Petroleum Accountants Society of Oklahoma February 11, 2015

1. Describe common audit issue 2. Recommended handling/Impacts 3. Suggested improvements 4. Questions 5. Other panel response 6. Open for follow-up questions 2 FORMAT OF PANEL DISCUSSION

Concerns We continue to get requests with less than 30 days to respond. 3 Issue 1 – Unrealistic Deadlines

How To Handle 1. Request an extension 2. Consider following-up with the auditor’s supervisor if an agreement cannot be reached on an extension 3. Push back on what information is being requested 4. Commit to completing part of request and get agreement on completion date for the remainder of the request 5. If not enough time is given to pull data for opening conference, you will most likely need extensions for new data requests 4 Issue 1 – Unrealistic Deadlines

Suggested ONRR Improvements 1. Don’t send canned opening conference data requested, only ask for what you need for that specific audit/compliance review 2. Explain what you are specifically looking for in the compliance review/audit 5 Issue 1 – Unrealistic Deadlines

Question What do we do when we are not being given enough time? 6 Issue 1 – Unrealistic Deadlines

ONRR Response  The 30-day response time is not applicable to all data requests. We normally set a 30-day due date for data requests that are from Data Mining or deemed to be more time consuming (e.g. data request sent with the engagement letter).  We agree that ONRR should only request applicable data. If a company feels ONRR is requesting unnecessary data or that the reason for the request is unclear, inform and work with the auditor for resolution  If you believe you have not been given enough time, request an extension of time along with the reason(s) why additional response time is needed 7 Issue 1 – Unrealistic Deadlines

Concerns  Auditors requesting information we don’t and can’t get as part of an audit, completely unrelated to our business and contracts (for points downstream of our sales contracts) and then threatening civil penalties when not provided.  Auditors also need to understand that no matter how good our information management process is, it will probably take considerably longer to obtain/provide pre-acquisition information for these time period. 8 Issue 2 – Supporting Documentation Issue

ONRR Response to Concerns  If the data being requested is deemed not applicable or more time is needed, work directly with the auditor for resolution  If you still are not satisfied with the response, request a meeting with the applicable supervisor and/or manager 9 Issue 2 – Supporting Documentation Issue

How To Handle Explain to the auditors upfront what information you are unable to provide or the likelihood that additional time will be needed to pull information for periods prior to the acquisition 10 Issue 2 – Supporting Documentation Issue

Question 1 Recently we were instructed by ONRR in situations where the transporter/processor “rolls-up” prior months adjustment into the current month plant statement, to figure out a way to split the volumes and values and report them to the production month they related to. How do you plan to audit months where the volumes will not match the plant statements because volumes have been either added or deducted due to adjustments the transporter or processor reported on a plant statement for different months? 11 Issue 2 – Supporting Documentation Issue

ONRR Response  Since we audit historically, there should be revised plant statements (when there are adjustments) to support the volumes along with any applicable PPAs and documentation of how the split was handled  You must report the volumes to the appropriate month. If adjustments were made, the plant owner should provide revised statements. For the specific situations that you are referring, please provide further information so we can look into the issue and get back with you 12 Issue 2 – Supporting Documentation Issue

Question 2 Wouldn’t it be better to report and pay based upon the plant statement, and if a Data Mining issue is identified, you send the Data Miner (DM) a reconciliation of the volumes? 13 Issue 2 – Supporting Documentation Issue

ONRR Response  The plant statement is typically the source document to support the reported volume for royalty purposes unless there is evidence otherwise. Industry has been informed to report using a ‘reasonable method’ to break the single lump-sum volumes into the various parts (field fuel, loss/unaccounted for, drip condensate, etc.).  If a data mining issue is identified, you should work directly with the Data Mining representative to reconcile the volumes. 14 Issue 2 – Supporting Documentation Issue

Question 3 Has ONRR looked into how they will audit field fuel allocations? There will most likely not be transporter or plant statements that tie to the fuel volume allocations to the various products or dispositions (e.g. field fuel, lost & unaccounted for; drip liquids; plant fuel, etc.)? 15 Issue 2 – Supporting Documentation Issue

