Audit of Southern Oil and Gas

Modernization of the Indian Oil and Gas Act

Modernization of the Indian Oil and Gas Act ("The Act") and associated regulations is a key priority for IOGC. This process is expected to take several years and involve extensive consultations. Amendments to the Act received royal assent in May 2009. A joint process is currently underway with IOGC, oil and gas producing First Nations, the Joint Technical Committee, and the Indian Resource Council to develop the new regulations.

The IOGC Modern Act, Regulations and Systems (MARS) project scope includes significant effort and activity in developing new regulations, revising business processes ('future state'), and making enhancements to information systems. Due to the volume of the regulatory amendments expected, the work has been divided into multiple modules and phases. In preparation for new regulations IOGC modified its organizational structure, effective April 2013, to better support anticipated operational requirements.

Modernizing the Indian Oil and Gas Act and its associated regulations is intended to address the existing regulatory gap and level the playing field between off-reserve and on-reserve oil and gas activities. Amendments to the Act will also reduce barriers to economic development and will allow the federal government to better fulfill its obligation to manage oil and gas resources on First Nations lands.

Modernization of the Indian Oil and Gas Act

Modernization of the Indian Oil and Gas Act ("The Act") and associated regulations is a key priority for IOGC. This process is expected to take several years and involve extensive consultations. Amendments to the Act received royal assent in May 2009. A joint process is currently underway with IOGC, oil and gas producing First Nations, the Joint Technical Committee, and the IRC to develop the new regulations.

The Modern Act, Regulations and Systems (MARS) project scope includes significant effort and activity in developing new regulations, revising business processes ('future state'), and making enhancements to information systems. Due to the volume of the regulatory amendments expected, the work has been divided into multiple modules and phases. In preparation for new regulations, in April 2013, IOGC modified its organizational structure to better support anticipated operational requirements.

Modernizing the Indian Oil and Gas Act and its associated regulations is intended to address the existing regulatory gap and level the playing field between off-reserve and on-reserve oil and gas activities. Amendments to the Act will also reduce barriers to economic development and will allow the federal government to better fulfill its obligation to manage oil and gas resources on First Nations lands.

5.1.1. Policy and Procedures Documentation

In order for IOGC to fulfill the Crown's fiduciary and statutory obligations related to the management of oil and gas resources on First Nation lands, it is important that IOGC establish policies and procedures which detail key responsibilities, activities, and process steps. Documented policies and procedures help to ensure IOGC oil and gas agreements are administered accurately and consistently, clarify roles and responsibilities, and provide guidance to support IOGC employees.

The audit found IOGC has developed several policies, procedure documents, and process maps which detail key process steps and control points. As noted above, IOGC management has also developed control checklists and routing slips to ensure quality and standardization throughout the lifecycle of agreements and ensure processes are performed in accordance with IOGC policies. Audit testing found that IOGC staff generally perform control procedures in accordance with these procedural documents and process maps.

While most key IOGC processes are adequately documented, the audit found a couple exceptions in documentation of policy and procedures, including:

• IOGC assists First Nations to dispose of their oil and gas rights through the granting of sub-surface agreements, including helping to negotiate these agreements with companies and ensuring fair returns for First Nations. Among the items negotiated are bonus terms (permit and lease) which are paid to First Nations. In order to determine the terms of the bonus, IOGC Sub-surface Negotiators reference bonus terms that have been established for lands that are located in close proximity to the new oil or gas site (i.e. within a one-mile radius). If there are no operating wells within close proximity, the Sub-surface Negotiator takes into consideration the bonus terms that have been established for lands that are located within a two-mile radius, then three-mile radius, and so on. The audit, however, noted that this process of determining bonus terms is not formally documented; and,
• A key monitoring responsibility of the IOGC environmental group is to perform field inspections of oil and gas facilities to monitor industry compliance with the environmental terms of oil and gas agreements and to ensure the adequacy of site reclamations prior to the surrender of agreements. Performance of these site inspections often requires IOGC Environmental Analysts to work alone in remote locations, with limited communications connectivity. The audit noted that there is no IOGC "work alone" policy established to define roles and responsibilities and related "work alone" safety procedures are not formally documented.

Without adequately documented procedures for all key practices, there is an increased risk that roles and responsibilities are not clearly understood, processes are inconsistently applied by staff, or rationale for key decisions are not adequately documented.

5.1.2. Maintaining Supporting Control Documentation

AANDC and IOGC operates pursuant to the Indian Oil and Gas Act and the Indian Oil and Gas Regulations and there is a requirement that all necessary supporting documentation for oil and gas sub-surface and surface agreements be properly maintained, and key technical IOGC personnel and delegated authorities perform adequate review and approval at key stages of the process.

As noted above, to ensure accuracy, completeness, and validity in the administration of oil and gas agreements, IOGC has implemented controls including procedural documentation, process maps, control checklists and routing slips.

