Not All Revenue Systems Are Created Equal03/05/2019
The purpose of this blog is to understand the depth of functionality needed in a revenue accounting system; distribution, accruals, escheat, and regulatory reporting that not all revenue accounting systems might have.
People may feel that revenue distribution functionality is the same across upstream oil and gas accounting solutions. It’s true, almost all have the basic abilities – revenue distribution, check and detail printing, and division order maintenance – but there’s far more to the story. Few systems do all the following:
- Manage the complexity of disproportionate takes, owner level deductions, and burdens
- Auto calculate revenue based on agreement terms and current pricing
- Cover the broader requirements of escheat, accruals, regulatory reporting, and special processing requirements.
Revenue Accounting Capabilities
The following are capabilities you want from your chosen oil and gas accounting system regarding revenue accounting systems.
There are specific laws around owing revenue to someone who you’re unable to locate. These laws dictate how those funds are managed, often sending the revenue to the state.
Trying to manage this in a spreadsheet becomes unwieldy and difficult, limiting your ability to ensure that you’re meeting all legal requirements. Having a system automate this process allows you to manage more with less, reducing the risk of penalties.
Netting is when you pay partners in a well while also collecting for billable items associated with that same well. Without netting, you could potentially be paying partners when they owe you money. This creates a big gap because the money working interest owners owe for the allowable joint interest billing (JIB) expenses can take months to recoup. By netting the money owed to them against the JIB they owe, you can recoup your money in a much shorter time period.
Oil and gas companies, like all businesses, want visibility into their revenue and costs as early as possible. This helps to make better decisions and better manage cash flow and business operations. To do this, companies can either accrue and book their revenue based on prior months or use actual daily sales.
Accrual accounting sees the reversal of the data once the actual revenue is booked. It’s important that the accrued amount be as accurate as possible, with many companies expecting the accruals to have less than a 3% variance from their actuals. A robust accruals process is required to ensure accurate accruals and accurate decisions based on them.
This allows for the month close to be earlier and reconciliation to be easier if a problem does arise between accruals and actual data.
States like Oklahoma have special processing rules around owner revenue calculations, such as requiring all non-working interest owners who do not live in Oklahoma to have certain percentage of their gross on Oklahoma wells withheld from their revenue checks.
Many systems don’t support a special process like this, often leaving it handled in spreadsheets – with manual calculations and extra data entry to get correct payments from a revenue system. Having the ability to manage this within the system, you can rest easy knowing that these cases are processed accurately and are auditable to avoid fines for incorrect distributions and regulatory reporting.
Being able to manage the many reports and requirements needed for the many entities of government- and Indian-owned lands is imperative.
It’s critical that the regulatory filings match what was distributed in revenue, so having an integrated solution with regulatory reporting tied to revenue ensures accurate filing and reduces the risk of fines. Additionally, as you have prior period adjustments, the ability to file updates and amended returns is crucial. Finally, having a system that checks to ensure the regulatory report and your revenue align and meet the audit checks of the regulatory agency will ease your reporting and, again, reduce your risk of fines.
Integration Across the Process
To calculate and validate revenue, you must have monthly sales volumes from your production team and accurate parties and ownership from your land team.
Accurate revenue requires production data and integration with a production system to ensure production data in the production system and the revenue system are the same. Additionally, revenue requires accurate ownership information and, thus, must be integrated with a land system. This closed-loop integration data helps with auditing data between land and owners.
True closed-loop integration ensures that master data has one system of record and one system of entry, allowing there to be only one true set of master data. Once you have a single set of master data (i.e. wells) that spans applications, you can associate transactional data from multiple systems (i.e. production and accounting) with that single set of master data.
To calculate and validate revenue, you must have monthly sales volumes from your production team and accurate parties and ownership from your land team. Having disconnected systems that don’t integrate allows systems to get out of sync and makes it difficult to ensure accuracy every month – leaving you open to losing money from incorrect receipts and audits from owners.
Reconciling Purchaser Statements
Many companies use spreadsheets to do comparisons with purchaser statements. It starts by receiving a check in the mail, along with the purchaser statement that contains details such as volumes received and value of volumes. The next step is to verify that the information is correct one of two ways, in a spreadsheet or in the system.
- Spreadsheets require data entry every month to fill in the production volumes, price received, deductions (fuel, transportation costs, etc.) and compare to the check received. Spreadsheets are prone to errors and make it difficult to maintain complex calculations.
- An integrated system allows data to be automatically calculated. When you receive the check, you can easily understand if it matches or why it doesn’t. The system calculations provide visibility into the monthly processing data, volumes, deductions, and more.
There are two major benefits to having a system that automatically calculates volume:
- Calculate profit before it arrives, allowing for cashflow planning
- Validate that you’re receiving the right profit/value and maximizing the profit
We know that spreadsheets are prone to errors and they can prove difficult to calculate the complex agreement details, therefore it’s a huge advantage to have a system that captures the agreement, current pricing, and other relevant details to calculate the revenue from the production volumes. This allows you to quickly see what you’re owed, helping with cash management, and gives immediate feedback as to the accuracy of the check received, allowing you to maximize your revenue received.
About The Author
Tim Wadle, Vice President of Product Management at P2, has more than 20 years’ experience developing software solutions for oil and gas companies and has served on many industry committees along the way, including the American Petroleum Institute’s Committee on Production Measurement & Allocation and the Energistics PRODML Executive Committee. His work has been published in Oilfield Technology magazine and he has also been a featured speaker at the Offshore Technology Conference and AICPA Conference. When he’s not behind his desk, you’ll likely find Tim skiing one of Colorado’s slopes or biking one of its trails.