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COPAS Accounting Procedures, the 2005 COPAS Accounting Procedure, the Audit Process, and Legal and Practical Considerations

Karla Bower, Howard Blunk, Jonathan D. Baughman, Oil & Gas Agreements: Joint Operations (2007)

The operating agreement establishes the overall structure and framework for sharing the costs of the exploration and production deal. It establishes who is liable for the various operations and activities, and under what circumstances. The operating agreement also provides for the operator to pay the costs, and bill each non-operator for its proportionate share.

Operating agreements do contain some specifics on what costs can be charged to the joint account. For example, cost issues addressed by AAPL model forms include: cost of title work; penalty & interest on tax assessments; cost of providing certain information; cost of turning over operatorship; cost of non-operator access to property and records; cost of accounting if a non-operator's interest is divided among four or more parties; and the cost of taking production in-kind. The AAPL 610-1989 operating agreement also addresses the cost of regulatory hearings (Article IV.A). However, these provisions represent only a small fraction of the costs, and ones that tend to occur infrequently. For the most part, the operating [15-2] agreement provisions dealing with costs address who pays, rather than the classification of costs as direct or overhead. Examples of these include the costs associated with non-consent operations, abandonment and surrender liability, and occasionally the allocation of costs between zones.