The audit examined a sample of 90 oil and gas agreement (e.g. new surface agreements, sub-surface, amendments, assignments, surrenders, etc.). In all samples reviewed, the audit expected to find that controls were followed consistently and as per IOGC procedural documentation. While almost all 90 agreements reviewed included appropriate authorizations and approvals, a few minor exceptions were noted such as missing an acreage confirmation or a letter informing the First Nation of an assignment. A few minor instances were also noted where control checklists for processes such as issuance of surface agreements and surface amendments were completed; however, there was no evidence on the completed checklist of approval from the responsible manager.

When key documentation is not properly maintained or controls are not followed as intended there is increased risk of not being able to sufficiently demonstrate evidence of management due diligence, review and approval.

5.1.3. Monitoring Activities

IOGC is responsible for collecting oil and gas royalties on behalf of First Nations for all oil and gas produced from First Nation reserve lands; therefore, it is important that IOGC have practices in place to monitor oil and gas production and prices and verify, assess, and collect moneys such as bonuses, royalties, and rents. It is also important that IOGC make sure submitted royalty data is validated and verified and moneys collected are managed appropriately.

The audit found that IOGC has implemented a monitoring and assurance framework to validate and verify information reported to IOGC and manage the collection of monies. Procedure manuals and business rules are in place to guide IOGC practices for the collection of funds and management of suspense accounts. The audit found that IOGC has established practices to regularly monitor the status of agreements, conduct periodic rent reviews, and provide companies with monthly statements of account.

Royalty payers are required to submit royalty information (i.e. production volumes and pricing) through IOGC's electronic submission system. As production and price information is self-reported by companies to IOGC, IOGC has implemented assurance programs and monitoring activities to verify that company production volumes are reported accurately for well and production entities to ensure proper reporting and payment of revenues for all parties involved. As part of this assurance program, prices reported are verified and well production and royalty payments are subject to periodic audits which ensure proper reporting and payment of revenues for all parties involved.

While many of the IOGC monitoring framework activities were found to be well controlled, the audit found a few areas for improvement, as noted below.

The audit found that parts of the price, production, and royalty review processes are not fully documented. Specifically, although risk factors are considered in selecting companies for price, production, and royalty reviews, the audit noted that the approach and selection rationale is not formally documented.

The reporting of oil and gas production to provincial agencies is mandatory, in accordance with their respective regulatory requirements. To confirm that production information is being reported accurately and on a timely basis by production entities, IOGC subjects operators to periodic production reporting reviews. As per the IOGC Production Reporting Handbook, selecting which property or facility to review is determined based on selection criteria determined by IOGC (e.g. volumes, value of production, audit history, other factors such as complaints, etc.). An independent third party reviewer performs the review, assesses the information reported (e.g. schematics, reports, factors, procedures, formulas, tests, etc.), and determines any deficiencies or discrepancies in the production reporting.

When a review is completed, any deficiencies or discrepancies found during the review are expected to be communicated to the operator and the operator 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 of the non-compliance. Upon receipt of an operator's response letter, each item in the deficiency letter is expected be checked by the reviewer to ensure a proper response has been received. When the operator has satisfactorily addressed the concerns noted in the deficiency letter, a closure letter is expected to be submitted to the operator stating that the items raised have been satisfactorily addressed. Final approval of the operator response is then provided by IOGC.

It was noted during the audit that no production reporting reviews to facilitate IOGC's production volume validation process were completed in 2012-2013. This was due to the fact that the contracting vehicle in place for an independent reviewer expired and no new contracting vehicle was put in place as the priority focus was on regulations modernization. In addition, it was noted that the risk matrix (i.e. selection criteria) used to select which property or facility for production reporting review has not recently been updated, and is considered by IOGC to be out of date.

Lastly, while IOGC reported that independent reviewers do review operator responses to verify that operator actions will adequately address identified discrepancies and deficiencies, the audit found that the review and commentary by the independent reviewer is not adequately and consistently documented as per the IOGC Production Reporting Handbook.

When the rationale used to select companies, property, or facility for review is not up to date or not documented, there is an increased risk that monitoring activities performed may not address the most significant priorities or risks. Without adequate verification of operator production reporting information, there is a risk that production report information is not accurately reported. Lastly, without proper evidence of review of operator action plans, there is increased risk that operator responses do not fully address the identified discrepancies or deficiencies.

5.1.4. Agreement Processing Approach and Performance Measurement

In order to balance control requirements with available support and resources, it is important that IOGC follow a risk-based approach to processing oil and gas agreements. In addition, it is important that performance measurement strategies accurately reflect the desired outcomes and management monitor performance against planned results.

IOGC is responsible for processing a variety of transactions related to oil and gas agreements, including issuing and terminating surface and sub-surface leases, as well as assigning lease interests. While some transactions are simple and can be processed quickly, others are more complex and require negotiation with the company and the First Nation involved in order to process. IOGC has developed detailed procedures to process each type of transaction, which include completing checklists that are reviewed and approved by the Supervisor and Manager. As the workload is sometimes greater than the resources available, lease issuance agreements take precedence in processing. These types of transactions are considered higher risk, and their status is followed up on routinely by the companies and First Nations involved.