ONRR Response  ONRR issued a Dear Reporter letter dated December 18, 2014, which clarifies the original Dear Reporter letter dated August 8, ONRR will conduct audits, compliance reviews, and data mining activities according to these guidelines.  Some transportation invoices identify the field fuel volume while some gas plant statements identify the plant fuel volume. However, any additional fuel volume can be supported with other sources such as transporter notices, electronic bulletin boards, and FERC tariff rates that post the fuel percentages. 16 Issue 2 – Supporting Documentation Issue

Concern 1 Auditors do not understand gas/oil composition, processing and its impact on the composition (i.e. residue, plant productions, etc.) resulting in erroneous conclusions and instruction 17 Issue 3 – Training

ONRR Response  The ONRR auditors are subject to mandatory training as required by GAGAS. ONRR’s Workforce Development Office works with the staff to ensure training needs are met and the pertinent topics are covered.  On compliance reviews, the auditor’s supervisor’s name may not always be visible. You may request the auditor to provide the supervisor’s name if the need arises. 18 Issue 3 – Training

Concern 2 Some auditors and data miners do not always understand that adjustments may occur after an audit/compliance review/data mining issue has been closed. ONRR may need to provide some guidance to auditors, data miners, and industry regarding when (and what type of) adjustments should be made, even though an audit/compliance review/data mining issue has already been closed (e.g. when BLM approves CA/PA retroactively). 19 Issue 3 – Training

ONRR Response  Notify ONRR that adjustments will be submitted based on new information or government mandates 20 Issue 3 – Training

Concern 3 Other training suggestions might be to cover different types of processing contracts (traditional, POP, keepwhole, fixed recovery, etc.). This training might also be incorporated as part of Payor Training. Has ONRR staff been properly trained to understand the reporting of product code 15 and its impact on the audit process? How about the Statute of limitations and how it is to be applied in their audit/data mining requests? 21 Issue 3 – Training

ONRR Response  Companies can submit training suggestions and/or comments to ONRR 22 Issue 3 – Training

How To Handle 1. Take more time explaining and putting together documentation, walk through one month and all the calculations 2. Point them to the Payor handbook 3. Suggest they speak with a knowledgeable ONRR person 23 Issue 3 – Training

Suggested ONRR Improvements 1. Provide more ONRR training on overlaps, pressure base conversion, pool pricing, how the OGOR relates to the 2014, dual accounting, allowable transportation costs, and lease use. 2. Place the auditor’s supervisor’s name and contact information on compliance reviews 24 Issue 3 – Training

ONRR Response If the Supervisor’s name is not visible, you may request that the auditor provide the supervisor’s name and contact information if the need arises. 25 Issue 3 – Training

Question 1 After an audit is closed, can adjustments be made if the periods are still in statute? If not, why not? 26 Issue 3 – Training

ONRR Response After an audit is closed, adjustments can be made if both of these criteria are met: a) if the adjusted period is within the statute of limitation per the Royalty Simplification and Fairness Act (RSFA), and b) if the adjustments are not associated with any issues that were already resolved and adjusted during the course of the audit Note: The post-audit adjustments are to be reported on the regular Form ONRR-2014 and not Compliance Form CMP Issue 3 – Training

Question 2 What is the statute of limitations for making adjustments, is it 6 or 7 years? 28 Issue 3 – Training

ONRR Response  Per RSFA, royalty adjustments are applied retroactively to the date royalties are due within the adjustment period of (a) six years for Industry (via the regular Form ONRR-2014) and (b) seven years for ONRR (via CMP-2014).  Industry is allowed an extra year (total of seven years) if a refund request is submitted by Industry and approved by ONRR.  Note - These limitation periods are applicable to Federal royalties only, as there is no statute of limitations on Indian royalties. 29 Issue 3 – Training

Concerns We do not get closure notices on Compliance Reviews or timely closure/issue letters on audits, and often get requests 6 months or a year after we have supplied the requested information. 30 Issue 4 – Closure Notification

How To Handle 1. Ask for time to pull the documents to review and respond. 2. Send with the last data request and say you have provided all the requested information and ask if you can consider that Compliance Review closed 3. Ask the ONRR to close the original compliance review and issue a new one 4. Consider sending letter response and documents in an with an read receipt and delivery notice, and send via UPS/FED EX 31 Issue 4 – Closure Notification

