Upstream oil and gas accounting is critical to the success and survival of small & mid-sized operators. While the industry is mature, the accounting continues to evolve. Accounting for Upstream can become quite complex because it typically involves joint interest billing to multiple percentage holders and a lot of regulation. Accounting software solutions like WolfePak have been around a long time, but the ramp-up and learning curve is lengthy.
Adding to the challenges, many start-up operators assign accounting to a family member or a friend. With unfortunate regularity this becomes a problem as the company grows and the complications become more complex. When things start to go wrong, the family member or trusted friend may want to hide the issues for as long as possible hoping to fix things down the road.
Then the operator gets a letter from the Railroad Commission that their oil lease could be severed. At this point the operating company has invested heavily into that lease, and once a lease is severed, the operator cannot get it back.
Why are they losing the lease? There are several possible reasons, but it could be that someone complained. Either a royalty partner (surface owner of the land for example) or a percentage partner (private investor) complained to the Railroad Commission. Maybe they were not getting their cut – checks not on time, and/or inadequate reporting.
Competing Operators are always looking for an opportunity to take over and be awarded the “Top Lease”. They may be waiting for the chance to be the new producers on the well. It could be the surface owner does not own the mineral rights and sees a strategy to make more money.
All it takes for this domino effect to suddenly happen is a few months of bad reporting and problems with issuing the revenue checks. To guard against it you need a strong process for revenue recognition, a strong expense tracking process, accurate allocation of operating costs and overhead – and a timely and accurate monthly closing. This is what prevents the lease severance scenario.
Imperial Cost Control has the talent and expertise in Oil & Gas accounting to help independent operators in upstream and downstream and service companies of many kinds. We are ready with our free accounting system health check to give you an assessment of your needs and develop a plan to minimize your risks from accounting problems.
