By: Christy Reed (email@example.com)
Revenue Accounting in the energy industry can be complex. There is always room for human error when making calculations and deciphering data, contracts, and ownership. Most believe revenue accounting is as simple as taking the MMBtus and multiplying by the price, and you’re done. This is simply not the case.
Revenue Accountants must work closely with various departments within an organization, including the marketing team, land department, production team, and the tax and regulatory department, to understand the intricacies of each well in order to properly account for and allocate revenue. When calculating revenue, it is imperative to understand the following inputs by well:
- Take-In-Kind Status
When it comes to understanding ownership, working with your Land Department is essential. A few situations to note regarding the ownership in a well include the ONRR’s presence on the revenue deck, whether any working interest owners elected to go “non-consent”, and if any royalty owners are exempt from certain fees. There are numerous other scenarios to be cognizant of, however, at a minimum all of the aforementioned factors are essential for a revenue accountant to consider in determining the allocation of volume and dollars. Without a clear understanding of this data, the result can be an over- or underpayment to owners, which can then lead to further allocation of resources to correct errors.
Knowing an owner’s Take-In-Kind status will come from your marketing team. They will be able to tell you if there are owners in each well (if allowed by the JOA) who have elected to Take-In-Kind (market their own interest). The biggest question to ask/understand when it comes to Take-In-Kind Gas is who is responsible for what? The operator must designate a person to be responsible for sending reports that show the current Wellhead Gas Balance. This person should also be responsible for tracking balances for all Take-in-Kind wells and settling the balances when necessary. The Marketing Team and Land Department will be crucial in helping to answer these questions.
Fuel is another big factor to understand as each company and each basin can report it differently. Two ways you can see fuel allocated is either volumetrically (usually this is the best option if the ONRR is not on the deck) or fee based (if the ONRR is on the deck this would be an ideal option). Other than how it can affect the ONRR, either way is correct for calculating the fuel deduction. A few other items to note when it comes to fuel includes whether or not the operator owes the royalty owners for lease use gas, and where exactly the fuel is being deducted to ensure it is being calculated correctly.
There are many kinds of fees when it comes to getting gas/NGLs to market. Oil is generally straightforward and usually consists of a price received and any transportation to get that price (truck or pipe). Plant Products can be a little more complex, as usually there is a price received less transportation, storage, fractionation, and generally a processing fee (can also be shown as a Percentage of Proceeds.) Gas is where it gets complicated and not as apparent. First, the operator will need to decide how to calculate the fuel used on the lease, gathering system and/or through a processing plant, as well as in downstream gas transportation. Next, if your gas is processed at a plant or gathered on a third party system you will need to show all fees incurred including but not limited to compressor, processing, treating, electrical, low volume, tech fees, etc. Companies are getting creative with how they negotiate their contracts, so as a revenue accountant, you frequently see new fees structures. As such, it’s important to understand the fees and the terms of the fees in order to correctly apply them. This is when it is critical to work closely with your Marketing Team to understand how each molecule of gas flows to understand how the fees should be applied and therefore accounted for. The marketing team will also be an important part of understanding how escalating fees should be calculated. Once you understand the fees and know how to allocate them back to the well, the last step is understanding whether those fees can be assessed against a royalty owner. The land department can assist the revenue team in reading the lease and deciphering each royalty owners’ allowable fees.
It is important for a revenue accountant to review the wellhead production for each well, in addition to the inlet production at the midstream company for accuracy. An operator should reconcile to the midstream reports less any field fuel and loss. You will also need to consider each well’s status; whether the well is producing, shut in or plugged & abandoned. This information will also contribute to any analysis needed when there are volume discrepancies month over month. It is also helpful in determining which wells could possibly be assessed a low volume or tech fee from the midstream company.
When it comes to pricing, it is important to know where the sales point or title transfer point occurs. Is it at the wellhead, tailgate of a processing plant, delivery point of a gathering system, or somewhere further downstream? The point of sale is important to know because it will determine how you get paid, one stream or two. Once you have determined where the gas is being sold, it is important to understand how it is being sold. Gas can be sold in two ways: either to the Midstream Company via the Gathering/Processing Agreement or it can be sold to a third-party purchaser under a Transaction Confirmation. Whether it be an agreement or a transaction confirmation, the pricing for both gas and plant products will be defined in the contract and can be reviewed each month for accuracy. The Marketing Team is a great resource for understanding and deciphering the price calculations defined in these contracts.
Taxes can be difficult to calculate. It is important to know which wells have tax breaks, the rules for each state, and who is making the tax payments. If you understand the ownership of the well, and the marketing team has confirmed the sales point of the molecules, then knowing who is paying your taxes should be clear. The complexity occurs when deciphering which wells carry tax breaks, as well as the rules and rates that apply to each state. This may require more research into the wells to ensure taxes are paid accurately.
The revenue process does not need to be overly complicated, as long as revenue accountants have the time to learn and understand the important details of each well. Although the process of learning can seem overwhelming/time consuming it is important to ensure the accuracy of the revenue bookings. A lack of information and knowledge can lead to misallocations and over/under royalty payments. Implementing an efficient and accurate accounting system is imperative. The system allows for all the data from each department to flow easily through the calculation/allocation process. An optimal system streamlines most of the complexity and can help mitigate human error. In the end, communication and a best-practices system are two key elements in revenue accounting which will serve to minimize the complexities and issues inherent in the calculation and allocation of revenue.