Operational Volumetric Policy

Effective date: September 24, 2007 Version 1.5

Table of contents

1. Purpose

The purpose of this directive is to outline Indian Oil and Gas Canada's (IOGC) policy regarding the verification and validation of oil and gas volumes submitted by royalty payers. This includes:

2. Background

2.1 Verification and Valication of Submitted Volumes

To ensure proper royalties are paid by the producers of oil and gas, IOGC has implemented processes to make sure that volumes are reported accurately for each production entity. There are essentially two separate processes in place. The first provides a check of each month's submitted volumes to ensure that they are consistent with the amount of produced and recovered substances reported to provincial regulatory authorities and the Petroleum Registry of Alberta, and consistent with the prior month's reported values (i.e. by comparing absolute volumes, gas volume shrinkages and by-product yields). We refer to this as our verification process.

This verification process does not attest to the accuracy of the reported volumes, but goes a long way toward assuring us that the reported figures are reliable. As circumstances warrant, IOGC conducts another process to further validate the accuracy and appropriateness of the methods used by the operator to measure and allocate volumes to production entities. [Note: The word volume is used throughout this document, rather than quantity, but it should be understood to include the total energy content of marketable gas, as well as its mass, in the case of sulphur]. This policy refers to this process as the validation of the reported volumes. It is done by means of a Field Inspection of the production facilities and/or review of the company's records, allocation and reporting. A satisfactory outcome gives IOGC even greater confidence in the reliability of the royalty payer's on-going monthly reporting of volumes.

IOGC maintains a cooperative relationship with the Provincial Regulatory Authorities. This includes reciprocal sharing of audit findings affecting First Nations oil and gas production and, where circumstances warrant, joint participation in meetings with companies.

2.2 Submission and Retention of Oil and Gas Volumetric Data

Prior to the introduction of this Volumetric Policy, IOGC required royalty payers to provide, on a monthly basis, copies of the relevant provincial production and disposition reports, including amendments. IOGC received this volumetric support data either by electronic submission or in hard copy. The receipt of the supporting documentation was not enforced and was sporadic at best.

3. Authorities and References

IOGC Production Reporting Review Handbook

IOGC Volume Verification User Guide

ERCB Directive 017 – Section 6.3.3

Indian Oil and Gas Regulations, 1995

4. Scope

This policy applies to all oil and gas volumes reported to IOGC and to all volumetric support data for oil and gas production attributable to First Nation Lands.

5. Definitions and Abbreviations

Field Inspection
An on site inspection of a facility and its associated wells. The inspection focuses on the operator's measurement systems and methods to ensurecompliance with provincial requirements for equipment used to determine monthly volumes of produced First Nation oil, gas and gas by-products.
Flare / Vent
The controlled burning (flare) or release (vent) of natural gas that can't be processed for sale or use because of technical or economic reasons.
Fuel
Raw gas or residue gas that is consumed, prior to sale, in the gathering, compressing or processing of natural gas or gas product.
Metering Differences
Volume used to balance any difference that occurs between the measured inlet/receipt volumes and the measured outlet/disposition volumes at a facility, on a monthly basis.
Production Audit
A combination of a Field Inspection and Production Reporting Review.
Production Reporting Review
The review and analysis of record keeping and accounting procedures for facilities on First Nations lands. The inspection is focused on reported production and sales volumes and ensures that all oil and gas volumes are allocated and reported accurately for each production entity.
Volume Validation
Production Reporting Review or Production Audit, performed to ensure proper measurement, allocation and reporting of production for wells and facilities producing oil and gas from First Nations lands. Validation can be performed through a Production Reporting Review, Production Audit, or Field Inspection. As a result of validation, the volumes are either revised, or are considered by IOGC to be accurate and acceptable.
Volume Verification
An automated exercise performed by RIMS, or a manual review performed by IOGC staff, to determine whether the reported volumes meet IOGC's data standards and whether they are within IOGC's volume and variance thresholds. Volumes that have been verified may or may not require further manual review or validation.
ERCB
Energy Resources Conservation Board
EFM
Electronic Flow Measurement
IOGC
Indian Oil and Gas Canada
OGC
Oil and Gas Commission of British Columbia
PRA
Petroleum Registry of Alberta
REN
Royalty Entity Number
RIMS
IOGC's Automated Resource Information Management System
SIR
Saskatchewan Industry and Resources
VAS
Volume Available for Sale

6. Management Policy

6.1 Verification of Submitted Volumes

AB, SK and BC oil volumes

On a monthly basis, companies are obligated to report all oil production volumes to the appropriate regulatory authority. The regulatory authorities differ for each province (PRA in AB, OGC in BC and SIR in SK). IOGC receives the reported oil production data; via a third party supplier, three months after production. To assess oil royalties, IOGC uses the third party data, rather than the oil production volume submitted on the royalty statement. As such, oil volumes are considered independently verified. In other words, IOGC's automated check of that production month's submitted volumes has been completed, but the royalty payer's measurement and allocation methods may still need to be validated by means of a Field Inspection and/or Production Reporting Review.

