CONTRACT COMPLIANCE REVIEW/JOINT INTEREST REVIEWS IN GHANA’S FLEDGLING OIL AND GAS INDUSTRY

Ghana became Africa's newest oil producer on Wednesday December 15, 2010 when one of the world's biggest recent oil-field discoveries came online, capping three years of fierce competition for the region's energy resources.

The 1.5 billion-barrel Jubilee field has drawn interest from Western and Chinese oil multinational corporations as well as from American venture capitalists. At least $4 billion has been invested in the offshore field by various partners.

The field is operated by the U.K.'s Tullow Oil PLC, which has a 34.7% stake. Dallas-based Kosmos Energy LLC—which is backed by private-equity firms Blackstone Group LP and Warburg Pincus LLC—and Houston-based Anadarko Petroleum Corp. own 23.49% apiece. State-run Ghana National Petroleum Corp. is the other major shareholder, with 13.75%. The light, easy-to-refine oil started flowing at an initial clip of 55,000 barrels a day, following a ceremony on Wednesday December 15, 2010 attended by Ghanaian President John Atta Mills and thye two former ex-presidents.

Oil production is set to deliver a sizeable economic dividend to Ghana, already a major producer of cocoa and gold. Oil is expected initially to bring in about $400 million annually, rising eventually to $1 billion a year. And the government has forecast that oil will help push economic growth to as much as 12% next year from around 5% this year.

Some watchdog groups have raised red flags, however. Washington-based Oxfam America has expressed concern that the Ghanaian government hasn't opened up oil contracts to public scrutiny. The nonprofit also has said that the nation needs an industry regulator and an oil-revenue management law. "Ghana's challenge as an 'oil hot spot' will be to manage this industry with transparent and accountable policies and practices so the people of Ghana can truly benefit over the long term," Ian Gary, an Oxfam America policy manager, said in a prepared statement.

The government has said it is working hard to put regulatory measures and an oil-revenue bill in place(This has been accomplished to a large extent), but more work still needs to be done.

Whereas CAFAC does not pretend to have answers to all the problems posed by an infant oil industry such as Ghana's, it definitely has certain distinct and specific competencies that it brings to the table. These competencies are spelt out below in the following services which it can provide to the industry:

1) Contract Compliance Review/Joint Interest Review
2) Litigation Support
3) Profit Maximization
4) Other Services
In this article we shall discuss Contract Compliance Review/Joint Interest Reviews.

CONTRACT COMPLIANCE REVIEW/JOINT INTEREST REVIEW

In the oil and gas industry, a company can be overcharged or under-credited in an almost infinite variety of ways. Because of the way the industry operates, though, many of these discrepancies go unchecked and uncorrected, reducing the profitability of your investment. Conducting a contract compliance review is the key to resolving these problems. It also serves to protect you. Once you invest money with an operator, you have a fiduciary responsibility to your investors to assure their money is spent within the terms of the agreements. A review will document your efforts to meet those responsibilities and will improve your bottom line. Because of our high success rate in contract compliance review for the oil and gas industry, it's our primary service.

Reviews are performed for small independent working interests and major oil and gas corporations alike. Among our clients are drilling funds, non-operators, oil and gas companies, oil and gas investors, operators, partnerships, royalty owners, trusts, and working interest owners. With our tremendous amount of experience in this area, we don't waste time searching for potential recoveries - we already know where they'll be. We're so confident in our abilities that we have a standing challenge to any company or individual: We can find more recoveries than anyone else in the industry.

A contract-compliance review of the joint operating agreement is conducted for the purpose of verifying transactions and resulting charges reflected on the Operator's joint interest billings. Errors are always present, yet some working interest owners hesitate to conduct a review, citing long-term relationships. On the other hand, many others make it a wise policy to check everything in which they invest. In good times or bad, the contract compliance review improves profitability by recovering and precluding overcharges. Any non-operator can initiate a review. Typically, a working interest owner will ballot other non-operating working interest owners to join in the review, sharing its costs.

Summarized Interest Billings can only be verified with a contract compliance review

Below are some of the issues that will be encountered:

1. Journal Entries (not independent) - Overpriced?
2. Materials Transfers (Not independent) - Overpriced? Surplus ? Salvaged ?
3.Vendor Invoices Affiliates?, Not chargeable? Discounts?

