5-Step Process for Ensuring That Your Purchasers Are Paying You Correctly05/07/2015
Why upstream companies should record their revenue transactions from the contract detail and their production volumes
How do I know that I'm being paid correctly for what I've produced and sold?
In my 30-plus years in upstream oil and gas, I can’t tell you how many times I’ve heard that question.
But when operators record revenues from cash receipts and make distributions only after receiving payment from the purchaser, it's a question that's bound to be asked.
Did you record your true receivable? Did the purchaser pay you exactly for what you produced? How do you know? Are you certain that you’re meeting the terms and conditions of your leases? Those are some of the questions that I would have for those operators that have a book-and-distribute-revenue-from-cash-receipts process in place.
Here’s the best practice that my colleagues and I recommend: Record your revenue transactions from the production volumes captured in your production system, make the proper valuations based on your marketing contracts and lease arrangements, distribute to the owners, reconcile your receivables with the purchaser, then collect what you're due.
Let’s unpack each of these a little further…
Operators go to great lengths to capture such field data as well meter volumes, lease use, pipeline statements, and allocated well volumes. This data should be used to value and record your production volumes.
Using the information provided by your Production team to record your revenues and receivable transactions based on your lease terms and marketing contracts, you now know up front the true value of what you’ve produced. This practice creates a reliable audit trail and will save you considerable time and heartburn when the time comes to make prior period adjustments.
Using cash receipts and cash receipts only to record transactions is no longer a sound practice, simply because of the cost-sharing differences, individual owner-level pricing, varying tax rates, and other exceptional items that are wrapped into leases and contracts. Recording all of this information in the previous step helps ensure that accurate distributions are made.
Because you know what you’ve produced and the true value of that production, you can collect what you’re owed, when you’re owed it … not a penny less, not a day late.
Getting paid exactly what you’re due is a good thing, no question. But it’s not the only thing.
When companies use this process, I’ve seen them halve the time they spend on entering data into their revenue system. They also don’t have to make as many PPAs or estimate accruals for the current production period – two additional time-savers.
So now I’ll ask you, Do you know whether you’re being paid correctly for what you’ve produced and sold?
About The Author
Steve Tanabe, a Director of Product Management at P2, is our resident BOLO aficionado. Steve has 30-plus years of upstream oil and gas experience and more than 10 years of BOLO experience. A member of AAFP (Accounting And Finance Professionals), Steve studied Accounting at Metropolitan State University of Denver. If you’ve ever talked to Steve, you know he’s passionate about golf and classic cars. But he’s equally as passionate about the BOLO solution … and that’s saying something.