Navigating the Complexity of Ownership Changes06/23/2020
When you think of ownership changes in upstream oil and gas, a lot comes to mind and that’s because ownership changes is a broad topic. It spans both land and accounting, there are a myriad of types and challenges associated, and addressing them takes time, effort, and manpower, the latter of which may be scarce especially right now.
Ownership Changes: Common Scenarios & Challenges
- Overall Increase in DOIs and Owners on DOIs: Since the explosion of drilling in unconventional developments, the number of wells and the number of parties on the DOI for the wells have increased exponentially. With horizontal drilling, you cross numerous leases and property boundaries, so you have more people and more land covered by every single well. With increased drilling over the last 6-7 years, the number of wells has gone up significantly, so the challenge is really maintaining a higher number of owners in the well, different ownership at different depths, and the number of changes associated with the wells.
- Depth Ownership: As royalty owners gain more knowledge and develop sophistication in their negotiations with producers – plus the fact that owners often lease specific depths – the challenge becomes managing different owners for different producing zones. At one point in time, if you drilled a vertical well you had ownership in that well. There were certainly different zones, but it wasn't as common to have ownership at different zones. Now, someone may own 5,000 feet to 10,000 feet, with someone else owning 10,000 feet to 15,000 feet. Different ownerships may exist depending on different zones in the same well.
- Managing Suspense and Funds Transfers: When one owner (Tim) sells to another owner (John) and notifies the operator who may have revenue that’s been processed but not distributed for the existing ownership, Tim should be put in suspense immediately so that he doesn’t receive a check. That money should be held until the ownership change is made so the check can be rightfully sent to John.
- Complexity: The complexity of agreements has increased because property owners (lease owners) are more knowledgeable buyers and partners today. It used to be common that leases were simple transactions, and you got 1/8th ownership as a royalty. Now, they're very complex and have a lot of terms:
- Drilling must be completed within a specified time frame
- Shut in payments are required
- Minimum royalty payment clauses are in effect
As landowners become more sophisticated, so too do lease agreements. On top of that, there’s the management of this whole process, which is no small undertaking; it involves a lot of staff and staff time.
The Impact on Revenue and Accounting
The land deck (ownership) doesn't consider the burdens and taxes that are owed on a property that are required to correctly distribute revenue. For example, there could be different provisions about who will pay for transportation charges, etc. So, part of the complexity is handling decks and systems that must stay in sync, but are, in some companies, being managed by different teams. Typically, land decks are managed by the land team in a land solution, and revenue decks are managed in an accounting solution. This is not always the case but is common. The key here is that these systems are maintained and kept in sync. Ideally, when you’re operating land and accounting systems concurrently, there is a mass change functionality where changes to the land deck flow automatically to associated decks. The mass change process allows you to change multiple owners on multiple properties at the same time with the same reason, and that will update the decks appropriately.
Managing & Solving Intricate Revenue Challenges: It’s What We Do
Because of the issues discussed above, revenue decks can be very large (we’ve seen 100,000 rows!). Being able to manage this scale with the associated regulatory filing requirements is critical for successful O&G accounting solutions, and it’s sage to leverage a mature product that has been proven to manage this scale and all types of operations and regulatory, including federal, state, or Indian-owned lands. All three have different regulations around them and managing revenue for upstream oil and gas in the U.S. is particularly complex.
P2 manages each owner's unique contractual terms and ownership issues through deep, embedded functionality and mature software. No other provider in our space can make the same claims.
P2 Reporting & P2 Workflow Help Manage Ownership Changes
P2 Reporting: P2 Reporting streamlines this process by pulling data directly from the system of record. If an ownership change takes place, you must let the owner(s) know about the change; additionally, printing DO documents for owners is time consuming and can be hundreds of pages and multiple days for one person to complete. There's a bounty of administrative work associated with an ownership change. P2 Reporting makes this process quicker and easier.
Tracking Changes and P2 Workflow: Before an ownership change can be submitted or approved, the change must be researched, and all of the required documentation must be collected and validated. This process is normally completed manually with hard copy documents and file folders on desks. P2 has a call log that tracks requests for changes and is building additional workflows to capture accompanying documentation, routing for approval, and when completing, submitting automatically to the system(s) of record to make associated mass changes and funds transfers without re-keying data.
Your Partner in Navigating Complex Ownership Changes
Handling and managing ownership changes in upstream oil and gas has become one of the most resource intensive aspects of managing the back office. It’s a challenge most in the industry face collectively. At P2, we’re your partner in reducing this effort and solving these complex challenges through our solutions that take on the heavy lifting of mass changes, track thousands of owners on DOIs, and create workflows that help you work faster and with less manual effort.