By Deborah Kirkpatrick
Best Practices
Closely monitoring your oil sales is a best practice and involves considering several different factors that can impact those sales. To be truly successful, it requires production accounting, field operations, marketing, purchasers, and any 3rd party transporters to have good communication and be working in tandem. You need good measurement practices established, and it’s helpful to have some automation in place so variance analysis can be conducted throughout the month and not left entirely to the month-end close. Finally, the production and revenue groups need to reconcile the volumes each received to ensure proper payment was made.
Tank Calibration Tables
Every oil tank should have a tank calibration table, also called strappings or tank tables. When a tank is first set on location it might be given a generic table until a first sale has occurred. Some organizations use generic tables for all their tanks, but I prefer to try and get every tank strapped with true measurements.
Strapping every tank used to be a standard practice in the industry and handled automatically by purchasers. In the past, new tanks were filled with water to create the tables before the first sale ever occurred. I’ve recently noticed some pushback from purchasers and marketing teams on doing this. Cost is likely a factor. However, since this determines the barrels your organization settles on for every sale that is trucked, I feel obtaining real straps for every tank is an important goal. Horizontal tanks require actual measurements since every quarter inch is different.
A recent argument submitted by a marketing group is that tank straps aren’t needed when tanks are going to be put on pipeline. I disagree and here’s why—
- That pipeline is going to go down for maintenance at some point and you’ll likely want to be able to sell oil during that period. Sales will then need to be taken off the load line at the tank.
- There’s also often a short period when a well first comes online that the pipeline and associated LACT aren’t ready, so first sales will need to begin at the tank.
Generic Vs Actual Example
Let’s assume you’ve drilled a new well that’s going to be put on pipeline and it starts producing 1,500 bbls per day but first sales will need to occur off the load line at the tank. If your tank isn’t strapped, then you’re agreeing to accept whatever sales volume the purchaser provides on a ticket.
Let’s pretend you put a temporary generic tank table in place for that period, then received an actual tank table a few days later. If the difference between the generic table and actual strapping was only 1%, it would still translate into a potential loss of 15 bbls per day. If it takes a week to get the new LACT running, you potentially lose 105 bbls to the purchaser. While that may not sound like much, multiply it by the contract’s price per bbl then consider if it would’ve been worth paying the $1,200-$1,500 to get a tank strapped? I’ve seen this occur where it took two months to get a new well connected to pipeline.
1,500 bbls day X 1% = 15 bbls difference day
15 bbls day difference X 30 days = 450 bbls
450 bbls X $70 bbl = $31,500 potential loss per month to operator
Now let’s assume that an organization has only been using generic tank tables and they operate 1,000 tanks. Let’s also imagine that half of those tanks have at least one sale every month while the other half are building inventory and don’t sell as often. I’m again going to use a 1% difference between the generic table and an actual tank strapping for this example.
180 bbl average oil sale X 500 tanks that sell monthly = 90,000 bbls
90,000 bbls X 1% difference = 900 bbls mo generic vs actual tables difference
900 bbls mo difference X 12 mo = 10,800 bbls yr generic vs actual tables diff
10,800 bbls yr X $70 price per bbl avg = $756,000 potential loss in annual sales
The $756,000 only reflects the 1% variance on half of the tanks that have a sale monthly. It doesn’t account for the additional sales throughout the year on the tanks that build inventory between months. Could this work the other way and be in favor of the operator with the purchaser overpaying for bbls? It could, but I don’t think it’s as likely. What if the variance was smaller, less than 1%? How would you know how big the variance truly was unless you had an actual tank strapping to compare against a generic table? Over the life of the well you’d still be settling on generic measurements that may or may not be a true reflection of your actual sales. Get tanks strapped. I’ve seen instances where the variance was larger than 1% in my career.
Volume Metered On-Metered Off Trucks
Oil is generally metered off a truck at the purchaser’s delivery point. Many times, oil is metered as it’s put onto a tanker truck as well, and those two volumes should be close if you’re able obtain both volumes and compare them. Purchasers won’t always provide both volumes, even when asked. Generally, you’re only allowed to see the volume metered onto the truck. As the operator, you have no knowledge of when the meter on that tanker was last calibrated and you certainly had no company representative there to witness the calibration. I think most purchasers are honest and try to pay the operator fairly for their barrels, but I’ve seen situations where the volumes paid under a generic tank table differed by 15+ bbls per load when those same sales were recalculated using actual tank calibrations. And the purchaser refused to make prior period corrections to those initial sales because doing so wasn’t negotiated up front in the sales contract by marketing, costing the operator over $10,000.
