Got a well drilled and completed without any problems. Nothing broke down etc. Now the second largest WI owner is asking us to join him in an audit for our share of 15K. The AFE was 9.5 mil and the ending charges were over 15 mil. What happens to the owners that don’t join the audit? Do they reap the benefit?
In most cases no. You have to pay your share of audit costs to gain any benefit, if overcharging has occurred.
So the operator finds out that they overcharged some people, but doesn’t have to make it right?
I would think that a fair settlement would allow the one who put up the money for the audit to get a part of the refund from those who didn’t pay for the audit. 200 or 300% of the unpaid audit fees.
You should inquire to the WI party that is going to perform the audit and ask them what the terms are.
There is nothing illegal about going over AFE. When you get a working interest it is just that. Working interest.
We aren’t talking about the legality of cost overruns. However, WI partners have the right to question expenses that are out of the norm. As an example: if the AFE says tubulars are estimated at $150,000 and the bill is twice that, the non-ops are entitled to get an accounting of why the difference. There are lots of brother-in-law deals out there.
There is no legal agreement or statutory right which would allow the auditing WI to be paid a portion of overpayment made by other WI. No free rides for those WI who do not participate in the audit. The auditing WI run a risk that audit cost will not be covered by refunded over-charges. Or that total audit costs will end up more than estimate. Each WI needs to do a cost-benefit analysis and participate or not. What explanation has operator given for the significantly higher AFE expenses? If there are overcharges, will operating costs be overcharged in future? Is auditor experienced in this area? It is not uncommon for WI to audit expenses when there are concerns. No idea of frequency of refunds.
If your normal cost of drilling & completing a well cost X and for no stated reason the bill comes in 50% over budget, something is likely wrong. I’m amazed at the sloppy bookkeeping. I’ve got WI in a number of states. Many different operators who once or twice a year, correct over billings. Not sure who found the mistakes. It is illegal to bill someone the wrong amount and once you know you made a mistake it could change from a civil tort to a case of fraud. If the original bill was overcharged on purpose it would be fraud.
You get a well drilled and cased to a certain depth.
So are you okay with sloppy bookkeeping? I believe that truth is important. Business partners should not cheat their partners. Once they find out their mistakes, they should refund you. Many times I get billing adjustments both ways. More often those charges increase my bill. Do bookkeepers sometimes enter invoices to the wrong account by mistake? Do they sometimes do it on purpose? Remember Enron.
Address any concerns about cost prior to accepting working interest.
I’m a very small fry in this lease; 3 wells were drilled over the sections. I agree on no free rides. So I believe that the ones risking audit should get a return for their risk. I know that there isn’t current law. But it’s wrong for a company to know that they overcharge people and pocket the money that belongs to those people.
All expenses are tax deductible for the working interest owner. That’s why people take working interests.
Yep, I could have asked them, “Do you guys have sloppy bookkeeping? Did your accountant use to work for the government where 50% cost overruns is a good deal? Because we’re too lazy or incompetent to button down our projected costs.”
Yes, I do enjoy the ability to deduct all the expenses of drilling and completion of a well. But I surely don’t want to be overcharged for those expenses. I also love the depletion expense. But that’s only part of the reason.
You could just go along with the program and let the oil company do the exploration or you could call for an audit and owe more money.
Rockhound2 did you work for Samson or Enron?
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Go ahead with audit I guess. Sounds risky.
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