WHAT YOU ALWAYS WANTED TO KNOW ABOUT AUDITING BUT WERE AFRAID TO ASK

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

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

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

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

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

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

7. AUDITOR’S RESPONSIBILITIES

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

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

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

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

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

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

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

16. OVERHEAD • Drilling overhead • Check spud or “on location” dates • Calculate escalation • Producing overhead • Check month of first production • Calculate escalation

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

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

19. RECONCILIATIONS • Surface equipment • Reasonable • Put together the story • Boats • Property noted • How allocated • Helicopters • Property notes • How allocated

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

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

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

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

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

25. CONTINUING PROBLEMS • Materials • Miscodes • Technical Labor • Legal • Outside Landman Charges • Overhead Charges

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

27. TAKE TIME FOR SOME FUN

28. THE END