Everyone Needs to Use the Same Table
You also need to make sure that any 3rd party transporter hired by the purchaser is using the same tank strappings that you and the purchaser are using. Many larger purchasers operate their own tanker trucks but there are some who outsource to small “Mom and Pop” haulers. Make sure everyone is using the same calibrations from your field operations, software setup, purchaser, and whoever is transporting the bbls.
Actual Tables are Required by ONRR and BIA
If an organization operates federal or Indian wells, actual tank calibrations are required to be obtained and kept on location to in accordance with 43 CFR 3174, which replaced the old BLM Onshore Order 4. Tank tables are a standard audit request by ONRR and can result in fines if not provided.
Isolate the Tank
Years ago, bigger companies employed gaugers who went around and checked a tank’s kolor kut and isolated a tank before a sale occurred. I think this is now largely handled by very busy field operators and few companies continue to employ gaugers.
If you’re still producing into the same tank that you’re selling out of, there is no way to know how much oil was truly sold because you cannot obtain a true open or closing gauge since oil is still filling up that tank. When a purchaser comes to buy a load and a tank isn’t isolated, they’re going to leave a ticket on location with only the bbls they purchased listed and perhaps a note that it was a “TIP” tank, or tank in production. There is no way to verify if the sales barrel calculation was correct without proper gauges, so you’ll be settling on whatever is shown on that TIP ticket. An unscrupulous hauler could easily steal extra barrels since those barrels aren’t recorded anywhere. Always isolate your tanks prior to a sale. The production accounting team can’t fight for missing barrels if there are no gauges to work with.
Truck and Pipeline LACTs
I’ve worked with the two kinds of LACT units: truck and pipeline. Truck LACTs are used to help quickly load a transport truck, then the barrels are trucked off location. Pipeline LACTs are connected directly to an oil pipeline. Both need to be maintained and calibrated regularly. If the LACT isn’t in working order, then oil sales will likely occur at the tank’s load line and hopefully that tank has a proper tank strapping on file.
Good Grindouts
Getting a good grindout following a calibration is critical. If you have a LACT with a higher than 2% BS&W grindout, there should be no additional sales off that location until the situation has been reviewed and a new grindout obtained. If an operator continues to sell loads through a truck LACT with BS&W > 2%, they’ll lose barrels to the purchaser. I recall an event where a lot of water got into a truck LACT sample pot and the BS&W rate used for the entire month by the purchaser was 18%. The individual trucked loads each had a rate of less than 1%. Because the purchaser was settling using the truck LACT, per the contract, and the sample pot wasn’t checked until month-end, roughly 12,000 bbls in gross sales were reduced by 18% resulting in 2,160 bbls labeled as BS&W by the purchaser. It was a new well that had just come online with plenty of flush production.
2,160 bbls counted as BS&W X $70 price per bbl = $151,200 loss to the operator for entire month’s sales
In the above instance, the purchaser refused to negotiate or accept that the individual trucked loads all had a BS&W of less than 1%, even though copies of the run tickets were provided as proof. There was something wrong with the collection in the sample pot and since sales were contracted to settle at the truck LACT, they refused to budge on what they had determined net sales to be. The operator left $151,200 on the table over a bad sample pot grindout.
In a separate instance involving a truck LACT, a bad grindout was flagged early in the month and a new one obtained within a week. This lessened the negative impact since part of the month had to be paid using the bad grindout, but the rest of the month was saved since a new one was quickly obtained. Had the calibration and first grindout been witnessed by a company representative and all sales halted until the new grindout was obtained, there wouldn’t have been any lost sales. LACTs can be programmed to disallow sales if the BS&W reading is above a certain point. In this instance, I’m not sure if the LACT wasn’t programmed or malfunctioned.
A good production accounting team will try to keep an eye open for bad grindouts and look at the LACT factors provided on a calibration, then compare them against the monthly sales tickets to ensure the right factors were used to calculate bbls sold. When truck LACTs are being employed, a quick sum of the individual trucked loads should be compared against the truck LACT meter readings to ensure all sales were included and nothing is missing or out of line. Make sure beginning and ending LACT odometer readings match tickets.
