Joint Venture Auditing

in the Oil & Gas Done By: Maitham Zaman

Presenter CV

Industrial Engineer graduated from KUNIV

8 Years Internal Auditor for KPC JV Audit for 5 Years Audited many upstream operations for KUFPEC in Asia, Middle East, UK, Africa & Australia

Certified Investment & Derivatives Auditor (CIDA)

Contents

• Definitions • Why Joint

Ventures? • Joint Venture

General Module • JV Operator vs

Non-Operator

• Oil & Gas JV Phases • JV Audit Right • JV Accounting/Audit

Cycle • JV Audit Risk Areas • JV Auditor Skills

Joint Venture (JV) Definition

Business Arrangement

Two Parties

Or More

Combine Share

Loss Profit

Joint Venture (JV) Audit Definition

Process Independent Examination

One of the Parties (Operator)

Activities Procedures Expenditures

Defined Period

Why Companies Do JV?

Risks Spread

Company (X) Company (Y) Company (Z)

Why Companies Do JV?

Share Resources & Experience

Why Companies Do JV?

Financial & Cash

Why Companies Do JV?

JV enables Small Companies to Participate in Big Investments or Projects

Why Companies Do JV?

Exposure To New Technology

JV General Module

Government (Land Owners)

Agreement (PSC)/Concession

Agreement Partners

(Company or More)

Operator Non-Operator

Non-Operator

(JOA)

JV General Module

• Concession Agreement/Production Sharing Contract (PSC): A Contract Between the Government and the Contractor (All JV Partners)

• Joint Operating Agreement (JOA):

Contract Between JV Partners

Types of Block Acquisition

Licensing Auction by

Government

Farm-in/out Agreements

Acquisition of a License Interest

Farmor

Farmee

License Owner

Want to Acquire an Interest of

License

Share Purchase acquire a share of a

company which own the license

Swaps Swapping of Assets

JV Operator vs Non-Operator

• Operator • Non-Operator

Responsibilities: Operate, manage the Block & pay his share of Fund on Time

Rights: Receive Fund from Partners on Time

Responsibilities: Send Fund on Time

Rights: Join in Decision Making, Review & Audit

BUT he should not Loss or Gain

Oil & Gas JV Phases

Block Acquisition (Sign PSC/Concession Agreement)

Assign Operator (Sign JOA)

Exploration (G & G Studies, Seismic Scans)

Appraisal Process (Evaluate Commercial Quantity)

Development (Constructions-Additional Wells-

Installations)

Production (First Oil-Marketing-Supply)

Abandonment (Block Decommissioning)

JV Audit Right

What gives us the Right to Audit the Operator’s Expenditures?

Clauses in the JOA (Joint Operating Agreement)

Usually the Right of Last 24 Months

Types of JV Audit

Joint (Group of Partners)

Sole (One Partner)

JV Accounting/Audit Cycle

Partners Agree on Budget/AFEs

Operator Send Cash Call

Operator Send Joint Interest Billing (JIB)

Audit send Notification to

Operator

Receive & Analyze Detailed Transaction

Listing (DTL)

Reconcile DTL with JIB

Highlight Company's Concerns

Now do your thing (AUDIT) Fieldwork

Write IRs , PF & MF

Issue Draft Report

Discuss with Client

Issue Final Report

JV Audit Risk Areas

Operator

(A) 90%

(B) 30%

(C) 80%

Total=$10M Opt. Share=$9M

Total=$10M Opt. Share=$3M

Total=$10M Opt. Share=$8M

Total=$8M Opt. Share=$7.2M

Total=$14M Opt. Share=$4.2M

Total=$8M Opt. Share=$6.4M

Wrong Allocation

JV Audit Risk Areas

2) Logistics Charges – Supply Vessels

Port

3rd Party Block (C)

3rd Party Block (B)

Block (A) Our Block

Marine Log: Block (A) Block (B) Block (C)

Ledger: Block (A)

JV Audit Risk Areas

3) Rig Mobilization & Demobilization

Our Block

3rd Party Block

Port

From Port to Our Block

From 3rd Party Block

to Our Block

We should Pay the charges

JV Audit Risk Areas

Rig Demobilization

Our Block

3rd Party Block

Port

From Our Block to

Port

From Our Block to 3rd Party

Block

We Pay Charges

3rd Party Will Pay Charges

Make sure we are not charged the Demob

JV Audit Risk Areas

4) General & Administrative Charges (G&A)

G&A charges Should be Allocated FAIRLY between the Blocks

Block (A)

Block (B)

Block (C)

Operator

JV Audit Risk Areas

5) Operator’s Parent Company Overhead (PCO)

Parent Company

Subsidiary

Human Resources

Strategic Planning

Treasury

Others

The Parent Company Will Get a Credit of Small Percentage of Total

Operation Expenditure

Total Expenditures

Operator

JV Audit Risk Areas

5) Operator’s Parent Company Overhead (PCO)

Where is the RISK?

PCO Percentage Calculation Error

Parent Company

Non-Operators

PCO

Direct Charges

Duplicate

JV Audit Risk Areas

6) Well Reconciliation (Inventory)

Drilling Casing

Drilling Bits

Mud

Diesel

Other Tangibles

Daily Drilling Report (DDR)

End of Well Report

Reconcile

Ledger & Books Cement

JV Audit Risk Areas

7) Unbudgeted & Unrelated Activities

Operator

Football Tickets

Charity & Donations

Building Public Roads

JV Auditor Skills

Auditing Skills

Oil & Gas

Accounting

Leadership Skills

Communication Skills Warehouse & Logistics

Report Writing Skills

Data Analysis

What are the main Required Skills?

Q & A Further Inquiries E-mail: maitham@kpc.com.kw