In a perfect world, the relationship between an oil and gas Operator and its Non-Operators is one of harmony and complete trust, with the flow of funds and costs of operations completely transparent and all associated accounting timely and accurate. We all know that we don’t live in a perfect world.

The reality of the situation is that Operators are not fiduciaries of their Non-Operators and are only generally held to the standard of a reasonably prudent Operator while also being indemnified against everything other than their own gross negligence or willful misconduct.  Mistakes will inevitably occur, most immaterial, but sometimes these mistakes have a significant impact. The standard AAPL form Joint Operating Agreements (“JOAs”) and the associated COPAS Accounting Procedures contemplate this reality and provide clear audit rights to allow Non-Operators to keep their Operators honest.

First, when acquiring non-operated oil and gas assets, it is essential to understand your rights to audit the Operator. If there is no JOA, and the development is under pooling orders or by statute, you should ensure you understand your audit rights. If there is a JOA, it needs to be reviewed carefully to understand if the rights typically granted in the AAPL and COPAS forms have been modified in any way.

COPAS accounting procedures provide that Non-Operators are entitled to audit the books and records of the Operator with respect to any expenditures for the joint account. In the industry, this type of audit is known as a “JIB Audit,” standing for Joint Interest Billing Audit. A standard JIB Audit provision allows the Non-Operator to audit for two full years after the year the underlying invoices or JIBs were rendered. There are, however, some important restrictions to be aware of.  First, typically, a Non-Operator can only audit once per year (unless there is a change of Operator or the Operator consents). If there are two or more Non-Operators, they are required to make every reasonable effort to conduct a joint audit to minimize inconvenience to the Operator.

This means it is worth the effort for every Non-Operator to discuss and develop a plan for when, if, how often, and with whom it will conduct JIB Audits. If you’re looking to partner with other Non-Operators to coordinate audits and split costs or need guidance on the scope and timing of JIB Audits to maximize effectiveness without incurring unnecessary expenses, RR&A can provide expert advice. Don’t hesitate to reach out to RR&A today.