#046 - COPAS's New Accounting Procedure and Model Form Interpretation

On today's episode, we are talking with guests Karla Bower and Roger Gan, members of COPAS, who've been working for the last four years on a new accounting procedure and model form interpretation. Hear first-hand about some of the changes that you will find when it is officially rolled out.

On this episode we will talk about:
•   What are the COPAS accounting procedure?

•   The primary change in first level supervision is addressing contract labor

•   The new form and what it entails

•   The biggest changes from 2005 Accounting procedures

•   Two big takeaways regarding the materials that are used on the accounting forms

•   Why they did not want the MSI  - it would paraphrase the accounting procedure which would not help anybody

To listen to this episode check it out on iTunes + Stitcher or on the website. 

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About COPAS:
COPAS provides expertise for the oil and gas industry through the development of Model Form Accounting Procedures, publications, and education. We are a forum for the active exchange of ideas which result in innovative business and accounting solutions.

Find a society near you.

www.copas.org

Transcript

Oil & Gas Podcast  Ep 046

32:08

SUMMARY KEYWORDS

accounting, procedure, people, form, overhead, operator, industry, accounting procedures, Roger, Karla, joint, function, labor, addressed, JOA, charged, materials, podcast, discussions

SPEAKERS

Karla Bower, Tom Wireman, Phil Sherwood, Roger Gann

Tom Wireman  00:01

Hi and welcome to the Oil and Gas Accounting Podcast. I'm your co host Tom Wireman Executive Director of COPAS, the Council of Petroleum Accountants Societies. I'm here with my co host, Phil Sherwood, owner and founder of SherWare the provides software for oil and gas operators and accountants. If you're a CPA, an accountant, a bookkeeper and office manager. Or if you're an oil and gas operator doing your own accounting, this podcast is for you. 

Phil Sherwood  00:24

We're here talking with the experts in their respective accounting areas to keep you up to speed on the latest accounting news, rules, and data. There is so much happening in the world today, especially in oil and gas that affects the accounting function of a business. Our job on this podcast is to keep you up to date and help you see more, no more and do more as an accounting professional in our field. Let's get started.

Tom Wireman  00:50

Hello, everyone. Welcome to another episode of the oil and gas accounting Podcast. I'm Tom Wireman here with my co host, Phil Sherwood. We normally record these podcasts in the afternoon, but we're rolling here early today with this one.

Phil Sherwood  01:01

Good morning, Tom. I'm happy to be back with you for another episode. Today, our guests are Karla Bower and Roger Gan both members of COPAS who've been working, I guess you could say tirelessly for about the last four years on a new accounting procedure and model form interpretation. Good morning to you both. Good morning.

Tom Wireman  01:21

Well, let's let's begin this morning with our guests. I'm going to have you both just give us a short biography of each of you. Carla, why don't we start with you?

Karla Bower  01:29

Sure, yes, I'm a joint interest consultant in Houston, Texas. I graduated from University of Kansas -  Go Jayhawks. And I've spent most of my career coordinating land and joint interest accounting matters at ConocoPhillips. And I have served on the coast board of directors as well as the board of directors for pass for a while and it's COPAS president in 2007. I've also chaired passionate on interest committees. As a member of APL I'm also COPAS liaison to APL and I've led numerous COPAS Task Force or participated on them, I should say, over the years quite extensively and most recently with Roger was really pleased to work with Roger as the Co-lead the task force that developed the we hope will be the 2022 accounting procedure model form that will be a successor to the 2005 forum, and then also recipient of the COPAS Eagle Award and the COPAS. Ring of Honor.

Tom Wireman  02:25

Thanks, Carla. Hey, Roger, why don't you tell us a little bit about your background.

