Hydrocarbon accounting is a term for describing how the ownership of gas and oil is determined and tracked from the point of production to the point of sale. Other terms for it are Hydrocarbon Value Realisation or Production Management and Reporting. The main processes are measurement, allocation and reporting. Mistakes and/or delays in hydrocarbon accounting could put an operator at risk of significant financial losses. The problem isn’t simply that, “the spreadsheet is wrong.” An operator could be dealing with millions of dollars’ worth of hydrocarbon product each year. Even small errors can have big financial consequences.
After all, hydrocarbon accounting is all about money. It’s about making sure that all parties get what they are due. In this blog, I will highlight five areas where operators potentially risk losing production revenue.
Risk 1: Data Validation
Contractual breaches, misreporting of regulatory info and associated reputational damage for the company are risks worth mitigating. You must ensure the validation of the data that will be used in calculations. It is predominately production data, laboratory data and sometimes, financial data. Each of these data types has to be checked for accuracy before it is used. EQ8 often work with clients to give guidance on changes or updates to their system that might affect data validation. Sometimes, a client will have a discrepancy in their allocation system or measurement data. In these cases, we would be onsite helping the client to identify the source of that discrepancy.
Risk 2: Competency & Training
The background of a Hydrocarbon Accountant is typically engineering, accountancy or a similar analytical field. Operators need to ensure that these professionals get the right training. This could be in-house or outsourced with a company like EQ8 Consulting. However, training isn’t enough. Avoiding allocation errors and loss of reputation require more focus. It is equally important to maintain the competency of these professionals over time. There’s usually no measurement of competency in the same way that an operator would measure the competency of someone on the platform offshore. Ongoing measurement of competency allows you to highlight knowledge gaps. This can be carried out for current roles and future roles, helping operators identify training needs.
Risk 3: Allocation Systems
Another risk to hydrocarbon production revenue is when an operator does not have a fit-for-purpose allocation system. Poorly defined or inflexible systems are costly and unreliable, confidence in the accuracy of the results should be 100%. A system is not fit-for-purpose if you have just bought it off-the-shelf without closely considering what your ongoing needs are as an operator. Before buying an allocation system, consider whether the system is:
Consider access control and the costs – in terms of time, money and effort – of making changes. It is ideal for you to be able to make changes yourself without needing external support.
Risk 4: Internal & External Audits
It is good practice to carry out internal and external audits. This helps you to streamline your internal hydrocarbon allocation processes, ensuring accurate allocation information and demonstrating compliance with commercial and regulatory requirements. For instance, an external party might perform a pipeline allocation. The contribution of each pipeline user gets allocated. then you, as a user/operator, get your information. You’d have to perform certain calculations on that data. If you audit the information you get from third parties, and the way you handle this data, this provides confidence in the data and calculation accuracy.
Risk 5: Quality Assurance
Ensure that you have good processes and clear work instructions for your team. Also, have a business continuity plan. Our experience is that operators create a set of processes and work instructions, but the company rarely looks at them again. The procedures become outdated. As a result, people stop using procedures. Problems can arise when experienced hydrocarbon accounting team members leave the organisation, and no one fully understands the overall process. This puts the operator at ongoing risk of allocation inaccuracy with the accompanying financial implications.
Here are some associated business areas that can be affected by the poor deployment of the five risks mentioned are:
- Reserves estimation
- Tariff invoicing
- Stock accounting
- Production forecasting
- Environmental reporting
Some of these business areas have penalties attached to them. The enactment of the Sarbanes-Oxley Act of 2002 drove a growing recognition of the importance of hydrocarbon accounting. The act requires companies to ensure transparency and demonstrate a complete audit trail of all data with a financial bearing on the company. Identifying, controlling and continuously reviewing risks in the Hydrocarbon Accounting arena is crucial to meeting these goals.
Make every effort to ensure that allocation rules are clear and comprehensive. The computer systems where they are stored must be properly programmed and all measurements accurately reported.
For support with hydrocarbon accounting, contact EQ8 Consulting on 07495680111 or email firstname.lastname@example.org.