ONRR AUDIT PROCESS February 23 2021 Industry Compliance

ONRR AUDIT PROCESS February 23, 2021 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

ONRR Organization Office of Natural Resources Revenue Kimbra Davis Director Howard Cantor Deputy Director Audit Management Jeff Carlson Program Director Revenue, Reporting, & Compliance Management Coordination, Enforcement, Valuation, and Appeals Ruth Welch Program Director Bonnie Robson Program Director 2 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

ONRR Data Accuracy Efforts 3 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Up-Front System Edits Ø Up-Front System OGOR and ONRR-2014 Edits are in place that will reject your report when you submit Ø You can find a list of those edits under the Reporting/Paying Tab at ONRR. GOV 4 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Compliance Strategy Take Data • • OGOR | 2014 I P&R Reports Market Intelligence Compliance Feedback Risk Tool Apply Insight • Collaborate • Set Priorities Work Plan • • Data Mining Compliance Review Audit STRAC 5 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Data Mining Processes Volume Comparison • Detects missing ONRR-2014 s • Identifies and resolves high-volume discrepancies between OGOR reported sales volumes and ONRR-2014 reported sales volumes • Identifies and resolves lease and agreement misreporting Agreement Monitoring • Reviews new and revised communitization agreements (CA)/unitizations agreements (UA) • Verifies that leases in CAs/UAs are receiving the correct amount of royalties based on the allocation schedule contained in the terms of the CA/UA Reporting Analysis • Net Negative – Analyzes net negatives at the company/property/sales month/product code level to ensure proper reporting and payment • Ad hoc – Analyzes data and tests assumptions to develop future processes, such as original offsetting positive lines for negative adjustments, adjustments to closed or audited time periods, processed gas reporting, and other misreporting Industry Compliance Accurate Revenues & Data Professionalism & Integrity 6

Compliance Review Process Provides reasonable assurance that all or part of the royalty equation (volume, value, allowances, royalty rate) is reported and paid correctly Compares elements of the royalty equation to an expected value to determine if variances exist Allows for quick resolution of errors Performs Indian Gas Major Portion, Dual Accounting and Indian Oil Major Portion Compliance Reviews 7 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Audit Process Verifies royalties are accurately reported and paid Requires a higher standard of verification in the form of evidence Applies Generally Accepted Government Auditing Standards Is a longer more formal process 8 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

How Do You Determine the Compliance Type? 9 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Managers Audit Management Jeff Carlson Program Director Central Audit Management Shawna Schimke Program Manager (405) 879 -6006 Southern Audit Management Vacant Program Manager Tribal & State Audit Services Yvette Smith Program Manager (303) 231 -3485 Western Audit Management Vacant Program Manager Denver Mike Curry michael. curry@onrr. gov (303) 231 -3741 Houston A Yvette Henry yvette. henry@onrr. gov (281) 987 -6831 Audit Services Geoff Gibson geoffrey. gibson@onrr. gov (303) 231 -3689 Denver A Linda Shishido linda. shishido@onrr. gov (303) 231 -3820 Oklahoma City Rob Heiliger robert. heiliger@onrr. gov (405) 879 -6021 Houston B Cindy Nguyen cindy. nguyen@onrr. gov (281) 987 -6877 Tribal & State Audit Kyle Mc. Cartney kyle. mccartney@onrr. gov (303) 231 -3053 Denver C Karen Garza karen. garza@onrr. gov (303) 231 -3352 Tulsa Sherri Stepchinski sherri. stepchinski@onrr. gov (918) 615 -5247 Houston C Derek Kitchen derek. kitchen@onrr. gov (281) 987 -6811 Tribal & State Admin & Audit Bruce Rumburg bruce. rumburg@onrr. gov (303) 231 -3457 Dallas Megan Mueller megan. mueller@onrr. gov (214) 640 -9030 Industry Compliance Accurate Revenues & Data Professionalism & Integrity 10

Audit Management Program Areas 11 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

What is an Audit? Ø ONRR conducts audits to determine if companies extracting and selling natural resources from Federal and Indian lands are in compliance with lease terms, laws, and regulations OH NO !! WHY M E? WH DOE AT S MEA IT N? – Performs detailed examinations of companies’ reporting and payment processes from extraction to royalty reporting – Uses 3 rd party documentation to validate royalty reporting and payments – Generally occurs 2 to 3 years after reporting and includes a review of multiple years • Audit of Indian leases can go back many years 12 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Types of Audits Property Audit Company Audit • One company, including affiliates & subsidiaries • One or more products • One or more properties • Specified review period • An individual property (lease or agreement) • One or more products • One or more companies • Specified review period Special Terms Audit Issue Audit • A specified completion date based on regulation, policy or other management directives • One or more products • One or more companies • One or more properties • Specified review period Industry Compliance Accurate Revenues & Data • • • A specific issue or issues One or more products One or more companies One or more properties Specified review period 13 Professionalism & Integrity

