What it means
Oil and gas projects are often owned jointly by several companies, each holding a working interest, meaning a percentage share of the costs and production. The operator, which runs the well or field day to day, pays the bills and then charges each partner its share through a joint account.
A joint account is a running ledger of those costs and of the revenue from production. The rules on what can be charged, and at what rate, are set out in the joint operating agreement, which normally attaches the COPAS procedure as an exhibit.
The procedure distinguishes between direct charges, such as drilling materials and rig time, and overhead charges, which cover the operator's office and field staff. Without a common set of rules, partners would argue constantly about which costs belong in the joint account.
The procedure is most visible in its overhead rates, which are usually fixed monthly amounts for each drilling well and each producing well. A drilling well rate applies for each month the well is being drilled, while a producing well rate applies for each month of production.
Partners can then see a predictable cost per well rather than a shifting allocation of head office expenses. The procedure is revised from time to time, so the edition named in the contract matters more than any version a manager remembers.
Many parties also negotiate changes to the standard rates or add special clauses for unusual projects. Finance teams should confirm which edition applies before accepting any overhead charge.
For a non-specialist, the key points are that the operator charges, the partners pay in proportion to their working interest, and audit rights let partners check the bills. Partners can request an audit within the time limit set by the agreement, which is a valuable protection.
Misunderstanding COPAS charges is a frequent cause of disputes in joint ventures.
In practice
Real-world examples.
Example
An independent oil company holding a 30% working interest in a shale well receives its monthly joint account statement from the operator. The company checks the producing well overhead charge against the COPAS rate written into its agreement. It finds that one charge was billed twice and asks the operator for a credit.
Example
A two-partner gas field is run by an operator with a 60% working interest, while its partner holds the other 40%. The operator's finance team sends quarterly accounts that split direct drilling costs and overhead between the two companies. The smaller partner uses its audit right to confirm that the overhead rate was applied correctly.
Example
A trading company with a small non-operated stake budgets for the overhead charges the operator will bill each month. By applying the agreed COPAS rate to the planned number of wells, the analyst forecasts the cash calls the company must pay into the joint account. The forecast is then compared with the actual bills each quarter to test its accuracy.
Formula
Calculation
Overhead charge for the well = Fixed monthly well rate x Number of months charged
Partner share of overhead = Gross overhead charge x Partner working interest (as a percentage)
Actual rates are set in each agreement, so the figures below are illustrative. Suppose the operator charges a drilling well rate of $12,000 per month for a well drilled over 3 months, giving a gross overhead charge of $36,000 (3 x $12,000). A partner with a 25% working interest bears $9,000 of that (25% x $36,000), and the other partners bear the remaining $27,000 between them.Case study
Seen in the real world.
Ferrand Ridge Energy is a fictional independent company with a 35% working interest in a shale well run by a larger operator. Each month the operator sends a joint account statement with overhead charges, and the company's new controller compares those charges with the agreement. She notices that the operator has billed a producing well rate for a well that is still being drilled.
The controller calculates that the error overstated the charges by $12,000 in gross terms, so the company's 35% share of the overcharge is $4,200 (35% x $12,000). She writes to the operator with the agreement's rate schedule and asks for a corrected statement. The fictional company recovers the amount in the following month's billing and adds a monthly COPAS checklist to its accounts process.
Watch out
Common mistakes.
- Assuming the COPAS procedure applies automatically, when it only binds the parties if the joint operating agreement attaches it.
- Confusing overhead charges with direct costs, which leads to disputes about whether office and staff costs should be billed separately.
- Paying the joint account statement without checking the edition, the rates and the audit rights named in the contract.
Questions
People also ask.
Is COPAS the same as a tax rule?
No, it is an accounting procedure for sharing costs between partners, and tax treatment is governed separately by tax law.
Who bears the overhead on a non-operated well?
The partners bear it in proportion to their working interests after the operator has charged the gross overhead to the joint account.
What should a partner do if an overhead charge looks wrong?
It should query the operator in writing, ask for supporting detail and use its audit right within the time limit in the agreement.
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