJVA is excited to offer customizable and accessible web-based learning options to industry professionals. PJVA has a suite of web based courses geared towards practicing and prospective JV professionals and personnel involved in the development and operation of a Joint Venture facility.These courses, available via the eStudies link at www.pjva.ca, are a supplement to the Joint Venture Certificate Program offered through PJVA and Mount Royal University. The courses offered on eStudies are identical to the courses offered at Mount Royal, the only distinction being that the Mount Royal courses are applicable towards the Joint Venture Certificates while eStudies are not. As well, the eStudies courses are offered in segments such that the student can customize and streamline their learning experience.
eStudies courses include Joint Venture Agreements, with modules in Construction, Ownership and Operating Agreements, Unit Agreements, and Service Agreements, Joint Venture Administration as well as Joint Venture Analyst Levels 1 and 2. The Agreements courses offer excellent background knowledge to anyone who works with or is bound by a Joint Venture Agreement. Joint Venture Administration details exactly how work is to be conducted within the legal framework of Joint Venture agreements. The Analyst courses provide understanding of Joint Ventures techniques and processes.
Check out www.pjva.ca today and click on eStudies!
JV Rep Tool + Role Descriptions
Don't forget this valuable member benefit when looking to define or advance your career.
Looking for a New Opportunity?
Check out the PJVA Job Board for recent postings.PJVA LinkedIn® Group
PJVA is on LinkedIn®, the world's largest professional network. It's a great way to stay connected and exchange ideas with other PJVA members and industry professionals.Click here to submit your thoughts and ideas!
PJVA was incorporated in 1985 to represent individuals and organizations involved in petroleum joint ventures. JVViews is published to keep members informed about upcoming PJVA and industry events, courses and seminars offered and/or sponsored by PJVA and current projects being facilitated by the Association.