Roger Gann  02:28

I've been with Martindale since 1995. And to see my background I've been doing joint ventures audits  for most of my career. That our firm also often credited for services and accounting services been involved with COPPA since 1996. Obviously working on some of the graphing committees and then in different roles, serving on merging Issues Committee, local level as well as an audit committee chair. I've worked on a couple of different graphing committees with Carla but this one has obviously been the one we've had the most fun on before years coaching. And I will tell you call it on his godson taking care of most everything on this and keeping our cats on our team is not a simple task. So she has done an awesome job and

Karla Bower  03:29

the feeling is mutual Roger, you've done a lot to keep the group on task to and broad process after we've debated things on nauseam Rogers, the one that kind of brings that sage and by that peaceful presence to the discussion and cuts through all that hours of discussion that we've hit there, so

Tom Wireman  03:52

Well, thank you guys, we're gonna begin with questions. Phil, I'm gonna turn it over to you.

Phil Sherwood  03:57

Yeah, we're gonna be talking about the COPAS accounting procedure. And before I dig in to asking you some questions about it, can you just tell our listeners, what is the accounting procedure because there's some people listening that are not members of COPAS. They may not even know what an accounting procedure is or why we need it.

Roger Gann  04:16

COPAS accounting procedures are typically going to be what the JOA provides the provisions for charges between the parties can also come in for Carla's and various uses as well as I have and it's not always the JOA. But that is what it's designed for is to provide what is going to be chargeable and that's going to be covered by overhead gives you direction on how to handle those costs.

Phil Sherwood  04:46

Okay, take us through why does COPAS Why are you working on a new accounting form? Why did COPAS undertake this project now? Or I guess you started four years ago, right? It's been a long process.

Karla Bower  04:59

I will go ahead and take that one out this had discussions. So I would say starting around 2017, we had discussions about concerns or issues that people were running into with the 2005 accounting procedure model form. And so the project was actually authorized in 2017. Another concern at that time was we knew it would take several years at least to develop and 2005. You know, but the type who got a 2020 accounting procedure would already be 15 years old. So it was also just an age factor is that in there, but regarding the improvements to the 2005 form, we wanted to update it to reflect changes in laws and regulations, ESG concerns, certainly, that's more of a driving force in our industry nowadays, we also recognize that operational dynamics were different because of horizontal wells, the way things were being done, we have drilled but uncompleted wells, we have offtake issues. Now we're venturing into areas where like, say for North Dakota for a while there, you didn't have many offtake choices to move your product. And certainly technology is a big one can hardly pick up the paper now without reading about advances in technology, where we can do more and more things remotely. And so that was a big driving concern there. And just industry practices change too. And in the years since 2005.

Karla Bower  05:35

Karla, you mentioned, that it just makes me think, you know, Copalis has been the organization that everyone's look to, to keep things current and you know, focused in the industry. I mean, that's, that's really what the organization does. You mentioned ESG. For one, we've had a few guests on our podcast, covering that topic. But really the advancement of technologies and things just kind of keeping our forms up to date. And current with that is certainly we've seen that with remote technology centers and some of the other things that that Koch was has been publishing here lately. So great background on that. Roger, did you want to add anything to that?

Roger Gann  06:58

Well, yeah, I was just gonna add, you know, the interesting thing about the draft accounting procedure, when we started, obviously, all the things Carlos talking about been 12 years since 2005, a lot of things have changed. And we were really able to kick it into high gear, those first couple of years on this procedure. And one of the biggest things that really drove some of our changes happen, because we realized in our industry, I was kind of sad, a lot of things could be done remotely, which made people have to approach this a little bit differently. While people look to COPAS, for industry standard and how you do things, it's amazing how, just like most human beings, people don't like change. So you know, as we're trying to identify and show this accounting procedure was was taking on some of the new things are happening because of COVID and technology, and trying to really wrap that together so that we could make this thing last 10 or 12 years. That was probably one of our biggest challenges.

Karla Bower  08:22

Yeah, yeah, that's a good summary.

Tom Wireman  08:24

Well, what are some of the things that this new form addresses? I'm sure, there are a number of things that that you've addressed as you I mean, you really kind of give us a summary a little bit ago, but maybe maybe specific things that this is going to talk to this particular form. Carla, do you want to start?

