Real Time Cost Monitoring and Audit Under The Production Sharing Agreement (PSA) In Uganda’s Petroleum Sector

A number of fiscal regimes are applied in the Petroleum industry by different countries. It is difficult to evaluate one system over another as countries have specific conditions within them that favor one over another. Uganda as a country employs Production Sharing Agreements. Under these agreements, a company is licensed to undertake all risks involved in petroleum exploration. Should the company be successful, it is entitled to a share of the profit after recovering the costs incurred in the search for petroleum. This regime is good for Uganda as the country does not carry any exploration risk. Additionally, as the petroleum sector requires very skilled labour and specialized technology that was initially not in the country, the companies that were licensed brought with them the necessary skill set and technology.

The petroleum legislation in Uganda allows the government to undertake an audit of all the company’s costs to ensure that only necessary and economical costs involved in the search for petroleum are paid to the company under the cost recovery regime. These are referred to as cost recovery audits. The role of undertaking cost recovery audits is mandated to different institutions in different countries. For some, the National Oil Company undertakes the cost recovery audits, for others it is the Ministry of Petroleum or any other regulator, while for others it is the Supreme Audit Institution.

Irrespective of who undertakes the audit or review, the purpose is to ensure that only necessary and economical costs are recovered by the oil companies. However like all audits, the cost recovery audits are undertaken after an activity has been done or after the close of the year. Because of this, the audit serves to assist future operations and does not necessarily improve past or current operations. Additionally, exploration activities can happen over more than one year or across two calendar years especially for activities undertaken towards year end for example drilling deep wells, setting up central processing facilities and some surveys.  As a result, the issue of cutoff for activities that occur across two or more years occurs. It is important that an effective an efficient criteria is applied for reporting costs cutting across different periods. These particular incidences make the need for regular monitoring of all activities under the PSA very important.

Monitoring can take on many different forms for example field monitors deployed at all times in the fields, regular sharing of petroleum data in the form of daily drilling and activity reports, or installing smart meters. For any form of data sharing, it is important to determine who actually owns the data from petroleum activities. The company collects the data but it is important that this information is shared with the Government at no extra charge.  Occasionally, oil companies have proprietary information and in many instances involving data exchange, the issue of confidentiality between the two parties is important and should be addressed beforehand.

The Ugandan Perspective

The monitoring role starts at the budget approval stage. The petroleum regulations mandate that an Advisory committee is set up within 30 days of signing a petroleum agreement. The Advisory Committee considers the work programs, budgets and costs submitted by the licensed company. The companies are expected to submit their work programs and budgets for review at least 60 days before the beginning of the year. This is to enable adequate revision of these budgets and work programs.  The Advisory Committee is expected to convene meetings to deliberate on the work programs or budgets.   The Petroleum Authority of Uganda (the Regulator) is authorized to either approve the submission of the Advisory Committee or reject it -with reasons. The licensed companies are allowed to resubmit the budgets and work programs to the Petroleum Authority thereafter.  This is the first stage of cost monitoring applied in Uganda.

The Petroleum legislation allows the Government free access to any data it requires. Part nine of the Petroleum Exploration Development and Production Regulations 2016 detail the reports that should be submitted to the regulator by the licensed companies. These include daily, weekly, and monthly reports. Additionally activity reports should be submitted at the end of each activity. Examples of reports that should be submitted include; a daily drilling report, a casing and cementing report, a daily mud report, a health, safety and environment report, a daily geology report, a daily cost estimate report, a choke manifold and blow-out preventer test report, a daily operations report, and a kick sheet.

Form 12 of the above mentioned regulations lists the reports that should be provided to the Regulator by a licensed company. Additionally, the company is required to submit real time data to the regulator for any drilling campaign. This should keep the Regulator informed of all activities as they occur. Furthermore, the daily drilling and operations report that is submitted should have at least a 24 hour forecast. This gives an estimation of the costs expected to be incurred in the next 24 hours. The objective of requiring all this information to be submitted is to ensure that the Regulator gets regular updates on all activities and the costs involved. This is an important step for cost control by the Regulator. This data once submitted can be reviewed early enough before the final cost recovery audit. This enables real time monitoring of the petroleum activities.

This is in addition to the monitors assigned to the licensed companies. A monitor employed by the Regulator stays in the field and sends his/her own reports about each activity on a daily basis to the Regulator. The monitors are rotated regularly. The monitoring role is undertaken by staff of the Petroleum Authority and all other institutions involved such as the National Environment Management Authority, and the Uganda Wildlife Authority for activities in national parks. The monitoring reports are important for the audit as they give firsthand accounts of what happened in the field in addition to the reports from the companies.

Real time monitoring is important for both the company and the Government. For example if a well is drilled and it was expected to use 100 casings but it uses only 80 casings, both the Government and the drilling team will immediately be aware of the amount of casings used rather than waiting for a stock taking exercise. This improves inventory movement on the company’s part. It also ensures that by the time the final cost audit is undertaken, most of the costs have been reviewed through this mechanism.

Furthermore should there be an incident that could potentially jeopardize the progress of the well or make it difficult to complete any drilling campaign, this information is relayed to the Regulator immediately. This enables quick remedial action both at budget level and at the point of work in the field.  Since all costs to be incurred should have undergone the approval process, should they rise to a point at which they may exceed the budget, all parties involved will be aware. Furthermore, it is important for a company to notify the Regulator about such occurrences. This limits incidences of costs exceeding budgets.

Review of all this information is important in order to undertake a comprehensive audit of the sector. This review can be initiated as early as when quarterly cost statements are submitted to the Regulator. The value of work done can be audited and redundancies put in place for any delayed invoicing.  Real time audit reviews by nature are meant to ensure that costs are controlled at an early stage. They furthermore reduce the work to be undertaken at the end of the year. As a result, the audits will take a shorter time to be completed.

Conclusion

As profit is a function of cost, it is important that costs are kept at a minimum. Real time review and monitoring activities are important for both the Regulator and the licensed companies and should be encouraged. During the final cost recovery audit, these cost reports are useful for both the contractor and the auditor as they are expected to communicate with the final cost recovery statement submitted to Government. For activities cutting across more than 1 year, care should be taken for any cost recovery to be made. The costs submitted for recovery should have been approved in the year they are incurred irrespective of the fact that the activity was initiated the previous year.

All this is done to ensure that the Regulator is kept abreast of all activities in the field, but it is also beneficial to the company. This might seem like a lot of information but the oil and gas industry is run on information and any information asymmetry is dangerous for either party. From the reporting requirements, it can clearly be seen that cost control is not a preserve of only the cost monitors but also geologists, drilling engineers, environmentalists’ auditors and all concerned parties.

By Henry Luwemba Kasule – SAI Uganda

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