American Oil and Gas Reporter - May 2015 - 141

ConventionCoverage: Kansas Independent Oil & Gas Association
that other wells share, but they fail to
provide evidence of allocation between
the different sources. He added other errors that showed up regularly included
incorrect starting dates for new pool exemptions, mistakes in daily production
calculations or claims with the wrong
numbers of wells.
Based on the meetings, Boekhaus said
KDOR changed some of its audit procedures, and was willing to further discuss
the process.
Oil Experience
Krauss said it took her company almost
a year to respond to the state's request
for records after it announced plans to
audit the company's severance tax filings.
After the April 2013 audit notice for production from July 2010 to February 2013,
she said John O. Farmer Inc. submitted
its documentation in March 2014 and received its initial KDOR response five
months later, followed by a secondary
information request in October 2014.
"We provided volumes of information,"
Krauss said. "The company had to go
back as far back as 2008 because it was
looking at a three-year statute of limitations
and there was an exemption period. Because some wells are going to be at the
end of that exemption, that takes you
back another two years. Then you have a
six-month qualifying period. The company
had to go back to 2008 to pull gauge
records to substantiate some of its 201013 exemptions."
Because of the volume of information,
Krauss said the auditor asked her company
to extend the statute of limitations while
it processed the paperwork.
"We respectfully declined to grant
any of those waivers, and rather requested
that the department just focus on getting
through it. We provided the documentation
in a timely manner, and were under a
little pressure to sign those waivers. That
was frustrating, but we moved on with
the audit," she said.
The process was further delayed when
the information request added new leases
while the company collected more information on the newest applications, Krauss
said.
"We finally got through it," she reported. "In the end, the results were fine,
but it did take a lot of hours. I cannot emphasize enough how much time it took."
The main points of contention regarded
production days, Krauss said, adding that
the Department of Revenue may now

agree with the industry's production calculation methods. She said John O. Farmer
Inc. had become much more cognizant
about timing barrel tests, especially on
multiwell leases where each well had its
own exemption.
"When we do reworks now, we do a
barrel test before and then one immediately
following, so we know how that operation
has changed our production for each
well," Krauss said.
Krauss also recommended that companies with wells near the six barrel a
day exemption limit plan and prepare for
audits by saving gauge sheets, API numbers, copies of county renditions, and
barrel test results.
Gas Audit
Dayvault walked through Abercrombie
Energy's experience with KDOR's natural
gas audit process, and said his chief complaint was that department databases already had much of the information requested-including monthly lease production recorded by Mcf and MMBtu- from
pipeline companies.
"There was some duplication of effort."
Dayvault said. "The input of this information could be streamlined. Based on
our conversation in November, KDOR
believes it needs this information to tie
to gross revenues."
The audit process also revealed confusion
over electronic records, he said. His company keeps paper copies of its records, but
other producers have told KDOR they
have transferred to electronic versions that
state auditors are reluctant to accept. Dayvault said the department accepted electronic
records, provided they were complete.
He related that this was a particular
problem in establishing production days
and verifying well downtime. Pumpers
at Abercrombie Energy use gauge sheets
to indicate hours of equipment operation,

but he said that information must be
added to the electronic records.
"My recommendation, particularly if
you are dealing in oil, where you only
have to keep these things for less than a
year, is to hang on to your paper records
for at least that long," Dayvault advised.
"Abercrombie typically keeps all its
records for six years. I know there are a
lot of companies that deal with much
greater volumes, and they do not want
that much paper around. If you want to
get rid of paper records, make sure to
transfer everything you possibly can to
the electronic records."

Risk Management
Jim McCallie with HedgeRight Energy
Solutions, a commodity brokerage and
consulting firm specializing in energy
clients, told KIOGA the Organization of
Petroleum Exporting Countries deserved
less blame for low oil prices than Wall
Street-linked energy investors, a stronger
dollar, and increasing domestic overproduction.
He asserted that despite 10-year high
oil inventories and double-digit production
growth in 2014, oil markets continued to
see speculative net ownership rise from
investment-oriented financial groups from
2012 to 2014. McCallie said this large
ownership interest kept oil prices relatively
high, and was largely because of a weak
dollar and rapidly increasing equity prices
as a result of the Federal Reserve's ongoing qualitative easing program.
According to McCallie, the turning
point came in the summer of 2014, when
the Federal Reserve indicated it would
end its bond purchases, which had caused
the dollar to rise rapidly into year-end,
ultimately hitting above 10-year highs
early in 2015. He opined that it was this
large jump in the dollar's value that
forced a mass exit of speculative longs

Jim McCallie (left), managing principal and energy risk consultant
for HedgeRight Energy Solutions,
visits with Tim Scheck, chairman
of the Kansas Independent Oil &
Gas Association, before his presentation at the association's
midyear meeting.

MAY 2015 141

American Oil and Gas Reporter - May 2015

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