SK gas volumes

On a monthly basis, companies are obligated to report all gas production volumes to the appropriate regulatory authority. IOGC receives the reported gas production data via a third party supplier, three months after production. To assess Saskatchewan gas royalties, IOGC uses the third party data, rather than the gas production volume submitted on the royalty statement. For royalty purposes, Saskatchewan gas production equals sales and as such, Saskatchewan gas volumes are considered independently verified.

Alberta and BC gas volumes

To assess Alberta and BC gas royalties, IOGC uses the gas and gas product production volumes submitted on the royalty statement. As such, all Alberta and BC gas and gas product volumes are subject to verification by IOGC. IOGC verifies Alberta and BC gas and gas product volumes as outlined below. Verification of volumes is based on acceptable thresholds, set by the IOGC analyst. The thresholds can be modified at any time, and will be actively reviewed by IOGC for reasonability.

Gas Volume Verification

On a monthly basis, each Royalty Payer with an active gas REN is obligated to report to IOGC their gas volume available for sale (VAS). By aligning the VAS submitted to IOGC and the total gas production reported to the appropriate regulatory authority, IOGC is able to compare the two values and determine the reasonability of the reported VAS.

There are two methods of verification of the gas VAS submitted on the royalty statement. One is based on total gas volume; the other is based on gas volume variance.

Gas Volume

A gas volume is verified if the monthly gas VAS reported to IOGC, and the monthly gas production volume reported to the appropriate regulatory authority, are both below the established threshold.

Gas Variance

There is inevitably a variance between total gas production and gas VAS. In most cases, the gas VAS is less than the gas production reported to the appropriate regulatory authority. The variance is due to metering differences, fuel, flare, vent and product shrinkage. However in many cases, these factors combined can only justify a variance of about 10%.

When a gas VAS is far less than the total gas production volume, it indicates the need for manual review of the statement and possibly an audit of the battery and/or production reporting review.

In rare cases, the gas VAS is greater than the gas production reported to the appropriate regulatory authority. This variance can be caused by negative metering differences.

Based on these scenarios, the gas VAS is verified if the variance between the total gas production volume reported to the PRA and the gas VAS reported to IOGC is less than the established threshold.

Product Volume Verification

On a monthly basis, each Royalty Payer with an active gas REN is obligated to report to IOGC the Indian Interest portion of their total product production.

Unlike gas production, there is no independent product volume with which to compare the product VAS reported by the royalty payer. As a result, a slightly different approach is taken to verify submitted product volumes.

Product Volume

Product volume is verified if the product VAS submitted to IOGC for the month being verified, and for the prior month, are both less than the threshold set by the IOGC analyst.

Month over Month Variance of Product Yield

Product yield from a production entity is fairly predictable in the sense that generally the same amount of product can be derived from the same amount of gas, presuming the composition of the gas remains the same. Based on this, we can say that product volume is verified if the month over month variance of product yield is less than the established threshold.

We use the total volume of products, excluding sulphur, in the calculation. We exclude sulphur from this calculation because it is measured in tonnes, while all other products are measured in cubic meters, and the value of sulphur is usually small compared to the value of the hydrocarbons.

6.2 Validation of Submitted Volumes

Selection Process for Volume Validation

IOGC will use a risk based volume verification process as referenced in the IOGC Volume Verification User Guide, to identify which production entities require a Production Reporting Review or Field Inspection. Other production entities will be reviewed as time permits.

When a Production Reporting Review or Field Inspection is conducted, IOGC will notify the royalty payer, by letter, prior to the review or audit start date. This letter will be formatted as outlined in the Production Reporting Review Handbook.

All correspondence will be copied to the Chief in Council or the First Nation oil and gas contact.

Review / Audit Process

IOGC will complete the Production Reporting Review or Audit and will provide a deficiency letter to the royalty payer, which clearly identifies the deficiencies noted during the review. This letter will be formatted as outlined in the Production Reporting Review Handbook.