Karla Bower  08:41

I think the highlight for me, if I had to pick one headline, it's a chargeability, when it comes to labor is really determined by function and not location. Again, as technology makes remote work even more prevalent, we need to address that. So that's probably at the top of my list, as well as environmental projects overhead. It's a change a lot on how can it be used, you know, on newer agreements, hopefully operators are paying more attention to environmental issues. I don't know if that'll really apply too often under new agreements. But anyway, that's those are the top two headliners for me, Roger DS, maybe you have some other ones that you want to highlight.

Roger Gann  09:17

Both of those. Those are my top two were simplified as much as clarified better, functional form. When it comes to labor, especially technical. A lot of some of the classes we found conflict between our layer count of shooters in jail the jail age when it came to some of the land man type functions that were being charged. Those more on to the electronic awarding by function got away from title affiliates, I think we really did a good job but better clarify how you identify when an affiliate is struck with chargeable and specific culture people to be able to follow. Those will be mindfully through changes in discount.

Phil Sherwood  10:18

Okay, what are some of the anticipated usages of the accounting procedure?

Karla Bower  10:23

Oh, good. And take that one we might primarily for onshore operations and offshore shelf properties, ie not deep water, because COPAS does have a 2012 model for mechanic procedure for deepwater. All those people certainly could use this for deepwater if they were so inclined. In particular as we were because we knew that it was primarily offshore and shelf and onshore properties. We paid attention to the APL 610 J, always recognizing this is going to be use with newer new properties, probably not as often amended to govern old property. So there's really new prospects coming along. So it would be the APL 610 1989 89 H and 2015 model form j aways, the Rocky Mountain mineral foundation form two for federal exploratory divided interest units. And then APL has a 710 form for offshore shell. So we really tried to connect the dots between the accounting procedure and the JOA. As as we were writing this could be used for facility or other kinds of agreements, would it take more modification to get that done?

Tom Wireman  11:33

That's pretty impressive. You guys took the time to make sure that you were, as you said, connecting the dots between all those different joint operating agreements and other potential usages. So kudos for doing that? Yeah.

Phil Sherwood  11:45

But it's, it's nice that you thought about the other documents and what they covered and not overlapping some of this.

Tom Wireman  11:50

I wanted to follow up just a little bit, you guys, you talked about labor chargeability. And some things I wanted to circle back around for that a little bit. You talk about, you know, chargeability by function, and that sort of thing. Can you clarify that for our listeners just a little bit? How's that different than the way, you know, like the 2005, or the 84, or any of the other procedures, so have really addressed that

Roger Gann  12:15

The biggest change in 2005 already kind of started down that phone. And really starting out function versus location, which a lot of older accounts on and focus on, what we tried to do is take away a lot of terminology, such as on side off side, on the joint property and changed a lot of that in the operations simply because our joint property no longer standing after, and actually doing that work. And it could be done 20 miles away from the wall, and we don't want to consider charging. So we did our work, especially in the candidate technical labor, primary focus was what are people doing in the industry? For the last two years COPAS has published? Do what I ask the world of 100 people in this room tiktoks on site technical labor and puts it in the overhead 100 People can look their hand and say no. So our team is why do we even have that as an election and the overhead why? Why does that even need to be there? Let's just take care of that. But the charges. So that was an easy assumption to say. That becomes sharper and sharper. When it came to the offside. Call on I debated this a lot. I wanted to continue with an election. With Apple, we're taking some polls and we're allies with a lot of companies, we're using alternative 3005, people had realized that that was a great alternative or 2005. For the charging off site. It was very specific, it really drove home, what types of operations and functions related to those operations. So by based on those polls, our team decided to charge them, then if anything else falls outside of those two functions of overhead. So that made it very easy for us to do that.

Tom Wireman  14:25

Yes, that's kind of coming back to what you were saying a little bit earlier. Carl, I think you mentioned this, but really addressing industry practices, what is what are what are the things taking place today? Not necessarily what the contract language had been saying, but you know, how are how are companies handling that today? So it sounds like that's really one of the things that you focused on as well. What about first level supervision any any changes in definitions there? That's always an interesting conversation with with companies on first level supervision.

