How investor in 0il and gas lease audit operator to expose suspected fraudulent AFE/ lifting costs that result in neg mo. ROI?
3 attorney answers
I agree with the other two attorneys. You should seek out a good oil and gas attorney in your area. I would also suggest that you employ a good oil and gas accountant. Between the two of them, they should be able to obtain an audit of the well expenses and production to help you determine the status. Good luck.
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Your rights are dictated by Kansas state law. You may need to consult with a Kansas lawyer who is experienced with O&G law.
In many, if not most states, your audit rights may differ depending on they type of interest you own. In your case, you claim to own 3 different types of interests.
In each instance, your rights may be expanded or limited by assignments, deeds, contracts, leases, etc. by which each such interest was created.
I suspect that your RI was created by a lease, and that you might be a lessor under a lease. Can you verify or advise how the RI originated. If by a lease and the lease was negotiated by a person with experience, you probably have express, written audit rights which you can insist upon asserting. You may or may not also have rights under Kansas law.
I would be surprised if the document giving rise to your ORI contains express audit rights, but it might. Even if it does not, you may still have audit rights under Kansas law.
With respect to the RI and ORI, it is likely that any express audit rights would probably only be limited to correct payment (sale contract review, production amounts, prices received, deductions made) and possibly to reasonable development.
Your WI rights are likely to be very different. In the first place, is your WI subject to a Joint Operating Agreement (JOA)? Most "deals" between industry investors/participants are governed by a JOA which the parties have signed. Although there are exceptions, JOA's on dry land (not in the Gulf of Mexico, ocean, etc.) are a standard pre-printed agreement published by the AAPL. It's called a AAPL Form 610 Model Operating Agreement or a name very similar). They have edition dates as they are revised from time-to-time. An AAPL JOA is usually accompanied by an exhibit called an accounting procedure - almost always from COPAS. Between the JOA itself and the COPAS, a party to the JOA have clearly set out express audit rights but with some limitations (e.g., time for audit, cost of audit, etc.). Is your WI subject to a JOA? If so, look there for your audit rights, your liability for costs and cost overruns, etc.
In order to evaluate the operations, costs, cost overruns, etc., you may need the services of a petroleum engineer as opposed to those of a lawyer. Your rights and obligations, however, respecting them will be dictated by the provisions of the JOA, if one is in place, and under Kansas law if not. Actually, Kansas law will still be relevant even if there is a JOA. In most states, however, the JOA will control over general contract and property law in at least certain instances if not most. An AAPL JOA is a very lengthy and complicated contract. Even experienced O&G owners usually need an "expert" to review it.
You should contact a knowledgeable oil and gas attorney in your area, but you will likely face an uphill battle. Proving fraud can be very difficult, and one bad well does not make an operator incompetent or imprudent. If you have not yet, it is your right under most JOAs to audit the expenses you have been billed. Absent audit findings, you will likely have no meritorious claims to make.