JIB Expenses - Legit or Not?

I bought an Oklahoma WI well package over 15 years ago. On the THIRD operator now. Each operator has acquired and ALSO owns 70% of the package.

Same MO each time:

New Operator take over, JIB’s are reasonable and for operations only for a few months, BUT then they start loading JIBS with allocated Overhead, Employee Salaries, Employee Benefits, etc. and they turn a monthly profit into a loss for me. This “switch” to aggressive Overhead Loading just started with the 3rd producer now.

The first TWO PRODUCERS had the same result (BK it appears). Honestly I stop paying the JIBS when they start this aggressive OH loading. On advice of Atty he said to send a Certified Letter Requesting an full audit each year (my right as a WI Owner), and they never pursue past due, never send dunning, etc. Very strange. I have other WI where I don’t see this practice in play on the JIBs, however in those cases the Producers do NOT own 70% of the package.

My Guess/My Take:

  1. By owning 70% themselves, aggressive OH Loading effectively creates a situation where the operator can jack up the JIB amounts and “siphon” off the 30% of us non-Operators to pay for their business expenses.

  2. There must be some Tax Benefit to this for the Operators…effectively EXPENSE the OH on the fly immediately…is maybe better through the tax grinder?

I think this whole process is an egregious siphoning scam. I pay all my other JIBS, and would GLADLY pay the true Operating Costs of these JIBs on this well package as I have in the past.

Basically if the Operator owns 70%, and were to actually PAY THAT 70% JIB INVOICE AMOUNT to themselves, they’d be losing a ton of money and would shut down the wells. They don’t shut the wells down though…which makes be believe they aren’t really incurring those costs as represented, those costs are inflated so that when the 30% pay it is net more to the Operator and helps cover their 70% shares in the JIB. To me that is fraud and should be illegal if it is happening.

Just wondering if any advice on these situations:

  1. What IS legal for Operator to charge?
  2. Besides the “request for audit” approach, how can I drive costs back to realty (I’m just under 2%)
  3. Any low cost DA/legal/Industry Review Panels that I can complain to who have actual power?

When I go to my Printer (for example) and spend $2,000 on stationary/envelopes, etc., I pay $2,000, NOT $2,000 plus another $1,800 prorata share of the Printer’s Overhead.

Any input appreciated, Mike J.

Is there a Joint Operating Agreement (JOA)? If so that will give you some answers. If you don’t know then ask the Operator for it. They should comply. Typically your options are:

  1. Keep paying.
  2. Stop paying and Operator files a lien against your interest (Operator might sue you FYI).
  3. Assign your interest to Operator.
  4. Send a plugging proposal to Operator.

The JOA will usually give you options. Absent a JOA, your options are typically more limited.

Many Operators treat COPAS as income to feed other parts of their operations. It isn’t right. But it doesn’t stop them.

Also, I’m not sure what you mean by aggressive overhead loading, but COPAS is a reasonable expense in most cases (the exception being a well losing money). And once COPAS is set (usually when a well is drilled) then there’s a standard rate of escalation that’s used to compensate for inflation.

There’s other OH items that sometimes show up which almost are always JOA related. Example being district expense.

Thanks for reply. I have asked last two operators for JOA…they didn’t have one they said (at 70% owner they both said that they didn’t need one). Hmmm. Asking the current third Operator now.

The overhead amounts invoiced are MORE than other WI’s that I have…a broader range of detailed OH types: (eg., Employee Ins OH, Supervisor OH, Benefits, etc., etc.). All of this pretty much now causes a slight loss to Break Even situation each month (by design I imagine!). This is at least better than previous two Operators where losses were HUGE.

Atty advised to do the call for audit on a regular basis, and if they don’t facilitate the audit, they will never sue (Not a CPA, but I used to work for a Big 4 as a Consultant, and I let them know that :))

I just wish their was a watch-dog option for this behavior. Grumble Grumble.