Karla Bower  14:53

First of all, we will I think the primary change in first level supervision is addressing contract labor. It And that arose out of some discussions that we actually had at COPAS meetings and emerging issues. So what happens when you have a contractor and the first level supervisor of a contractor is that billable or not billable? So it was staying plugged into the issues that were arising in our industry. So I think that's the primary change. Would you agree, Roger?

Roger Gann  15:20

I will. And I think we clarified better the first level supervisor is that the extra division of labor contract services, that was probably the biggest clarification, we may post on supervisors.

Tom Wireman  15:37

Right now. Thank you guys.

Phil Sherwood  15:38

You talked about some of the changes you made in the procedure. It's my understanding that you've also removed several long standing model form interpretations by reference. What does that mean, and how are those items addressed now?

Karla Bower  15:53

Yes, so 2005 accounting procedure had I think about seven empathize that were incorporated by reference, the whole thing was incorporated, incorporated by reference. We had a lot of resistance in the industry, when that first came out, and maybe still some today, actually. So what we did was we after this lot of discussions, presentations, then we took polls at caucus meetings, asked the society to pull their members report back to us. And as a result, we ended up removing the MFI references, but we didn't just leave things open ended, we did incorporate key concepts from those MFI as well, because

Tom Wireman  16:29

you never please everyone I know. But you guys have done a good job, I think of coming back and making sure that you've vetted this, which I think is a hallmark maybe of what the organization does. I mean, we may not agree on everything and exact terms, but we have a consensus. So it sounds like maybe you guys have done a good job of of ensuring that that's all been vetted through too. So congrats on that as well. I'd like to just maybe ask you a quick question. One of the things I think I've seen in the presentations is the opening paragraph and the overhead section has changed. Is the change intended to help parties better understand what's directly chargeable versus what's covered by overhead? What's what's the overall reason for this particular change?

Roger Gann  17:14

There's a couple changes in paragraph that you're talking about. We had we had had some companies submit some comments related to taxing authorities coming down and saying, Oh, look, you're getting compensated because that was the language used in all the prior accounting procedures, overhead compensation, or services by MDX services. So it's not compensation is reimbursement for overhead costs that you incur. So that was that was the biggest problem wording change we made was to take out that word compensation. And make sure everybody understood it was a reimbursement. The second thing we did by doormat is to make sure people understand what the reimbursement is you're receiving through your fixed overhead rate is deemed one our personal reimbursement, the overhead costs, meaning that we're seeing the central argument happens through our industry, industry goes up, overhead costs for an operator go up and operator complaints. Their overhead is enough to cover their costs. Their industry goes down operators, layoff, I have the opposite argument about an operator that, oh, your overhead is way too high, because you don't have all that costs, right? The only overhead function or the overhead costs is to over time, cover you. And so we want to make sure people understood that that overhead rate is deemed one artificial emotional event costs. So the graph is doing this. You're always drew overhead is covering over time. And you can't change it. You can't say, well, not getting enough. So I get the add on some additional cost. overheads, not enough. So that was wrong. My gosh.

Tom Wireman  19:19

So anything you want to add on that?

Karla Bower  19:22

No, I think yeah, we were really trying to focus on to make sure that this wasn't something that would be a taxable income. You know, it's reimbursement for costs. And as Roger said, it's an agreed upon amount. It's not it's not going to be precise, but it's what the parties agreed to, to compensate or reimburse the operator.

Phil Sherwood  19:41

What overall changes will we see regarding overhead elections?

Karla Bower  19:45

Well, the 2005 accounting procedure forum had elections for offsite and on site and technical labor. And so those were eliminated completely. Also two options for major construct catastrophe overhead that the operator had discretion. to pick and choose which of those options to use on a given project. So that's also going on, again, the chargeability of technical labors based on function, not on site off site. And what else do we have? So really, we tried to, there was some concern about that. And I have to admit, it was a step change for me to initially, but when you think about it, it's called a 8020 rule, what I experienced during my career, that's not to say the same for everybody, but so often on site was always chargeable. And I don't know, 80% of the time, maybe people picked alternative three on the offsite tech labor. And so this form, it removed those elections, but it's very consistent with what I saw as the most common elections, and that this forms, as well as the operator using option B for major construction and catastrophe. So yeah, it removed the elections, but it changed in practice, not so much.

