There is nothing common about producing and selling natural gas. E&P teams are finding molecules thousands of feet below the Earth’s surface, lifting them out of the ground and selling what comes out to an end-market buyer yielding the best price. Also, adding to that complexity, a list of investors (working interest owners, royalty owners, overrides, etc.) own the volumes produced. Each of these owners are entitled to their share in the benefit of the produced volumes and may or may not share in the expenses. But some interest owners will find end market values different than other owners of the same gas from a well.
So how does one correct inconsistency among investors? Gas balancing is required to correct the disconnect that occurs between joint owners in development projects. If you’re unsure about needing to transition to production accounting services, here are some common questions answered by our experts.
How does a gas imbalance happen?
Various scenarios can cause a discrepancy in the accounting of sales of produced hydrocarbons. Thus, a few common reasons for getting out of balance include:
- A working interest owner takes physical delivery of produced gas from a well (Takes In-Kind), instead of receiving proceeds from the operator marketing the volumes. That working interest owner may over or under receive volumes versus their proportionate ownership stake.
- A variance in measurement occurs between produced volumes and marketed volumes (inaccurate meters).
- Inaccurate record-keeping in well ownership decks, production reports and/or marketing statements leads to a failure to reconcile.
How does an Operator get back in balance?
If an Operator is out of balance based on actual physical volume discrepancies, they can get back in balance in two ways. Firstly, they can make a cash settlement based on the historical out-of balance volumes times a weighted average sale price. The second way is via a True Up, where future production volumes get the accounts back to level.
What about accounting for “Sales” or “Entitlement?”
Documenting a working interest owner on actual sales volumes requires revenue and accounting teams to book all sales volumes and values. This also includes any adjustments. This allows the operator to only book true sales without having entries on the books for overdelivered or underdelivered volumes. An Operator following entitlements books volumes and revenues strictly based on their ownership decimal. Any imbalance is then booked to a separate imbalance account, which is defined as a receivable or payable with the imbalance tracked monthly.
At PetroLedger, we use our oil and gas accounting expertise to help simplify and optimize accounting needs for natural gas producers, processing plants, and pipelines. Interested in learning more? Contact us today!
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