Economic Factors and Accounting Procedures

Does COPAS publish OH rates based upon the depth of the wells contracted to drill? 

Commencing with the 1974 Accounting Procedure, COPAS revised its model forms to eliminate an overhead rate structure that is based on well depth. For producing wells, a shallow well incurs the same amount of overhead as a deep well. They generally require the same amount of accounting, regulatory reporting, and other overhead services. The Operator might incur more overhead costs for drilling or conducting downhole operations on a deep well. Because the drilling rate is prorated based on drilling days, a deep well will recover more overhead dollars, even though it has the same rate as a shallow well.

These concepts and others are discussed in COPAS Accounting Guideline (AG) 23, “Overhead Negotiation and Calculation.” AG-23 also describes methods an Operator may use to calculate its theoretical break-even cost for providing overhead services. Another resource is COPAS Model Form Interpretation (MFI) 21, “Overhead – Joint Operations.”

If you or anyone in your organization would like more information on our Model Form Accounting Procedures, Model Form Interpretations, or Accounting Guidelines, please do not hesitate to contact us.

What OH rates should I use? Where can I get OH rates? 

COPAS does not publish overhead rates. In addition, COPAS does not endorse the use of “benchmark” rates for overhead.

The overhead fees are to compensate the Operator for the cost of providing overhead functions. In theory, the parties start from a “neutral” point, i.e., the Operator should neither gain nor lose money on the overhead fees. However, during the course of the negotiation, the parties may decide to increase or decrease the overhead fees in exchange for other commercial terms. Also, one Operator’s practice may be to charge the joint account for something that another Operator includes in its overhead services – e.g., technical labor. All other things being equal, the former Operator should have lower overhead rates than the latter.