A Thorny Accounting Process Simplified: Managing Cost Center Allocations & JIB09/29/2020
Figuring out how to efficiently and accurately manage JIB – joint interest billing – continues to be a challenge for many oil and gas operators. Many operators process transactions manually with spreadsheets, while others use software solutions to identify, aggregate, and manage cost center allocations.
Ownership for billing lease operating expenses and capitalized costs is normally managed at the well, and lease operating statements are normally generated at the well level to accurately evaluate well profitability. The ability to systematically allocate cost to the well level is needed to provide correct well economics. Cost center allocation enables the operator to capture cost at a cost center (field, area, prospect, PAD, or other common level) and allocate associated expenses to the individual wells using attributes captured in the system (well status, well count, well production by individual product, lease acreage, etc.)
An excellent example would be the allocation of cost associated with a saltwater disposal (SWD) well. Expenses are normally captured at the SWD well and are allocated to the wells based on the volume of saltwater production hauled and disposed through the SWD facility. Complex allocation normally comprises multiple levels (nested), e.g. allocating office expenses from the corporate office to the district office to the field office to the well.
Solving JIB & Cost Center Allocation Intricacies
In this blog, we will identify ways in which automated software solutions can be used in helping operators simplify and sort through the many intricacies involved with JIB and cost center allocation. When the correct processes are in place, cost center allocations provide operators with significant benefits:
- Timely and accurate billing of partners provides quicker receipt of partner receivables
- Accurate and timely cost center allocation reduces the need for prior period adjustments (saves time and money by reducing administrative staff cost)
- Automated processes are effective dated and automatically account for ownership changes and allocated cost to the wells based on both the production period and ownership effective date
- Automated processes reduce both financial and JV audit time and effort. An auditor normally audits the process and signs off on the cost allocation vs. the need to audit in detail individual transactions.
The following three cases illustrate when automated processes should be used to replace manual ones.
Allocating Costs for Pumpers
In the world of oil and gas, pumpers play a vital role. They visit sites; operate equipment; adjust valves; review remote data; lubricate; repair, maintain, and examine oil pumps and related pipelines; and much more. From a JIB standpoint, accounting for pumpers and determining how to assign associated expenses to cost centers can get complicated. Factors to consider:
- Is the pumper an employee, in which case payroll will be charged?
- Is the pumper a contract worker who is billing for services?
- What wells has the pumper visited during the month?
- What are the additional charges – truck, mileage, etc. – associated with the pumper’s work?
- What are the factors used to allocate cost to the individual wells?
One way or another, operators are going to book costs to a cost center, and then pumpers will need to be allocated to the wells they serve. Pumpers may have 30 wells that they service every day along their routes, and their routes can change from day to day. Much of that cost would be directly billable through JIB; exactly how much is billable, however, can be a gray area. The joint production agreement determines which costs can be shared between the operator and the working interest owners in that well.
In the case of pumpers, operators want to bill as much as they possibly can. However, some operators cannot bill everything because they don’t have the backup data – complete with the thorough documentation required – to do so. Their billing wouldn’t successfully pass an audit, or their system isn’t robust enough to perform those capabilities. In this instance, manually sorting through paperwork to ensure audit-worthiness isn’t the best option; it’s too time intensive, expensive, and prone to error.
Automated software tools can simplify an otherwise complex process, saving operators time and money, and importantly, giving operators peace of mind that the JIB they’ve established is audit proof every time.
Sifting Through Saltwater
Another JIB situation where cost center allocation can get complicated is around saltwater disposal fees. Generally, operators allocate back to individual wells based on the amount of saltwater produced by those wells. In this case, multiple wells are feeding tanks and the saltwater has been put into common tanks. At this point, the operator allocates costs back to the wells based on the volume of saltwater that came from each well.
A final example of JIB cost center allocations being problematic involves costs related to compressors like fuel and rentals. Depending upon the large gathering systems they have, operators need to account for hundreds of wells and be able to allocate them back to the actual gas, which is all running to a centralized compressor facility. Accounting for such costs can translate into operators having a difficult time recovering and billing partners.
Typically, compressor-related costs are allocated back to the individual wells that require compression. Quite often, however, costs like the amount of test throughput are not accurately captured, especially when those costs are tracked manually. Using automated software tools like P2 BOLO, operators can steer clear of these inaccuracies. By doing so, they gain the ability to allocate compressor costs based on gas production, gas sales, or any number of other dispositions. Costs can be more accurately allocated when tied to these physical attributes.
To learn more about the solutions that help efficiently manage cost center allocations and joint interest billing while alleviating the manual burden on oil and gas accountants, click here, or click the banner below.