WHAT YOU ALWAYS WANTED TO KNOW ABOUT AUDITING BUT WERE AFRAID TO ASK PASPB Technical Session October 31, 2006

WHY Dollars Dollars Unique Agreements Unique Agreements Trust Trust History History Interest Interest Cost to conduct audit Cost to conduct audit Just because we can Just because we can

AUDIT PROVISIONS Contained in the Accounting Procedure 24-month limitation on auditing Non-Operators will join together Operator bears no portion of cost

NON-OPERATOR’S RESPONSIBILITY Determine time needed for field work Determine time needed for field work Contact the operator and schedule Contact the operator and schedule Authorize someone to conduct audit Authorize someone to conduct audit Confirmation letter to operator Confirmation letter to operator Request documentation Request documentation Prepare ballot letter to other non- operators Prepare ballot letter to other non- operators

NON-OPERATOR’S INTERNAL PREPARATION Joint Operating Agreement Joint Operating Agreement Review Accounting Procedure Review Accounting Procedure Joint Interest Billings Joint Interest Billings Drilling Report, if applicable Drilling Report, if applicable Authority for Expenditures Authority for Expenditures Any other agreements with operator Any other agreements with operator

OPERATOR’S RESPONSIBILITY Work with audit team to schedule time Work with audit team to schedule time Provide confirmation letter Provide confirmation letter Provide a list of current Working Interest Owners Provide a list of current Working Interest Owners Provide JADE Provide JADE Make documentation available to auditors upon arrival Make documentation available to auditors upon arrival Have adequate facilities Have adequate facilities

AUDITOR’S RESPONSIBILITIES

SCOPE Capture as much as possible Capture as much as possible Don’t ‘spend a dollar to chase a dime’ Don’t ‘spend a dollar to chase a dime’ Don’t go under scope unless a systemic problem Don’t go under scope unless a systemic problem Be as fair as possible to both sides Be as fair as possible to both sides

REVIEW AGREEMENT Look for changes to basic JOA Look for changes to basic JOA Note date of agreement Note date of agreement Check for how to handle title opinions Check for how to handle title opinions Check for version of Accounting Procedure Check for version of Accounting Procedure Check insurance provisions Check insurance provisions

ACCOUNTING PROCEDURE Look for changes to basic procedure Look for changes to basic procedure Check offsite technical election Check offsite technical election Check overhead rates Check overhead rates Look at overhead terms Look at overhead terms Check major construction overhead Check major construction overhead

DRILLING REPORT Note dates Note dates Operations Operations Bits Bits Tubulars Tubulars Vendors Vendors Tour report Tour report Completion report if available Completion report if available

GETTING STARTED Compare JADE to JIB’s Compare JADE to JIB’s Keep original JADE and just copy workpapers over Keep original JADE and just copy workpapers over Eliminate offsets Eliminate offsets Eliminate under scope Eliminate under scope

VERIFY CHARGES Verify invoices over scope Verify invoices over scope –Property –Dates –Activity –Comply with JOA –Comply with Accounting Procedure –Note invoice number –Make sure amount agrees with charge

ADDITIONAL VERIFICATION Double check large invoices against drilling report Double check large invoices against drilling report Look for duplicate payments Look for duplicate payments Check field tickets supporting invoices Check field tickets supporting invoices Check drilling charges against drilling contract Check drilling charges against drilling contract

OVERHEAD Drilling overhead –C–C–C–Check spud or “on location” dates –C–C–C–Calculate escalation Producing overhead –C–C–C–Check month of first production –C–C–C–Calculate escalation

RECONCILIATIONS Bits Bits –Pull from tour reports –Verify serial numbers against invoices Tubulars Tubulars –Pull from drilling reports or completion reports filed with authorities –Gather information from transportation invoices

RECONCILIATIONS Diesel Diesel –Charges while rig on location –In Texas, check sales tax –Offshore transfers Chemicals Chemicals –Look for credits from mud company –Offshore transfers

RECONCILIATIONS Surface equipment –R–R–R–Reasonable –P–P–P–Put together the story Boats –P–P–P–Property noted –H–H–H–How allocated Helicopters –P–P–P–Property notes –H–H–H–How allocated

PERSONNEL Payroll records Payroll records –Timesheets if time is allocated –Employee benefits rate –Vehicle expense Tech labor Tech labor –On site & off site –Qualifications –Specific condition or problem

OTHER Insurance –C–C–C–Complies with JOA Operator owned facilities –C–C–C–Complies with Accounting Procedure Legal –G–G–G–Generally no ‘in-house’ attorneys chargeable Unusual –H–H–H–Helicopter charges for a West Texas property

INFORMATION REQUESTS Be specific Be specific Adequate documentation Adequate documentation Follow Operator’s guidelines Follow Operator’s guidelines –Electronic –Hard copy –Copy of JADE

Exceptions Be specific Be specific Quote JOA, Accounting Procedure, contracts as applicable Quote JOA, Accounting Procedure, contracts as applicable Adequate documentation Adequate documentation Copy of JADE the Operator furnished as support Copy of JADE the Operator furnished as support Leave field exception with Operator before leaving location Leave field exception with Operator before leaving location

AUDIT REPORT Actual Report Actual Report –Send out within 90 days of field work –OR by December 31 st if late in year –Note amount of $’s audited –OK except for Operator’s Response Operator’s Response –With 180 days of receipt or in violation of most agreements

CONTINUING PROBLEMS Materials Materials Miscodes Miscodes Technical Labor Technical Labor Legal Legal Outside Landman Charges Outside Landman Charges Overhead Charges Overhead Charges

TOOLS Computer Computer Printer Printer Lots of Office Supplies Lots of Office Supplies COPAS CD COPAS CD Flash Drive Flash Drive Cell Phone Cell Phone Sense of Humor !!! Sense of Humor !!!

TAKE TIME FOR SOME FUN

THE END