When the royalty payer has satisfactorily addressed the concerns noted in the deficiency letter, IOGC will submit a closure letter to the royalty payer, stating that the issues raised have been satisfactorily addressed. This letter will be formatted as outlined in the Production Reporting Review Handbook.

All correspondence will be copied to the Chief in Council or the First Nation oil and gas contact.

Correcting Reported Volumes

Upon completion of the Production Reporting Review or Audit, where the audit reveals a deficiency in the volumes reported to IOGC, IOGC will revise the affected volumes (RIMS override). Where the audit reveals a deficiency in the volumes reported to the appropriate regulatory authority, IOGC will ask the royalty payer to resubmit its volumes to the regulatory authority.

When an override is created, IOGC will notify the royalty payer either via email or provide the royalty payer with an adjusted statement showing the revised royalties owed.

6.3 Submission and Retention of Volumetric Support Data

Volumetric support data is not submitted to IOGC on a monthly basis, for the following reasons:

  • For oil and gas in Saskatchewan and for oil in both Alberta and BC, production equals sales, and royalties are paid on production, therefore no support documentation is required for verification purposes.
  • With the exception of reported gas and gas products for Alberta and BC, all volumetric data is received directly from a third party data supplier and can be considered independently verified by the appropriate regulatory supplier.
  • The Alberta volumetric data is available to IOGC staff through the PRA website.
  • The volumetric backup is generally used to validate production and sales volumes, not for monthly verification of reported sales volumes.
  • The validation process will require companies to submit, on demand, support documentation for volume allocation.

6.4 Non-Compliance with Policy

Failure to submit oil or gas volumes, or failure to provide the requested volumetric support documentation, will result in escalation through the non-compliance process. This may include meetings with Corporate Executives and Provincial Regulatory Authorities and possibly Direction to Comply pursuant to section 46 of the Indian Oil and Gas Regulations, 1995 or other action including legal. IOGC will notify the royalty payer of this action by letter or email.

7. Responsibilities

7.1 Royalty Payer

The royalty payer must submit oil and gas volumes to IOGC no later than three months after the month of production.

The royalty payer must make available to IOGC within 30 calendar days of IOGC's request, support documentation as follows:

  • Test records: any records and documentation produced in the production proration testing of wells that affect measured volumes.
  • Proving records: any records and documentation produced in the proving of meters and calibration of the prover and all peripheral devices (if the prover and peripheral devices are owned and operated by the licensee).
  • Sediment and Water records: any records and documentation produced in the determination of relative oil/water percentages that affect volumes.
  • Delivery and receipt records: any records and documentation produced in the determination of delivery or receipt volumes.
  • Estimation records: any records and documentation related to the estimation of reported volumes, including estimation methodology, record of event, and approvals.
  • Tank gauging records: any records and documentation produced in the determination of reported volumes.
  • Volume loss records: any records and documentation for volumes lost due to incidents such as theft, spills, and fires.
  • Electronic Flow Measurement (EFM): any records and documentation (electronic or paper form) produced in the determination of measured volumes in accordance with the ERCB EFM requirements.
  • Any additional backup as listed in the IOGC Production Reporting Review Handbook Rev #4.

The royalty payer must retain volumetric support documentation for a minimum of 4 years.

Upon issuance of a deficiency letter, the royalty payer is required to provide a detailed response outlining what steps were taken to address the deficiency and what steps will be taken to prevent future occurrences.

The royalty payer will work with IOGC to arrange payment for any royalties owing resulting from the Production Reporting Review or Audit.

7.2 IOGC

The procedures for verification will be completed as outlined in the IOGC Volume Verification User Guide.

IOGC will complete the validation activity, resulting from receipt and analysis of the supporting dcumentation, within 90 calendar days of receipt of all requested supporting documentation.

IOGC will work with the royalty payer to arrange a re-payment schedule for any royalty overpayments resulting from the Production Reporting Review or Audit

8. Procedures

IOGC will post the Volumetric Policy and Production Reporting Review Handbook on the IOGC website.

The Production Division will make every effort to ensure that royalty payers are adhering to the guidelines specified in the Volumetric Policy and Production Reporting Review Handbook. Results will be included in the Production Division's annual reports.

Where instances of non-compliance are noted, the Production Division will take the action noted in Section 6.4.

9. Enquiries

Enquiries relating to this directive should be forwarded to:

Production Compliance
Telephone: 403-292-5887
Email: productioncompliance@inac-ainc.gc.ca

10. Service Standards

The Production Division will meet the deadlines noted in section 6 and 7.2.

APPROVED BY:

____________________

Executive Director
Indian Oil and Gas Canada
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