Unbundling Keep Whole Agreements PASO-2017 Federal/Indian Compliance Workshop Presented by: Morris Miller, President Miller Energy Consulting LLC C: 918-691-4559

Miller Energy Consulting LLC Agenda Walk-through Keep Whole Example ONRR’s UCAs – Consider Unbundling Theirs Too Miller Energy Consulting LLC

Objectives – in less than fifteen minutes… General understanding what ONRR may require under new regulations related to reporting plant products for gas sales under a Keep Whole sales agreement. Miller Energy Consulting LLC

Miller Energy Consulting LLC Disclaimer Obtain legal advice first. The intent of this presentation is to identify the components of Keep Whole agreements for discussion purposes only. Miller Energy Consulting LLC

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ONRR Response to Public Comment - KeepWhole To aid lessees in their effort to properly compute royalties for gas processed under a keepwhole contract, we published a reporter letter dated November 21, 2012 (Reporter Letter). The Reporter Letter provided guidance on how to report keepwhole contracts, including instructions for situations where the lessee receives no NGL volume or value data. It is important to note that, in most cases, this requirement does not increase the royalties that a lessee pays because the lessee may include the difference in value between the gallons of NGLs that the plant recovered and the MMBtuequivalent of the NGLs returned to the producer in its processing allowance. ONRR Response: Our regulations require lessees to base their royalties for gas sold after processing on the values of condensate, residue gas, and gas plant products resulting from processing gas produced from a Federal lease. Lessees sell gas processed under keepwhole contracts after processing, and, therefore, lessees should value their gas as such. This requirement also protects the public from hidden processing deductions that the lessee takes that may exceed the 662⁄3 percent limit of the value of the NGLs. Additionally, numerous entities rely on and scrutinize our data, making accurate reporting essential. Miller Energy Consulting LLC

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Report FL&U as PC15 – Excluding shrink from Drip Condensate Miller Energy Consulting LLC

Example from ONRR KW Letter Mcf Shrink at 14.73 = 2,833 Miller Energy Consulting LLC

Checklist of Information Required WH Gas Analysis WH Production Data Sales Prices Residue Gas NGL Prices (OPIS) C2 C3 IC4 NC4 IC5 NC5 C6+ Drip/Scrubber Condensate Tariff(s) – NGL Pipeline Fractionation Fees UCAs Gathering Processing Fees Allowed Agreements Transportation (Post Processing) Gathering Fuel Plant Fuel Inlet Compressor Heaters Residue Compressor Miller Energy Consulting LLC

Plant Statement Calculations – Gross NGL Gathering fuel from gathering invoice. L&U for illustration. Under KW reporting can assume no L&U when unable to determine plant inlet. In this example Drip Condensate (PC05) is zero because time constraints. If PC05 is reported adjust the Pentanes on the plant statement. Gas Analysis – Wellhead Miller Energy Consulting LLC

Miller Energy Consulting LLC Calculate Residue Miller Energy Consulting LLC

Assumed UCA’s for Gathering and Processing Miller Energy Consulting LLC

The New KW Royalty Report PC03 Allocate $349.50 to all products. Royalty Rate = 12.5%: - PC07 “Proc Allowance” includes the $122.51 processing fee plus $594.49 NGL Fractionation. Miller Energy Consulting LLC

Miller Energy Consulting LLC Summary – KW Reporting Plant data is not available – create a plant statement from what’s available ONRR Requires royalty on Residue and Plant Products Calculate theoretical plant statement from Well volumes Well gas analysis Pricing requires Residue sales price OPIS NGL Prices NGL Tariffs NGL Fractionation Keep Whole Plus – future topic Miller Energy Consulting LLC

Other Unbundling Considerations Variations in Gas Analysis Distances to Plant (Pressure of Systems) Inlet compression may not be used. Gas Bypassing NGL Extractor – lean gas likely bypasses expander Sales Point (Sold to end-user at lower Pressures) i.e. Pressure of gas at tailgate could be higher than pressure where gas is sold. Miller Energy Consulting LLC

End of Keep Whole Presentation Next topic – Watson Millican and Associates Miller Energy Consulting LLC