Tom Wireman  20:55

Okay, again, reflective probably, of what the industry had been doing all along, correct. I mean, it's just, it's really kind of cleaning up that or solidifying kind of what the actions have been to this

Phil Sherwood  21:07

point. It sounds like you guys have gone through a process sort of like we do in software, you put something out there, and then you watch how people use it. And then you go back, and you can make changes by seeing how everybody is using and asking questions. And what they don't understand type of thing is, is that the kind of feedback you guys got over this process?

Roger Gann  21:29

Correct? Yes, several different ways. over four years, that changed quite a bit one way. First couple of years, we were headed in one direction, and then we had to change a little bit the last couple of years. But yes, that is, that is a true statement. One thing I want to add, one of the things our team really tried to do is make this a form that could be modified by user functions and technical challenges, that's usually stricken. Because they're all. So there are ways to modify the standard procedure you're so on. And so retain some of the components from procedures.

Karla Bower  22:18

And as Roger said earlier, COVID I think it was probably around 2020 When we moved that final tech labor election, and I remember, okay, it was pretty, it's gonna take a lot of drafting work to take that out of there. And if it didn't go over, it's gonna take a lot to put it back in. But we were going through COVID At that time, and we're going Yep, we can do a lot of stuff remotely, it's time to move forward with that. So so that that really put a whole different perspective on things, I think. And then Phil, you asked him, what else is different about overhead, and again, the environmental project overhead is is new. And I personally saw some some things happen with ballot from an operator under an old JOA, they were going to do an environmental project, the landowner wanted something cleaned up. Those old accounting procedures just didn't address that. So that is a new section in the overhead portion of the agreement.

Phil Sherwood  23:10

Oh, that'd be useful for a lot of people.

Tom Wireman  23:12

Let's talk about materials for just a little bit materials is a big section, the accounting procedures, what kind of changes are we going to find their and why?

Karla Bower  23:19

I think the big thing for me the big, two big takeaways, we've added weighted average pricing for material transfers that wasn't in there before, but a lot of companies use it. So again, getting back to industry practice, there might be a time or place for that. And then also, another big takeaway for me would be the unused condition A and B material under the 2005 accounting procedure unused. A and B material that's transferred away from the property is valued at the same price as when it was originally charged as a joint property. Well, if you think about it is the prices are going up, the operator enjoys all the gains. If the prices are falling, the operator has no incentive to dispose because it would bear the entire loss. So in this one unused condition AMD materials transferred from the joint property is repriced. So any gain or loss, it's born or shared by the joint account.

Tom Wireman  24:10

Interesting concept.

Phil Sherwood  24:12

I like that. Yeah, that sounds sounds really good. We've talked about a lot today. Are there any other items we might have missed in the conversation that you'd like to comment on? Any other changes?

Karla Bower  24:23

How much time do you have?

Tom Wireman  24:27

As much time as you'd like?

Karla Bower  24:29

Well, actually, you know, if people are gonna compare them word for word, they're gonna see a lot of changes. And I want to emphasize that even though the wording is different, many places, the concepts are still the same. And so we tried to do things to improve the drafting. And so I would tell people don't let that throw you off. It's not as different as you might think. And again, we're trying to reflect current industry practices. The other point to make we've really talked about the accounting procedure, and we also have a model form interpretation to accompany that accounting procedure now one thing we anticipate we get every time we roll these out is what's the effective date for that new MSI? Well, it's only gonna pertain to agreements that have this accounting procedure attaches and exhibits. So some of them apply to those. We don't really have an effective date for the MFI. We did a lot of polling, extensive discussions over the five years to develop this. And we had a very good mix on the team, we had joint interest, audit representation, different company sizes, geographical areas, different societies involved, again, to try to get that input from all over. So Roger, let me take her away.