PURPOSE, SCOPE AND MAGNITUDE OF THE CONTRACT COMPLIANCE REVIEW

A contract-compliance review of the joint operating agreement is conducted for the purpose of verifying transactions and resulting charges reflected on the Operator's joint interest billings. A review is conducted on a test basis of Non-Operator advances, lease purchase costs, lease operating expenses, payouts, production volumes, and revenues only if adequate review time is available and/or there is applicable oil and gas production. The examination is made in general accordance with guidelines established by the Council of Petroleum Accountants Societies (COPAS) Bulletin number 3 (Expenditure Audits in the Petroleum Industry). We include such other procedures that we consider necessary under the circumstances. The scope of the joint account review is primarily governed by the compliance to the terms and conditions of the records and documentation from the oil and gas activities, i.e.,

Also, the scope of the review is designed to assure that the records for the operations conformed to the provisions of the preceding agreements, contracts, documents and practices; it is also designed to review the propriety of advances, joint interest billings, invoices and supporting tickets, journal entries, and material transfers for a minimum of the following types of expenditure areas:

1. Advance reconciliations
2. Before/after casing point
3. Bit usage
4. Boats & helicopters
5. Casing and tubing
6. Coding errors
7. Company labor and benefits
8. Consultants
9. Contractor charges
10. Diesel fuel
11. Discounts
12. Duplicate charges
13. Equipment for lease & well
14. Facility charges
15. Freight equalization
16. Insurance
17. Lease & prospect acquisition
18. Lease rentals
19. Lease operating agreements

GENERAL COMMENTS
The exceptions that are included in the reports, in most cases, reflect common occurrences normally observed when reviewing the records of other operators. Large dollar amounts or quantities of exceptions are not considered a reflection against any operator; it is a representation of the exceedingly complex nature of oil and gas industry activities, combined with years of experience, expertise and tedious review procedures.

Although recoveries normally exceed review expenses in an active review program, the objective should not necessarily be limited to obtain recoveries of money from the Operator. More importantly, valuable information can be made available to the investors about the Operator; the investor can better determine which Operators are making the best attempt to deal fairly with the investors.

It should be noted that standard oil and gas industry practice and procedures bear a significant relevance to our overall review scope. Also, if a contractual clause is found to be contradictory and/or to the disadvantage of the client Non-Operator and/or the Operator, information which we consider to be most essential and beneficial will be reported in either a direct formal exception or included in the body of a letter. In many cases, this indicates a need for an extended investigation in the oil field and/or a review of the vendor(s) to assure the results of the joint account as a whole are fairly presented. Vendor reviews help keep honest vendors honest.

BCP/ACP means before CASING POINT / AFTER CASING POINT. In this case, the Operator's share of the cost may be carried or shared by the Non-Operators until casing point is reached. This promote rewards the Operator for putting the deal together. Per industry practice, the BCP normally changes to ACP after the log has been completed and a decision is made to either plug or complete the well. Exceptions normally ask the Operator to change the charge from BCP to ACP. It should be kept in mind that BCP/ACP exceptions do not result in full credits to the Non-Operators, but result only in a lower working interest cost for the Non-Operators. These types of exceptions, therefore, can inflate the report results. There are other forms of promotions besides ACP/BCP, e.g., carried through tanks, promotion by the Operator charging 110% vs. 100% costs to the Working Interests, and carrying another working interest in order to obtain a farmout of a lease.

TBD means TO BE DETERMINED and is used in place of amounts:

1. to present items which cannot be quantified with a dollar amount and, therefore, can never be treated lightly - sometimes a TBD can be the largest recovery;

2. to present items which are exceptions and must be addressed, but may only require a reply by the Operator;

3. to present miscellaneous items which may fall into gray areas;

4. to obtain additional information before the item can be properly resolved.

Turnkey or footage contracts are considered by some to limit the available exceptions; however, it can be just the opposite since they can create large dollar exceptions, e.g., the rig contractor should have furnished the surface casing or the logging, which was erroneously charged to the Joint Account. Every well is different and the results are always unknown, until actually reviewed.

