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Alberta Energy and Utilities Board

year ended March 31, 1999

Scope of audit work In addition to the annual financial statement audit, the following work was completed:

• A review of the controls related to the Board’s well and production reporting systems. This included a review of the Board’s plans to upgrade or replace these critical systems.

• A review of plans to address the Year 2000 issue with regard to the Board’s many automated systems.

Well and production reporting systems

The Board operates three computer systems that are critical to its own and others’ success. The three systems, which I will refer to collectively as the Board’s well and production systems, are:

There are three critical

Board systems • The Basic Well Data system, which records well

characteristics such as location, depth, drilling date, and operational status.

• The Production, Injection and Disposition system, which collects and records the monthly production and

disposition of oil, gas and other fluids.

• The Gas Gathering and Processing system, which

collects and records the monthly volumes of gas gathered at and processed by gas plants.

The Board uses the data from these systems to monitor, regulate, and report industry activities. As well, these systems interface with Department of Energy systems that calculate royalties and freehold mineral tax and that administer resource allocation in the Province.

The Board needs to upgrade or replace these systems

For many years, the Board has considered the upgrade or replacement of these three systems. The technology used in the systems has been superseded and the Board’s three-year plan calls for a migration of these systems to newer

technology. The systems themselves are reaching the end of their life cycle. In particular, the Gas Gathering and

Processing system is antiquated, inefficient, and limited in its functionality. For example, there is no on-line inquiry available; all queries are run in batch and printed overnight.

As a result, it is difficult to determine which Gas Gathering

and Processing data errors have been corrected and which errors have not.

Broader strategic reviews in the Ministry have preempted the system upgrades/replacements

While the Board would like to upgrade its well and

production systems, the Ministry has for several years been attempting to streamline the process of industry data

reporting, collection, and storage. As a result, to the Board it always seemed imprudent to press forward with upgrade or replacement while the broader strategic reviews were underway. The effect has been that the upgrade or

replacement of the Board’s systems has been delayed for a number of years.

The Ministry again plans to streamline the reporting and storage of data

The most recent of these strategic reviews began in 1997.

By January 1998, a joint Department, Board, and industry task force made a number of recommendations intended to simplify the natural gas and by-product business, including production reporting, data storage, and royalty calculation.

One recommendation called for the rationalization of data collection and storage within the Ministry by combining ownership data collected by the Department with the production data collected by the Board.

There is still uncertainty regarding VIPIR’s scope and impact

Carrying forward the task force’s findings, the Ministry initiated the Volumetric Infrastructure Petroleum

Information Registry (VIPIR) project. VIPIR is the project that will implement the task force recommendations. The total budget for the VIPIR project is $22 million over three years; a management structure has been created and work began in 1999-2000. One of VIPIR’s first tasks will be to scope out in detail the deliverables, costs, and benefits of the task force recommendations. At this writing, VIPIR, in consultation with the Ministry and industry, has not yet concluded how much of the Board’s production data will be combined with the Department’s data in the proposed Shared Information Registry, or even whether the Registry is a viable concept.

In addition, the impact of VIPIR on the existing Board and Departmental systems has not yet been clearly defined.

I have two concerns with regard to the Board’s three systems

In my view, two risks have evolved as a result of these circumstances. First, because decisions have again been delayed by a broader strategic review, the Board does not have a plan to upgrade or replace its three well and

production systems. Second, key controls related to these three systems should be immediately enhanced, thereby reducing risks to data integrity. Data integrity is critical to

the quality of resource allocation decisions and to the calculation of resource revenues.

Strategic information systems plan

Recommendation No. 26

It is recommended that, once the scope of the Volumetric Infrastructure Petroleum Information Registry project is determined, the Alberta Energy and Utilities Board develop a strategic information systems plan to support the business needs now served by its well and production systems.

Currently the Board does not have a strategic plan regarding these systems

Due to the uncertainty generated by initiatives such as VIPIR, strategic plans have not been prepared with regard to the Board’s well and production systems. Until this year, annual operational plans had been prepared, but none were created for 1999-2000 due to the uncertainty created by the VIPIR

project. Should the Shared Information Registry concept go forward, management has indicated that the VIPIR project will fund any new interfaces required to link the Board’s systems with the Registry. If, in addition to building new interfaces, the VIPIR project finances the upgrade or

replacement of the Board’s systems, the Board will have an answer for its systems funding issues. However, any other scenario is likely to pose challenges for the Board. The cost of upgrading or replacing these systems will be significant and other IT projects within the Board have higher priority.

A strategic plan would be the foundation for responding to the Board’s business needs

A strategic plan would establish the business needs for the Board’s well and production data and consequently the requirements for the functionality of its systems. In particular, the Board should be prepared to upgrade or

replace the Gas Gathering and Processing system if the VIPIR

project does not do so. Once the scope of VIPIR is

determined, strategic plans should be developed for the well and production systems in order to facilitate a well planned and resourced transition to systems that can respond to the Board’s business needs.

Controls over existing systems

It is recommended that the Board review the key controls for its well and production systems to ensure that data integrity is maintained.

Data integrity is critical to both Board and

Departmental business

Data from the well and production systems is critical to a number of processes in the Ministry. For example, well and production data from the Board forms the basis for the

Department of Energy’s calculation of royalties and freehold mineral tax. The data is also critical to resource allocation decisions at the Board and the Department; these are decisions concerning the assignment of mineral rights to industry applicants. When the data entered into the Board’s well and production systems is inaccurate or incomplete, it will require correction through a subsequent refiling. Refiled well and production data will cause royalties or mineral tax (as applicable) to be retroactively recalculated. The work involved in processing refiled data and tracking restated royalty and mineral tax amounts is difficult to quantify but is probably substantial. These problems may also cause

resource allocation decisions to be retroactively restated.