Roger Gann  25:44

Yes, a couple of times. And that's something I've given a couple of presentations so far to become societies on. And that's one of the things I've tried to find out exactly what color you're going to pick this up, it's going to look really different. The reason it looks different is because the team tried very hard to simplify and clarify. So we have moved some things around. Yes. And we have removed model form interpretation references, but we've also put key concepts. And then we took those references and move them into the interpreting section. So the interpretation, if you still want to go read MFI, 37, it directs you to go there and look at that, it takes you there for training. So I mean, they're cool, you watch any old concepts, and our new accounts to do but I mean, goes right, first time you look at it, because we did things around. One thing we didn't touch on, it's gonna really be different. Since right, all of that under the old accounting procedures as all other materials, which didn't make a whole lot of sense. Section 2, really belongs back in section four materials relates to so you know, we made that move. Anybody looking at the older accounting procedures, they're gonna look at section two materials. And we're gonna go, Whoa, what happened on language, you're just like two sentences here. Now, it used to be much longer, well, it didn't disappear. It's just another section. So we took out some definitions that needed to be taken out. Of our numbers, as we tried to, we asked everybody on the team to define equalized. Talk about a lot of glassy eyed people on our team and all people who have been in the industry a long time. What the heck is equalized, right? How do you define? So we put that term out? Back in the fight section and materials, we, we did our best to explain what that concept means. So I mean, yes, it's gonna look really good to people. But as color pointed out, the concepts are all still there. I just have to read it closely. And we'll figure that out.

Tom Wireman  28:17

Well, very good. I mean, part of the reason we had you guys come on today is like anything that changes in the industry, we try to educate people as well, it's not just a matter of dropping the document out there and say, here you are on your own. So thank you guys for coming on today and sharing the rationale and reasoning for some of the things that we're going to see. And particularly in clarifying. And I think I was in the camp of going wow, this is considerably This is I think I say I use the phrase radically different at one point. And you guys all cautioned me that that's not really true. It's it looks different. But it still functions the same as it always has. So hopefully, we got that through to our listeners today.

Karla Bower  28:55

Thank you know, I like to be you word use the word education there because that was one of our guiding stars as we were developing the MSI. And sometimes people like why are you putting that in the MSI? Well, we didn't want an MSI, that would paraphrase the accounting procedure that doesn't help anybody. And based on the comments and discussions that we're having, as this was being developed, we knew that these are the issues questions that people had. So we're really developed that as an educational tool to complete accounting procedures that we really encourage people to read it. We tried to use lots of examples where we could so we think that that will be really helpful to folks.

Phil Sherwood  29:33

Yeah, that's great. Thanks, Carla, and Roger for being with us here today and explaining the new COPAS accounting procedure in more depth. I like ending on that word education because there's a lot of people that probably don't even know about the accounting procedure and about COPAS and we want to educate them on the resources that are available. So if you want to find out more about the accounting procedure and COPAS go to the website, copas.org. And you can find out a lot more information there. Want to thank our listeners as well, we love when you subscribe to the podcast. We have more than 10,000 downloads so far, and we're happy that you've enjoyed the episodes. Feel free to share our podcast with, you know, two or three friends, the episodes that you really liked, we love spreading the love around. And if you would like to be a guest on the podcast, or you have a suggestion for a topic or a guest, please contact us you can send it to podcast at sure where to come. We'd love to hear your ideas and your feedback.

Tom Wireman  30:35

And I'd like to add my thanks for you guys being here today to just one clarification, maybe a disclaimer, this particular publication has not been approved yet by council. That vote happens October 22. We anticipate that since it's past committee at this point that it will be formally approved by Council. And not long after that, we'll be rolling it out and people can start adopting that. So again, as Phil said, watch what takes place on COPAS.org announcements will be sent there. We'll probably send out some general announcements to the industry through some social media channels as well. But that's it for today. Thanks again. We'll see you soon on the next episode of the oil and gas accounting podcasts. Have a great day everyone.

31:14

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