4 Phases of an Audit Planning Analysis Resolution Closure • Send Engagement Letter/Data Request • Conduct Preliminary Audit Work • Select Sample • Finalize Audit Plan • Conduct Fieldwork • Send Data Requests • Send Preliminary Determination • Send Order Letter • Confirm Compliance • Hold Exit Conference • Send Audit Report or Closure Letter 14 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Planning Phase Ø Communicate with company Ø Conduct entrance conference – Include all personnel responsible for contact listed on Form ONRR-4444 reporting and paying royalties – Perform a walkthrough – Internal control questions – Fraud questions – Ensure ONRR-4444 is up-to-date – Agree to entrance conference date (generally within 30 days) Ø Confirm Message. Way Account – Secure method of transmitting information Ø Issue engagement letter and initial data request Ø Confirm lease universe & select sample properties/months Ø Develop the audit plan – Information due at or before entrance conference – Make sure the information provided is accurate and complete 15 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

What is a Walkthrough? A detailed explanation of all systems and processes used to perform all aspects of the handling of minerals from extraction, measurement, transportation, processing, valuation, to the calculation of royalty payments on Federal and/or Indian properties The purpose is to educate the auditor with an understanding of your systems and processes, as well as your organizational structure and relationships with other entities ONRR identifies the walkthrough property(ies) and month(s) in the Engagement Letter - There may be more than one property - Your explanation should be complete for all products, leases and wells Industry Compliance Accurate Revenues & Data Professionalism & Integrity 16

What is a Walkthrough? (cont. ) Include all personnel who prepare the OGOR, 2014, and P&R reports, and all other reports required by ONRR - Engineers responsible for the setup and maintenance of equipment - Marketers who can explain sales contracts and pricing - Personnel who can explain the transportation and processing activities - Accountants who can explain how they record and allocate production Tie source information to OGOR, 2014, and P&R reports and payments - Explain calculations of volume, price, allowances, and royalty - Include all source documents to support steps, e. g. , volume measurement statements, purchase/sales/transportation/allowance contracts, Etc. - Address product measurement type and location - Identify and explain all off-line calculations Industry Compliance Accurate Revenues & Data Professionalism & Integrity 17

Analysis Phase Ø Conduct field work Ø Perform quality control steps – Analyze supporting information – Validate reporting (OGOR, 2014, P&R) and payment Ø Send data requests – Request clarification or additional supporting information Ø Identify compliance issues based on criteria – Check facts on schedules for accuracy and math – Consult royalty valuation – Define criteria – Perform supervisory review Ø Communicate-Communicate – Address questions, discuss issues, etc. – Based on lease terms, Federal laws and regulations, and other directives 18 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Common Issues Reporting Errors Volume Issues Ø Missing Agreement Numbers Ø Reporting Quality Bank Adjustments as TC 13 on ONRR-2014 Ø Misallocation of Volume and Value Between Leases in an Agreement (Especially Allotted Indian leases) Ø Incorrect Pressure Base and Wrong Saturation Base (S/B @ 14. 73, Dry) Ø Reporting Royalty Bearing Flared/Vented Gas Ø Reporting Gas Used or Lost Along a Pipeline Prior to the Point of Sale as PC 15 on ONRR-2014 Ø Reporting Drip Condensate Ø Facility Measurement Points vs Sales Meters Ø Takes vs Entitlements Ø Oil Nomination vs Delivery Issues Ø Cash Ins/Outs Ø Platform Imbalances 19 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Common Issues, cont. 1 Value Issues Marketable Condition Section 6 Leases Deepwater Royalty Relief Issues Indian Oil and Gas Major Portion/ Index Pricing Ø Actual Dual Accounting Ø Minimum Value for Natural Gas Liquids (Indian) Ø Netting Transportation/Processing Costs Ø Ø Ø Arm’s Length Dedicated Contract – Index Value vs Gross Proceeds (Indian) Ø Major Portion Value vs "Gross Proceeds" (Indian) Ø Alternative Method of Dual Accounting- Incorrect BTU Factors (Indian) Ø Invalid Reasons for Exemption from Dual Accounting - ONRR-4410, Part A (Indian) 20 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Common Issues, cont. 2 Allowances Issues Required Forms Ø Marketable Condition Ø Non-Allowable Gathering Ø Non-Arm’s Length Transportation/ Processing Costs Ø Arm’s-Length Transportation/ Processing Costs - Unbundling/ UCAs Ø ONRR-4444: Address/Addressee of Record Changes Ø ONRR-4393: Request to Exceed Regulatory Allowance Limitation Ø ONRR-4410: Accounting for Comparison/Dual Accounting Ø ONRR-4411: Safety Net Report Ø Indian Lease Allowance Forms - UCA not allowed for Indian leases Ø Deepwater Transportation Issues – 2016 Rule changes Ø Exceeding the Allowance Limits Ø Not Filing Transportation/ Processing Allowance Forms for Non-Arm’s Length (Indian) Ø Not Separating Transportation and Fractionation Costs Industry Compliance – – Accurate Revenues & Data ONRR-4109: NAL Gas Processing ONRR-4110: NAL Oil Transportation ONRR-4295: NAL Gas Transportation Note: Contracts required for AL Processing and Transportation Allowances 21 Professionalism & Integrity