Automated edit and validation checks within the well and production systems can also be enhanced

Many of the automated edit and validation checks designed to ensure data integrity in these systems are no longer being investigated and resolved. In the past, these edit checks were considered key to controlling the accuracy and completeness of data. As I understand it, their discontinuance was not the result of a review of assurance requirements; rather, it was based on manpower constraints. A review of data assurance requirements will establish which edits and validation are now key to well and production data integrity. This review should be undertaken as soon as possible.

The Board can strengthen controls related to its overall computer environment

In the general computer environment, a disaster recovery plan should be documented. Formal documentation and coordination of a plan are important since staff from both the Board and their service providers, Public Works, Supply and Services, would be involved in the recovery. As well, the Board should review its controls over physical and logical access to its computer systems. For example, issues such as restrictions on the number of in attempts, automatic log-offs at unused stations, and password-protected screensavers for the Board’s many networked computers should be reviewed. These general controls around the computer environment protect the Board’s ability to collect, store, and distribute accurate and timely data to its many stakeholders.

Shared computing services at the Calgary Data Center

Background

In February 1998, the Department of Energy and the Board amalgamated their mainframe information processing requirements by agreeing to operate on a shared computer.

This computer is owned and operated by Public Works, Supply and Services (PWSS), and is housed at the Calgary Data Center. While the Department and Board paid the capital outlay for the machine and are the major users of this machine, PWSS can enlist other users who would then share the computing power on this machine. I understand that

PWSS and the Ministry of Energy have drafted a written service agreement that governs the performance

requirements for the Calgary Data Center; this agreement will be signed in the near future. This shared service arrangement reduced each participant’s mainframe computing operating costs.

Formal agreement regarding computing services

It is recommended that the Alberta Energy and Utilities Board and the Department of Energy establish a written agreement to govern the financial aspects of the shared data processing facilities at the Calgary Data Center.

PWSS invoices the Department, which then invoices the Board

Currently, the arrangement for the computer at the Calgary Data Center calls for PWSS to invoice the Department monthly for estimated operating costs related to Department and Board processing. The Department then invoices the Board for its portion of the cost. In 1998, the Department and Board agreed to a costing formula based on usage at the Calgary Data Center. However there is no written agreement that defines the distribution of costs within the Ministry of Energy.

PWSS costs were higher than anticipated; the Board did not pay its share for February and March

At the end of 1998-99, PWSS updated its cost estimates for the year’s service and invoiced the Department

approximately $250,000 more than anticipated. In addition, due to budget constraints, the Board was unable to pay its February and March 1999 share of the cost, estimated at

$315,000. As the Department was in a surplus position at the year end, it was able to absorb the extra costs invoiced by

PWSS and also to pay for that portion of the processing costs that the Board was unable to pay.

Financial accountability is compromised by these transactions

The Ministry, through the Department’s payment of the Board’s share of costs, has in effect increased its financial support to the Board. This increase in support is not

reflected in the entities’ financial statements; fortunately the amounts are not material to the two entities’ financial statements. Full accountability requires that all costs related to the operation of an entity be reported. Such information is critical to the assessment of program effectiveness and managerial responsibility. As well, with a written agreement in place, all parties would be in a better position to manage this important service.

Other entities

A financial statement audit was also completed for:

Alberta Petroleum Marketing Commission - year ended December 31, 1998

Guidance to reader

At March 31, 1999, the Ministry comprised the Department of Environmental Protection, the Environmental Protection and Enhancement Fund, the Natural Resources Conservation Board, and the Environmental Appeal Board. Until

November 1, 1998, the Ministry also included the Alberta Special Waste Management Corporation (ASWMC). At that time, the Special Waste Management Repeal Act was proclaimed and the remaining assets, liabilities, and

obligations of ASWMC were transferred to the Environmental Protection and Enhancement Fund.

The Ministry’s mission emphasizes the stewardship and sustainable development of Alberta’s renewable natural resources. The Ministry implements its mission through its two core businesses, resource management and

environmental hazard management. Program delivery within the Ministry has evolved in recent years, focusing now on community level service, shared services, shared

responsibility, and public involvement. For example, the Ministry has established six Delegated Administrative Organizations to deliver programs as diverse as the

promotion of tire recycling and the regulation of professional outfitters and guides. To be successful in this context, the Ministry’s management and sharing of information as well as fiscal and operational accountability will be critical.

My work examines the systems and reporting that support the Ministry’s mission, core businesses, and goals. I have focussed on areas where there has been significant recent change in program delivery or accountability structure.

The Ministry is responsible for fighting forest fires in the

“green” (or non-agricultural) area of the Province. The Ministry’s business approach to fire fighting has changed in recent years. Five years ago, the Ministry delivered all fire fighting services themselves, including support services such as fire camps and meal service; now many of these services are contracted to the private sector. In addition, the 1998 fire season that ran from April through September was unusually active. This gave my staff the opportunity to examine the Ministry’s financial administration systems in a year when more than $230 million was spent on fire fighting. As a result of this examination, I have several recommendations.

In a busy fire year such as 1998, the Environmental

Protection and Enhancement Fund funds the majority of the fire fighting effort. More than $210 million of the costs were borne by the Enhancement Fund, which is financed annually by a portion of the timber royalties collected by the

Department. As I believe that annual budgets should be approved by the Legislative vote process, I am

recommending that the budget approval for fire fighting be reconsidered so that government accountability can be strengthened.

The Ministry’s role in managing sustainable development includes reviewing and approving applications to build or alter projects such as plants, dams, etc. The approval process sets the environmental impact standards for a wide variety of developments in the Province. This year, my staff examined the regulatory approval process related to applications under the authority of the Environmental Protection and

Enhancement Act.