For International Joint Ventures and Production Sharing Contracts
International Joint Venture Operating Agreements and the corresponding Accounting Procedures typically allow Operators to charge an overhead fee in the form of a percentage of all capital, operating and G & A costs incurred during the year for the concession. The overhead rate that is stated in the Accounting Procedure to the Joint Operating Agreement has been agreed to by the companies, governments or individuals who are a party to the agreement. Some costs are precluded in the calculation such as overhead etc.
Through the course of conducting audits of countless international joint ventures as well as cost recovery accounts pursuant to Production Sharing Agreements, we have consistently found issues surrounding the overhead fees charged by Operators. The purpose of these overhead fees is to cover charges that are typically defined as indirect services and related office costs to the Operator and its affiliates that have not already been provided for in the Accounting Procedure to the Operating Agreement. The issue that we have is trying to identify which “indirect” costs are in fact covered by the overhead. It is difficult to ensure that these costs have not already been recovered through another mechanism such as a time writing rate for example.
In typical international operations, whether it is a sole concession or a multi-concession operation, every cost incurred in the country of operation is chargeable unless it can be identified as being a corporate expense that is of sole benefit to the Operator. Examples of these types of costs would be those incurred by the Operator to pursue other concessions in country or promotional costs where only the Operator is recognized in name and not the joint venture.
Operators charge head office and affiliate costs and other costs that are of benefit to the Operation in the form of time writing. Through the time writing charges, the Operator can recover administrative and support costs that are built into the rate charged for the employees who are charging time directly to the Operation. The support costs that are built into the time writing rates typically cover office rent, computers, stationery and any other office equipment requirements that enable the employees to carry out their work. Administrative and other support staff costs are also built into the time writing rates.
The overheads charged on large international operations can run well into the millions of dollars on an annual basis. As mentioned above, the calculation of the overhead rate does not take into account overheads that have already been charged. If this were the case there would be a situation where overhead is being charged on overhead. Another major preclusion in the calculation of the overhead fee that we have noted are instances where facilities like platforms and FPSO’s are being leased monthly. These lease costs are very substantial and since there are minimal efforts in terms of time requirements on behalf of the Operator to manage these costs, overhead fees are typically not charged for these types of costs. One major factor that must be taken into account regarding the preclusion of the lease costs from overhead fees is that this must be formally approved by the parties. If it is not already written into the Accounting Procedure to the Operating Agreement, there are options to remedy this including an amendment to the Accounting Procedure or issuing a mail ballot.
In conclusion, it is our opinion that many of the “indirect costs” that are covered by overhead fees have already been billed through other mechanisms mentioned above. We highly recommend companies or governments who are entering into or are already party to joint venture or production-sharing agreements, should aggressively negotiate or re-negotiate administrative overhead fees to take into account lower indirect costs that will be covered by the overhead.
About the Author
Aaron DavidAaron David has more than 30 years of experience in the oil and gas industry. Prior to launching a career dedicated to oil and gas auditing Aaron worked in corporate income tax and financial accounting. He was chief accountant for a U.S. subsidiary of a Canadian oil and gas company as well as treasurer of a public oil and gas company in Canada.
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