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COPAS Accounting Procedures, And Legal And Practical Considerations

Jonathan Baughman, Karla Bower, Joint Operations and the New AAPL Form 610-2015 Model Form Operating Agreement (Dec 2017)

I. COPAS ACCOUNTING PROCEDURES1 A. Introduction & Purpose The operating agreement establishes the overall structure and framework for conducting exploration and production operations and sharing the costs of such operations among the parties to the agreement. 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 contain some specifics on what costs can be charged to the joint account. For example, cost issues addressed by the American Association of Professional Landmen (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 and 2015 operating agreements also address the cost of regulatory hearings (Article IV.A). However, these provisions represent only a small fraction of the costs involved in conducting oil and gas operations, and ones that tend to occur infrequently. For the most part, the operating 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 surrendering a lease, and occasionally the allocation of costs between zones. The details surrounding the treatment of costs are left to the accounting procedure. Specifically, the accounting procedure sets out how the operator is to be compensated for all operations and activities conducted under the agreement, aside from the exceptions in the operating agreement. The accounting procedure outlines the basis of direct charges and credits to the joint account, what is included in overhead and how it is to be recovered, and the handling of materials and inventory. B. History Accounting procedures have been in existence for many years, evolving in the early 1960s into the model form accounting procedures developed by the Council of Petroleum Accountants Societies, Inc. ("COPAS") that are used today. Other petroleum accounting organizations that have published model form accounting procedures over the years, and their publications/dates, include the following: