Independent Audits: A Strategic Necessity for Non-Operating Partners in Upstream JVs

Why Independent Audits are Essential for Non-Operating Partners in Upstream JVs

In upstream oil and gas joint ventures (JVs), non-operating partners (NOPs) rely heavily on operators to manage the project's day-to-day operations and financial reporting. While this structure is efficient, it creates a significant dependency on the operator’s accuracy, transparency, and decision-making. For NOPs, particularly those in unincorporated joint ventures (UJVs) or operating across different countries, independent audits are a critical and cost-effective way to safeguard their interests.

Here’s why every NOP should exercise their right under the Joint Operating Agreement (JOA) to conduct independent audits:

1. Cost Recovery and Financial Assurance

Operators handle large budgets, and even minor discrepancies in cost allocation can lead to significant financial consequences. Independent audits ensure:

• Accurate cost allocations, preventing JV funds from being misused.
• Identification of unjustified overheads or non-compliant expenditures.
• Confidence in the accuracy of revenue distribution.

Even small corrections in large-scale projects can lead to substantial recoveries, making audits a high-return investment.

2. Oversight Across Multiple Jurisdictions

For NOPs from different countries, managing projects with financial accounts in yet another country adds complexity. Independent audits help:

• Navigate jurisdictional financial discrepancies and ensure compliance with local tax and regulatory frameworks.
• Verify proper application of exchange rates for currency conversions.
• Ensure cross-border tax obligations and transfer pricing align with international standards.

3. Red Flags: Identifying Non-Competitive Contracts

One of the most critical aspects of an audit is uncovering red flags, such as:

• Non-competitive contracts awarded to service suppliers with ties to the operator. These arrangements may lead to inflated costs and conflicts of interest.
• Irregularities in procurement or contractor selection processes.

Audits provide transparency and assurance that the JV operates in a fair and competitive environment.

4. Risk Mitigation

In today’s uncertain world, risks extend beyond finances. Operators make operational decisions that carry environmental, geopolitical, and reputational risks. Independent audits:

• Highlight compliance gaps in safety, environmental, and regulatory standards.
• Ensure risks like cybersecurity vulnerabilities or geopolitical exposure are adequately addressed.
• Reduce the likelihood of future liabilities or project delays.

5. Enhancing Transparency and Building Trust

Independent audits foster transparency between the operator and NOPs. They help confirm:

• Adherence to the terms of the JOA.
• Consistency and accuracy in financial and operational reporting.

This transparency builds trust, ensures accountability, and strengthens the relationship between JV partners.

6. A Small Cost for High ROI

While independent audits come with some cost, they often yield significant financial and operational benefits:

• Recovering overcharged expenses.
• Preventing long-term risks from poor operator management.
• Providing confidence in the JV’s financial health.

In comparison to the financial and reputational exposure of not auditing, the cost of an independent audit is negligible.

Conclusion

In upstream JVs, independent audits are not just a contractual right—they’re a strategic necessity. They provide financial assurance, mitigate risks, and build trust, ensuring NOPs protect their investments and influence project success.

Call to Action: If you’re a non-operating JV partner, make independent audits a cornerstone of your oversight strategy. Proactively safeguarding your investment today can prevent financial and reputational issues tomorrow.

My recommendation is to contact my friends Dennis Ochmann and Athar Khan of JV Audit Services (www.jv-auditservices.com) who specialise in this sector.

#RiskManagement #EnergyLeadership #OilAndGas #NonOperatingPartners #JVManagement