Substantial discounts have been available from most vendors since early 1982 in order to be more competitive. Discount information can be difficult to obtain since the Operator can only compare discounts within their own company; whereas we are able to document these discounts for the same, or like, vendors in different companies. Discounts are not limited by the size of the vendor or Operator. The final result can mean that the drilling of every future well can be for less than price list costs. Operators who pay invoices late, will receive fewer discounts from vendors - Operators may take a temporary interest gain, but will no longer receive favorable discounts from some vendors on future wells drilled.

OPINION AND FINDINGS
This contract compliance review consists of an examination of all significant charges and credits to the Joint Account. We perform sufficient test checks and other review procedures to assure that the Operator satisfactorily maintains the accounts and the supporting records for the Joint Account for the subject properties in an acceptable manner. The charges and credits are reviewed and considered for reasonableness and proper inclusion in the Joint Account. Items considered to have a lack of impact are reviewed on a selective basis, depending on proven, prior-exception experience as to specific categories which bring about larger exceptions in related areas.

Operators do not allow a review of the Operator's financial statements. Accordingly, an opinion is not expressed on them. We receive very limited time and information, whereas public auditors have full access to the Operator's records and personnel since they are employed specifically by the Operator for the Operator's benefit, providing financial statement services. Public auditors almost always have totally different training and expertise.

OPERATOR'S TREATMENT AND TIMING OF JOINT INTEREST REPORT

The operator is normally requested to:
1.Reply in writing to a report within a reasonable period of time (not to exceed six months which is currently recommended by COPAS);

2. furnish in response to a report with the amount of credit allowed on each exception and the month in which the credits will appear;

3. insure the accounting department identifies on joint interest billings and/or statements of the participating Non-Operators the individual credits due, by the report date (or AFE #, etc.) and exception number;

4. provide adequate documentation should any exception be adjusted for an amount other than that presented;

5. provide us and the investing Non-Operators a copy of the Operator's response to the report and a copy of any joint interest billing reflecting credits due to the Non-Operator's - especially to assure the exception results are controlled, summarized, monitored and ultimately resolved for the benefit of both the participating Non-Operators and the Operator. If the Operator fails to copy us, the Non-Operator should be alerted that the Operator may be attempting to circumvent our rebuttal to their reply. Also, it has been shown that we were copied; however, no copy was ever received by us.

It is important for both the Non-Operators and the Operator's representatives to note, some reports receive 100% credits; most will have one or more exceptions denied due to inadequate or incorrect information furnished to us. However, Operator replies to reports, which have most or all credits flagrantly denied, will most likely be unacceptable and should immediately alert the Non-Operators as the Operator's sense of fair play. Some operators will deny some of our report credits, but will later grant them only to those Working Interests who exert pressure. If necessary, the investor should complain to the Operator's highest management level when treated unfairly by the author of the reply to our report. One of the functions of the report is to obtain refunds for overcharges; however, the primary function of the report is to determine what kind of an Operator you are investing with - past, present and future. Satisfied Non-Operators can and will most likely invest future monies with the Operator. The Operator should, therefore, be as willing to fairly and promptly refund any credits due to the Joint Account. According to COPAS bulletin No. 3, Expenditure Audits in the Petroleum Industry Protocol and Procedures Guidelines, "Accordingly, non-action by the auditee in excess of one year of the… final report / most recent substantive response should be viewed as acceptance… and appropriate adjustments and/or payments will be expected by the Non-Operators."

FOLLOW-UP
It is the ultimate responsibility of the Non-Operators to follow up on all exceptions, unless we are specifically paid to handle the follow-up work. Pressure exerted by the individual or collective Non-Operators is far more effective than any from our company. Once the Non-Operators have been granted credits by the Operator, each Non-Operator should make certain their individual credits actually appear on their joint interest billings.

RECOMMENDATIONS
We recommend to any and all Non-Operators, and Operators in a Non-Operator status that the following must be inserted at the end of all operating agreements for properties operated by other operators:

Any joint interest review report will be resolved within sixty (60) days by binding arbitration in accordance with the Commercial Arbitration rules of the American Arbitration Association if:

1) The report is not answered by the Operator within one year.

