OIL & GAS ALERT: COPAS Overhead Adjustment Factors

    1 April 2008

    For the many organizations that are subject to an Operating Agreement, they will find that most of those Operating Agreements (onshore) have, as Exhibit C, the COPAS Accounting Procedures.

    If this is the case, then you know that you (or your Operator) are entitled to adjust the Drilling Well Rate and Producing Well Rate (the overhead provision) on April 1 of each year by the increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers, based on comparing the last calendar year to the preceding calendar year, and as determined by the Bureau of Labor Statistics.

    The problem is that the last year for which the BLS published the index was 2002. Since then, pursuant to COPAS’ Model Form Interpretation 50, COPAS has used two other indexes as substitutes. MFM 1984-1 (April, 2004) modified the provision to say that the rate would be modified “by the percent increase or decrease published by COPAS.”

    As we enter a period of increased risk of inflation, you may want to consider modifying your existing agreements to adopt these two indexes and MFM 1984-1. You certainly want to deal with this issue in your new Operating Agreements.