How To Handle (continued) 5. If you have divested properties and have not received a response that an audit or compliance review has been closed, and the acquiring company wants to know about any potential liability, request a status report from the Federal auditor, and if you don’t hear anything substantive back, report that an audit is currently going on but that you are not aware and have not been notified of any specific issues 32 Issue 4 – Closure Notification

Question 1 Is there a standard time that auditors have to respond to data that has been provided to them? Isn’t more than six months too long? 33 Issue 4 – Closure Notification

ONRR Response  There is not a standard time for auditors’ response to the data being provided  If Industry does not hear back from the auditor within a “reasonable” time, follow up with the auditor 34 Issue 4 – Closure Notification

Question 2 What should a company do if they have not heard anything about an audit or compliance review after a year? 35 Issue 4 – Closure Notification

ONRR Response Communication is key. If you do not hear back from the auditor, we encourage that you follow up with the auditor for the status of the audit or compliance review. 36 Issue 4 – Closure Notification

Question 3 What can or should a company do if they inquire about the status of an audit for which they have not received a response for over a year and they are told it is “on hold?” 37 Issue 4 – Closure Notification

ONRR Response For any audit that is “on hold,” there is usually a situation that we cannot disclose. ONRR will inform the company if any action is required on their part. Companies can contact the auditor for the status of an open audit. 38 Issue 4 – Closure Notification

Concerns What do we do when an auditor is requesting that we do something that is not correct – conflicts with the CFR, Dear Reporter letters? Example: In an instance where royalties are due on takes, the majority partner paid on entitlements and agreed to correct things prospectively but not retroactively. ONRR auditor says royalties had to be adjusted to an entitlements basis, and working interest owners had to settle resulting issue among themselves. 39 Issue 5 – Incorrect Directive Given

How To Handle Challenge the request and suggest they speak to someone more authoritative within ONRR on that topic 40 Issue 5 – Incorrect Directive Given

Question What should we do in these situations? 41 Issue 5 – Incorrect Directive Given

ONRR Response Companies can ask the auditor for regulatory support to his/her position and provide regulatory support to their position. If an agreement cannot be reached, request a meeting with the auditor and his/her supervisor/manager 42 Issue 5 – Incorrect Directive Given

Concerns Federal auditors, particularly State auditors on behalf of the ONRR, do not always have the most recent 2014/OGOR information in their workpapers, sometimes it is a year or more old 43 Issue 6 – Current 2014/OGOR Information

How to Handle Send back the request and require them to use the latest information (you may want to include an extraction of the latest information and/or comparison of what information they used and what the latest is) 44 Issue 6 – Current 2014/OGOR Information

Suggested ONRR Improvements Audit training should be to use the latest OGOR/2014 information 45 Issue 6 – Current 2014/OGOR Information

ONRR Response  When the audit is initiated, the auditor pulls the latest Form ONRR- 2014/OGOR, at that time. The auditor may extract the 2014/OGOR information throughout the audit on a case by case basis.  Once ONRR engages the company for an audit/review, ONRR strongly recommends that the company keep us informed of any on-going royalty adjustment throughout the course of the audit so that we can ensure to have the latest 2014/OGOR data for a more accurate review result. 46 Issue 6 – Current 2014/OGOR Information

Concerns If we have a compliance review or audit on a specific property, what should we do when a Data Miner requests information for that property for the same time period? 47

How to Handle 1. Send Data Miner documentation that the property and time period was under audit 2. Have the Data Miner speak with the auditor 48

Question Has ONRR implemented any changes to minimize this duplication of effort? 49

ONRR Response  We are continually working to improve coordination/communication among our offices. Currently, Data Mining’s reviews are chronologically ahead of audit/compliance reviews. Please notify ONRR of any overlap so that we can coordinate our efforts  Depending on the situation, Industry may still need to supply requested information to the Data Miner regardless of whether or not an audit is going on. If adjustments are required, Data Mining will coordinate the timing of the submission of the adjustments with the auditor. 50