Measurement of Oil and Gas Production in Western Canada

Laws control the lesser man… Right conduct controls the greater one.

Mark Twain

 

The Ancient Egyptians

Measurement has been a necessity for many centuries in order to facilitate not only commerce but also everyday life. The ancient Egyptians were amongst the pioneers of this and as early as the 4th and 3rd millennia BC measurement was used for surveying land, buying and selling commodities and, of course, the construction of the great pyramids. Weight and length were readily measured by the Egyptians but volume was more difficult and often weight was used as an estimate of volume. We have advanced measurement techniques exponentially since the Egyptians and can now measure the speed of light, the atomic mass of elements and for volumes we have developed meters. However how do we know that the measurements from meters are accurate? As in many business processes the way we ensure accuracy is to implement controls that are properly designed and are operating effectively.

The Influence of SOX and CSOX – Controls over Financial Reporting

Following a number of high profile business failures (often involving fraud) in the 1990s legislation was introduced that was intended to give shareholders comfort that the figures in a company’s financial statements could be relied upon. The legislation was formulated on the basis that the best way to ensure accuracy was to implement internal controls that would either prevent or detect errors. The requirement to have controls over financial reporting has been with us for over two decades and internal controls are now established and embedded in relevant business processes.  Until relatively recently there was not a requirement to have controls over the measurement of production, which impacts both company revenues and government royalties. In Alberta and Saskatchewan the regulatory bodies have decided to leverage the methodology that was developed earlier for controls over financial reporting (SOX and CSOX) and apply them to the measurement of oil and gas production. Alberta has been at the forefront of this initiative but Saskatchewan is now taking a similar approach although it is in the very early stages. Accordingly, the remainder of this article will focus on the procedures in Alberta. If you require information regarding compliance in Saskatchewan PFC has produced a specific document for that province and is available on request.

Directive 76 – Operator Declaration Regarding Measurement and Reporting Requirements

The Alberta Energy Regulator (“AER”) formerly known as the Energy Resources Conservation Board (“ERCB”) has implemented many directives but this article addresses primarily the requirements of Directive 76. The directive “sets out requirements according to which operators are to declare the degree to which they have infrastructure in place to ensure compliance with AER measurement and reporting requirements.” In order to give operators guidance as to how they should implement the required infrastructure the AER has documented its Enhanced Production Audit Program (“EPAP”) together with a detailed EPAP Operators Handbook. The EPAP’s process requires that each operator’s senior executives submit an annual declaration attesting to the state of their controls designed to ensure compliance with AER’s measurement and reporting requirements. The directive, which was introduced in at the start of this decade, requires operators to undertake the following:

Design controls over measurement and reporting

Disclose facilities for which there are no controls

Retain and provide control documentation Annually conduct evaluations of controls
Disclose number of facilities evaluated Remediate control deficiencies
Investigate and remediate items identified by AER

Report remediation activity

The above requirements appear ostensibly to be onerous for operators but are just the equivalent to having adequate controls over financial reporting and, ultimately, the requirements merely represent sound stewardship principles. There is however one key difference between controls over financial reporting and controls over the measurement of production. Controls over financial reporting are normally documented by finance people who are generally familiar with control practices whereas controls over production measurement are normally the remit of engineers who typically focus on ensuring the facility operates smoothly and without interruption. In our experience the process of documenting and evaluating controls over production measurement is normally a collaborative effort between engineers and control experts. The Operators Handbook is a detailed guide for operators but the following diagram illustrates the position at a high level:

The control process

The process commences with establishing what controls are required to ensure that the relevant processes’ output is complete, accurate and valid. Controls are then embedded in the process to effectively monitor its operation and are designed to either detect or prevent errors. The final step that completes the cycle is the evaluation of controls. Have the controls operated as intended and achieved their objectives? This is done by testing the controls and evaluating the results.

Essentially engineers bring to the table their technical expertise (such as how and when meters should be calibrated) and the control experts oversee the overall methodology and assist engineers in documenting and evaluating their controls. If the Corporation operates in Alberta, it should already be accustomed to the requirements but may be experiencing some difficulties in fully meeting the compliance requirements. We have received feedback from the industry that many companies are experiencing difficulties with compliance, which confirms that measurement problems are ongoing. If the Corporation is operating in Saskatchewan, it will likely not have fully commenced the compliance process and we would strongly advise that a project be commenced sooner rather than later to address the required controls gaps as it might jeopardize the potential loss of licence in future. Oil sand projects are typically much more complex than traditional production methods and there are additional requirements for oil sand projects. For example, directive 42 requires operators to prepare a Measurement, Accounting, and Reporting Plan (MARP) for Thermal Bitumen Schemes.

Regardless of the type of facility it makes sense to ascertain key measurement points at the design phase rather than after the fact as this can be costly and may result in lost production. This article is intended to give producers an overview of the measurement requirements rather than provide a step by step guide to compliance as each operator will have different facilities and potentially measurement points. If you are encountering problems with compliance in Alberta or planning for compliance in Saskatchewan, PFC’s team of experts can help by working collaboratively with you to adopt a cost effective approach that meets your needs.

Make compliance straightforward and avoid rework! – Act Early – Let’s talk.

For further discussion on this subject please contact PFC representative or e-mail: info@pfcaccounting.com or call us: +1(403) 375 9955