2) The report is not resolved within two years.
Each party is responsible for their own arbitration costs.

This need is due to A VERY LIMITED NUMBER of Operators having adopted unwritten policies:

• To overcharge since most investors will not or cannot afford to sue.

• To make scope limitations, e.g., charges under $1,000 are considered to be immaterial, in order to make unauthorized charges to the Joint Account.

• To not answer any reports.
• To answer reports only when pressured.
• To deny all or most exceptions.
• To deny any high-dollar or complicated exception.
• To attempt to make extra profits on Non-Operators (exception hereby is taken).
• To delay the review process until forgotten.
• To never resolve reports (even major oil companies).
• To agree to credits, but never pass them.
• To not negotiate in good faith during legal mediations.

With the adoption of this phraseology, the Non-Operator will observe an increase in the number of exceptions granted in most reports. This will also help preclude potential lawsuits that are both expensive and ruin excellent working relationship.

If any investor has a large working interest, they should consider obtaining their own comparative bids for: location, rig, equipment, tubulars, frac charges and any other extremely-large, AFE-proposed charges. This is to assure that the forthcoming charges from an operator are not inflated. Also, after an investor has paid an operator for large joint interest billing charges, he should consider requesting documentation from an operator which proves that the largest charges have been paid: otherwise, the investor risks paying the charges twice if an operator goes out of business without paying the vendors who can put a lien on the well. Also, larger discounts might not have been received since some vendors will allow the operator a year to pay e.g., on a $250,000 frac job. This allows an operator use of the investor's money, interest free for a year.

REVIEW NON-PARTICIPANTS
Non-operators have the right to not participate in a review of the Joint Account for various reasons, e.g., they assume, correctly or incorrectly, that the cost will exceed the benefit; or they assume unethically that there is no need to pay their fair share of review costs since the Operator will probably pass them credit anyway. In any case, based on the contract, i.e., COPAS Accounting Agreement, page 1, under the Adjustment paragraph: The statements "… shall conclusively be presumed to be true and correct…" unless "… a Non-Operator takes written exception thereto and makes claim on Operator for adjustment."

Therefore, if Non-Operators do not participate in obtaining recoveries, we are not authorized to represent them and we do not request any adjustment for them. However, we, not them, can reserve the right to take exception for them in case we are able in some manner to subsequently arrange for their participation in order to lower the review cost for all participants. Exception should be taken to revenue if it was not completely audited.

CONCLUSION
Per Joint Interest protocol, a formal report, copies of all review memos with detailed schedules, references, and copies of related documents to support exceptions will be provided to the Operator's representative during and/or after reviews to enable the retrace of proposed exceptions for the timely adjustment of the joint interest account, unless temporarily delayed by personal client review.

Although a Non-Operator might not be in all wells within a report, he is greatly encouraged to read the report in its entirety. The total information can give the reader a more significant understanding of the items which may pertain to their current and future investments. The Non-Operator is encouraged to share some of the information, as a by-product of this report, we developed with other departments, e.g., Engineering, since many times there is limited information available on outside operated properties.

Operators receive free review services, and in some cases receive most of the benefits and recoveries when the Operator has the largest working interest, e.g., contractor's responsibility, duplicate payments, vendor overcharges, coding errors to the wrong working interests, and other items which can and do occur. Only when credits are unusually large or important to the Operator, we request the Operator to consider, per the COPAS Accounting Agreement, crediting the Joint Account with the Operator's fair share of beneficial review costs, especially since the overall intent of the operating agreement is to equally share costs according to the working interest percentages.

In some cases, there are exceptions which we do not write since they would: be considered by some to be immaterial, have resulted in costs exceeding potential benefits, and/or have caused undue extra work on the part of the Operator.

One of the intents of our review is to clear up open and unresolved questions or problems and to give the Non-Operators the necessary assurances concerning their investments in a fair and professional manner, so they may continue to make additional investments with the Operator which will result in profits for all parties.

Professionally presented by,

Hector O. Boham - Co Founder and Owner
Sam Asamoah - Co Founder and Owner

TO CONTACT CAFAC
Email: hectoroboham@outlook.com
Mobile Phone: 732-797-8076
Office Phone: 862-252-2113