An assignment of a company's interest in an oil and gas contract occurs when a company sells or transfers an interest in the contract to another company or companies. When a company assigns its interest in a control, such as a permit or oil and gas lease, the company must obtain approval from IOGC, who reviews the assignment to determine whether it is in accordance with the regulations. IOGC can refuse an assignment for a variety of reasons, including if a royalty payment is outstanding, a party to the assignment is in default, the assignment is not properly executed, or the assignee cannot demonstrate sufficient financial ability to fulfill its obligations. Management noted IOGC is currently experiencing a backlog in processing assignments of agreements. Audit file testing of 20 assignments found they averaged approximately 1 year from receipt of assignment notification until completion.

While control checklists are used to ensure consistency and completeness, the audit found that a risk-based approach is not used to process surface agreement activities, despite some transactions being considered higher risk than others. In addition, performance indicators used by IOGC were found to measure only some aspects of the process (i.e. service standards for acknowledging receipt of an application) rather than the entire processing time, and therefore do not highlight the fact that completion of transactions can sometimes be delayed significantly.

IOGC has begun an activity to develop process maps of desired future state processes to support the new Act and regulations. During 2013-14, design state and future state process mapping will continue with a focus on royalties, royalty-related work areas. As part of this initiative, there is opportunity for IOGC to review control requirements and performance measures in support of the new regulations.

Without an approach which balances control requirements with risk and available resources, there is increased risk that resources are not optimized, resulting in slower processing overall and potential client dissatisfaction or liabilities. In addition, by not having performance measures that measure a complete transaction, there is risk that that management will not be able to identify potential process bottlenecks or sufficiently communicate actual processing times to clients.

5.2.1. Resource Information Management System (RIMS)

It is critical to have information management systems which capture, process, and disseminate accurate and timely data and information to support IOGC in the efficient and effective processing and administration of agreements. It is also important that these systems keep pace with changes in the business environment, and with provincial and industry advances in administration of and gas agreements. An important aspect of information management systems is to ensure there is effective governance and a structured and orderly approach to manage changes to information systems, introduce new systems, and manage the eventual decommission of legacy information management systems.

With regards to IOGC, the 'Resource Information Management System' (RIMS) is used to capture information related to oil and gas agreements. RIMS was developed with the objective of facilitating the accurate and timely processing of information, as required by IOGC. The audit found that RIMS captures a significant amount of information and provides a good base level of operational support for IOGC. As an information management tool for capturing and tracking information, RIMS was found to be integral to many of IOGC's business processes and mandated responsibilities.

Upgrades to RIMS have been proposed as part of the Modernized Act, Regulations and System (MARS) project, as many developments have occurred in the oil and gas business environment over the past few years and RIMS is a crucial part of IOGC activities within this environment.

The initial proposed solution for upgrading RIMS to better support new Indian Oil and Gas Act regulations, which included significant system upgrades and enhancements, was deemed too cost-prohibitive to pursue (i.e. full replacement of RIMS). As such, IOGC is now reviewing business requirements and examining options for modernizing RIMS within a reduced budget. A reduced-scope, focused, and modular solution to enhance the current RIMS platform is being considered. A revised business case and action plan is being developed and priority is being given to areas of greater need (e.g. royalty management).

Given the change in direction, a backlog of RIMS change requests now require review and prioritization by IOGC management to determine which enhancements can be managed incrementally within RIMS, or require inclusion in the revised business case for RIMS2. At the time of the audit, an IOGC Steering Committee and working group had recently been established to review and prioritize requested changes to RIMS; however, given the Steering Committee was newly created, the audit was unable to conclude on its effectiveness.

A formal and effective governance mechanism or change management practice is essential for the RIMS initiative. Without one, there is an increased risk that change requests will be inappropriately prioritized so that "must have" changes to RIMS are not identified and implemented in a timely manner.

5.2.2. Information available on IOGC Website

As the regulations and requirements for on-reserve oil and gas activity are unique, it is important that accurate and timely information is available to stakeholders (companies and First Nations) in order for them to understand what is required of them. On-reserve oil and gas activity accounts for only a very small portion of oil and gas activity in Alberta and Saskatchewan, and so these unique regulations are often not familiar to industry, as companies are more familiar with provincial regulations.

It was noted during the audit that while there is a significant amount of information available on the IOGC website, information on regulations and processes for on-reserve oil and gas activity is not always up-to-date. Specific examples include information related to environmental procedures, and royalty and production requirements.

Without providing accurate and timely information that is required to inform industry stakeholders on IOGC's practices, there is an increased risk that industry will not initiate or maximize its on-reserve oil and gas activity, therefore impeding on First Nation's ability to realize economic development.

Recommendation:

No recommendations were identified in this area.