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Practice Guide to Auditing Oil and Gas Revenues

Design of the Financial Assurance Program

To reduce the risk of inheriting financial liabilities from abandoned oil and gas extraction sites, many governments have adopted laws and regulations that create obligations for oil and gas leaseholders to plan for the decommissioning of their oil and gas wells early on in an extraction project and to provide government with sufficient financial assurances to cover the eventual clean-up costs should the sites be abandoned (after a bankruptcy, for example).

Different mechanisms exist for such purposes, but often governments require leaseholders to provide financial guarantees (cash, securities and bonds, letters of credit, certificates of deposit, or other type) to ensure that there will be sufficient resources in the future to cover remediation costs for their oil and gas wells and facilities. In some cases, oil and gas companies that have an excellent credit rating and a solid financial situation are allowed to self-insure.

Performance auditors can examine whether the design of the financial assurance program is adequate to ensure that the government is protected from inheriting further liabilities from sites that may be abandoned in the future. To achieve this, governments need to update their relevant regulations periodically to ensure that they still reflect best practices and that any fixed contribution amounts are updated to take into account:

  • the actual costs of remediating oil and gas wells and facilities based on market conditions;
  • new remediation technologies;
  • changes in environmental or accounting standards; and
  • the implications of recent land claims decisions, where relevant.

Table 14 includes examples of knowledge of business questions about the design of financial assurance programs that auditors can ask during the planning phase about the design and implementation of financial assurance programs. Examples of related audit objectives and criteria are provided in later sections of the Practice Guide.

Table 14 – Design of Financial Assurance Programs: Examples of Knowledge of Business Questions


Knowledge of Business Questions

Establishing the financial assurance program

  • Has the government established a financial assurance program to manage the financial risks that accrue from the remediation of oil and gas wells?
  • Which laws, regulations, and policies provide the framework for collecting financial assurances for site remediation? When were these documents last updated?
  • Are there regulations that define the requirements (standards) that leaseholders must meet when decommissioning oil and gas wells and associated facilities (the basis for estimating remediation costs)?
  • Has the responsible organization determined the costs of various activities that would likely take place during a remediation project, to serve as a basis for assessing cost estimates provided by oil and gas companies?
  • Are there rules about how long a company can maintain an oil or gas well in a non-operational mode before it is finally capped and cleaned up?
  • Do the laws and regulations define a required frequency of review for the adequacy of financial assurances?
  • Do laws and regulations take into consideration recent land claim agreements (where relevant)?
  • Do program rules require the funds submitted by industry to be held in trust?

Roles and responsibilities

  • Are there documented roles and responsibilities of the organizations responsible to manage the liabilities related to site remediation?

Clear rules and guidance

  • Is guidance provided to leaseholders on how to calculate their expected financial assurances?
  • Is the guidance updated as necessary to reflect changes in applicable regulations and lessons learned from experience? When was the guidance last updated?
  • Are changes in requirements communicated to leaseholders in a timely manner?
  • Is there clear guidance to set out the circumstances in which the responsible organization may accept that a leaseholder self-insure?

Program reviews and updates

  • Are the remediation cost baselines that are used to establish the levels of financial assurances regularly reviewed and updated? When was the last review completed?
  • When reference remediation costs are updated, is the adequacy of financial assurances held by the organization reassessed and corrective measures taken in a timely manner?

Once auditors have obtained answers to their knowledge of business questions, they can better assess the risks related to the design of the financial assurance program.

Auditors should consider including the design of the financial assurance program in their audit plan if their preliminary audit work indicates that:

  • The laws and regulations supporting the creation of a financial assurance program are very old and do not reflect current industry practices.
  • There are no rules about how long a company can maintain an oil or gas well in a non-operational state and statistics show that numerous wells have lain dormant for decades instead of being decommissioned and cleaned up.
  • There are indications that the responsible organization is too permissive in allowing oil and gas companies to self-insure or is not conducting all the necessary checks before taking such decisions.
  • Guidance for oil and gas companies about financial assurances does not reflect legislative or regulatory changes.
  • The remediation cost baselines that are used to establish the levels of financial assurances that should be provided by oil and gas companies are not regularly reviewed and updated.

This list of potential audit issues is indicative, not exhaustive. It is the responsibility of audit teams to review and analyze the information they collect in the planning phase in order to identify and assess significant risk areas. Only after conducting this work will auditors be able to decide whether to include the design of the financial assurance program in their audit plan.