Review Any Variance Greater Than 1 Barrel
Statements are received at the end of the month for oil sales and every sale should be compared against its associated run ticket. Any disparity > 1 bbl between what the field operations team estimated the sale volume to be versus the volume on the run ticket versus the barrels being paid on the statement should be investigated. If your tanks are strapped, everyone is using the same tank tables, and your tanks are isolated at time of sale then your variances should be within 1 barrel. Obtaining electronic tickets regularly throughout the month assists in finding some of these discrepancies earlier and can be addressed with the purchaser and field faster, resulting in a quicker close. I’ve stepped into situations where production teams were accepting large variances of 20-30 bbls on a single load and had to advise on how to review those differences.
Pipeline LACT sales should have an even tighter variance, providing everyone is using the correct LACT factors and coefficient. Purchasers do make mistakes and it’s ok to question a situation when there’s a variance. Sometimes LACT factor changes aren’t communicated, or keypunch mistakes were made on tickets. Errors can occur on the operator side as well. I’ve caught numerous volume mistakes by manually recalculating net barrels using the appropriate temperature and gravity adjustment tables then notifying a purchaser and requesting bbls be recalculated.
Review Total Variances by Statement
After a statement has been matched against every ticket and a variance calculated per ticket, add your variances up for a grand total for that statement. Current software is smart and can quickly do this analysis. Watch for trends and work with your purchaser to keep those differences low. Be sure to communicate to the marketing team any problems you have with a purchaser so the issues can be taken into consideration the next time contracts are bid out or renewed.
Production vs Revenue Reconciliation
The production group receives purchaser statements that need to be vetted against the check stubs received by Revenue. It’s not uncommon for the two groups to receive different information. When this occurs it’s important for both groups to go back to their individual contacts at the purchaser and find out what happened. The statements received by production accounting are generated by a different department within the purchaser’s organization than the group that processes accounts payable and generates payment. Sometimes changes to volumes or pricing isn’t communicated timely between the purchaser’s departments, so different settlement data is sent out to operators. Check the pricing on the statement and check stubs against the monthly crude oil bulletin underpinning the contract or contact marketing to verify the correct pricing was used.
Take-In-Kind Owners
Owners who take their oil in-kind are rare, but this does occasionally happen. My experience in these situations is that the owner needs to be given two choices:
- Set their own tanks on location and manage their own sales.
- Sell to the operator’s purchaser but obtain their own contract with that purchaser.
I’ve only seen one time in my career when a marketing group allowed a TIK owner to use the operator’s LACT and sell to a different purchaser than the operator did. Keeping track of sales belonging to the operator versus sales for the TIK owner took an extraordinary amount of effort by the production accounting team and caused several problems. I don’t recommend this option.
Review Rejected Load Fees
Some purchasers will include rejected loads on their monthly statement, deducting them from the total balance and others will bill an operator separately. Turndown tickets, also called rejected loads, should be tracked and analyzed every month. Some questions to ask:
- Did a hauler show up on a location looking for a load to haul and hadn’t been dispatched?
- Did they go to the wrong location?
- Was there too much BS&W in the tank?
- Was it the end of the day and the hauler wanted to go home, turned the load down then hauled it the next day?
Contracting with a second purchaser to act as an “emergency hauler” is unusual but I’ve seen it. A field ops group claimed the primary purchaser didn’t grab loads fast enough and preferred to call the emergency purchaser a day or so after the primary dispatch had been notified. Emergency purchaser might arrive first, haul the load, but no one remembered to notify the primary purchaser. This resulted in over $20,000 in rejected load fees in a single month. There were so many turndown problems in that area it averaged over $45K in fees over the course of a year. Another situation involved putting wells on an auto-haul list but failing to review the list and make adjustments as production declined resulting in avoidable turndown fees.
Pay attention to those fees. Some of them you can fight and have deducted from your monthly bill. Look to see if they’re being left by the same drivers? Are they on the same locations repeatedly? I tracked these for an organization for a year and most of the time the turndown tickets were being left for “No Oil in Tank,” meaning no one remembered to phone the other purchaser when a load had been grabbed and both purchasers had been called. My analysis also showed the majority were occurring on the same two routes. Those fees would’ve been easily avoidable with better communication.
Summary
There are factors and situations too numerous to mention that can impact your sales volumes. Following a set of best practices will help mitigate and avoid many problems that can cause those sales decreases. If your sales variances are > 1 barrel and you’d like your practices and processes reviewed, please give me a shout to schedule an assessment. I’d love to help you achieve your goals.