Resolution Phase Ø Perform Quality Control Steps Ø Voluntary Compliance – No written communication issued by ONRR Ø Send Preliminary Determination(s) – Informal communication/No appeal rights – ONRR not required to issue Preliminary Determinations Ø Send Order Letter(s) – Issues unresolved through voluntary compliance or Preliminary Determination – Formal communication w/Appeal rights – Order Types • Order to Report and Pay • Order to Perform Restructured Accounting and Pay Industry Compliance – Check facts on issues and schedules for accuracy and math – Consult royalty valuation group – Define criteria – Conduct formal referencing of Order Letters – Perform supervisory and management reviews Ø Confirm Compliance – Verify issues identified are properly and fully resolved – May require additional supporting information – Pending if Order Letter is appealed Accurate Revenues & Data 22 Professionalism & Integrity

How Does ONRR Notify You of Compliance Issues? Ø Methods of communication Ø Important information Case Number all Phone C Due Date PAD Number Lett er Email/Message. Way 23 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

What Should You Do When ONRR Contacts You? Ø Follow all instructions within the specified time period. Ø Refer to identifying information (i. e. , Case No. ) when responding to communications. Ø Contact the ONRR employee listed on the correspondence if you need assistance. Ø You may appeal or request a hearing on the record, if applicable. Ø Failure to follow instructions can result in Notice of Noncompliance, Civil Penalties, or other enforcement actions. 24 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Closure Phase Ø Conduct Exit Conference – Discuss issues and audit status – Address any questions Ø Send Draft Audit Report – Allow company 7 calendar days to respond Ø Send Final Audit Report Ø Perform Quality Control Steps – Check facts in report and schedules for accuracy and math – Conduct formal referencing of Audit Report – Perform supervisory and management reviews – Include company response Note: If Orders are appealed, ONRR will issue the Audit Report pending resolution. OR Ø Send Closure Letter – Terminate audit 25 Industry Compliance Accurate Revenues & Data Professionalism & Integrity

Escalation Process Action Type Due Data Request Maximum 30 Days (less if applicable) Data Request w/Engagement Letter Earlier of: Entrance Conf. Date OR Maximum 30 Days Preliminary Determination Maximum 30 Days (less if applicable) Order Letters 30 Days from Receipt Date (60 Days for OTP) 1 Auditor/Analyst Extension (Optional) Supervisor Extension (Optional) Manager Extension 1 (Optional) Next Steps N/A One 15 -Day One to multiple 15 -Day Extension from the Refer to Office Extensions from the Due Date or of Enforcement Date or Revised Due Date N/A One 15 -Day One to multiple 15 -Day Refer to Office Extension from the Extensions from the Due of Enforcement Due Date or Revised Due Date One 15 -Day One to multiple 15 -Day Extension from the Extension from Extensions from the Due Date or Revised Due Date N/A N/A Order Letter Refer to Office of Enforcement IF Not Appealed Multiple extensions may require approval from Program Manager. Industry Compliance Accurate Revenues & Data 26 Professionalism & Integrity

Expectations Knowledgeable audit coordinator Up-To-Date Form ONRR-4444 Active Message. Way Account Accurate and complete walkthrough of systems and processes used to report and pay Federal and Indian mineral royalties Timely and “accurate” responses to Data Requests, Preliminary Determinations, and Order Letters Accurate submission of corrected royalty adjustments using the CMP-2014 using the PAD Number supplied Review and correct reports for all of your Federal/Indian leases to assure they do not suffer from the same reporting deficiencies cited in the Preliminary Determination or Order Letter Communication – Communication Industry Compliance Accurate Revenues & Data Professionalism & Integrity 27