Indian Oil and gas royalty Reporting Issues John Barder, Program Manager Central Audit and Compliance Management

Disclaimer The statements or opinions expressed in all ONRR presentations and panel discussions at the 2017 PASO-Tulsa Federal/Indian Royalty Compliance Workshop do not necessarily represent the views of ONRR or the Department of the Interior.

Learning Objective The attendee will be able to understand Indian gas dual accounting as it relates to field fuel, as well as other Indian oil and gas reporting issues, after completion of this course.

Indian Gas Rule The rule was effective January 1, 2000 Indian gas is either produced from an Index zone or a non-Index zone In an index zone, Indian gas is valued for royalty purposes based on a formula price In a non-index zone, Indian gas is valued for royalty purposes based on the higher of gross proceeds under our rules or the major portion price for the month and designated area

Indian Gas Rule If Indian gas is processed before entering a mainline pipeline or a pipeline with an index, dual accounting is required Companies need to make a dual accounting election for each designated area where they meet the above criteria There are two options for dual accounting: Actual Dual Accounting; and Alternative Dual Accounting

Pipeline Fuel and Indian Gas Dual Accounting Guided by reporter letter dated December 18, 2014 Royalty is due on the full volume and value measured at the BLM-approved royalty measurement point Allowable fuel or line loss costs may be included in the transportation allowance (only applicable in non-index-zones) Report using PC 15 Generally the difference in volume between what was measured for royalty and what entered the gas plant, but should not include drip condensate Regs: 30 CFR §§ 1202.555, 1206.172(d)(8), 1206.178(f)(7), 1206.178(f)(9) 6

Pipeline Fuel and Indian Gas Dual Accounting Index Zone Non-Index Zone Pipeline fuel accounting not required for alternative dual accounting Pipeline fuel accounting not required for alternative dual accounting with one exception Valued using the index-zone price Valued as a no-sale situation under the non-arm’s-length benchmarks, then using the major portion price No additional transportation allowance because index value includes all allowable transportation Value of allowable fuel may be included in the initial transportation allowance, but not when using the major portion price No unbundling necessary for gas transportation Unbundling required to determine allowable costs 7

Example 1: Index Zone Alternative Dual Accounting In this example, we will assume no ownership in the processing plant 80 MMBtu used for fuel to run the compressor Indian Lease 900 MMBtu BLM-Approved Royalty Measurement Point 10 MMBtu L&U 1,500 gal NGLs 810 MMBtu enters plant RR - 18% 700 MMBtu residue gas Assumptions: Index-zone price Btu content Percent bump = $4.00/MMBtu = 1200 Btu/cf = 7%

Example 1: Index Zone Alternative Dual Accounting Sales Value: 900 MMBtu X $4.00/MMBtu X 1.07 = $3,852 Royalty Value: $3,852 X .18 = $693.36 No pipeline fuel accounting No unbundling necessary Indian dual accounting and major portion requirements met

Example 2: Non-Index Zone Alternative Dual Accounting In this example, we will assume no ownership in the processing plant 80 MMBtu used for fuel to run the compressor Indian Lease 900 MMBtu BLM-Approved Royalty Measurement Point 10 MMBtu L&U 1,500 gal NGLs 810 MMBtu enters plant RR - 18% 700 MMBtu residue gas Assumptions: Major Portion Price Btu content Percent bump = $4.00/MMBtu = 1200 Btu/cf = 7%

Example 2: Non-Index Zone Alternative Dual Accounting Sales Value: 900 MMBtu X $4.00/MMBtu X 1.07 = $3,852 Royalty Value: $3,852 X .18 = $693.36 However, there is still a gross proceeds minimum in a non-index area that includes: Pipeline fuel accounting Unbundling

Example 3: Index Zone Actual Dual Accounting In this example, we will assume no processing costs and plant fuel. 80 MMBtu used for fuel to run the compressor Indian Lease 900 MMBtu BLM-Approved Royalty Measurement Point 10 MMBtu L&U 1,500 gal NGLs 810 MMBtu enters plant 700 MMBtu residue gas Assumptions: Index-zone price NGL sales price Royalty Rate = $4.00/MMBtu = $1.00/gal = 18% ** Unprocessed gas value 900MMBtu X $4.00/MMBtu = $3,600

Example 3: Index Zone Actual Dual Accounting Processed Gas Value Product codes: PC 03 (residue gas) PC 07 (NGLs) PC 15 (pipeline fuel) Sales volumes: PC 03 = 700 MMBtu PC 07 = 1,500 gal PC 15 = 80 MMBtu + 10 MMBtu = 90 MMBtu Product Code Sales Volumes Sales Values 03 700 MMBtu ? 07 1500 gal 15 90 MMBtu

Example 3: Index Zone Actual Dual Accounting Processed Gas Value PC 03 Sales Value: PC 03 = Sales MMBtu x Index Zone Price PC 03 = 700 MMBtu x $4.00 PC 03 = $2,800 Product Code Sales Volumes Sales Values 03 700 MMBtu $2,800 07 1500 gal ? 15 90 MMBtu

Example 3: Index Zone Actual Dual Accounting Processed Gas Value PC 07 Sales Value: PC 07 = Sales Gallons x Arm’s-Length Sales Price PC 07 = 1,500 gal x $1.00 PC 07 = $1,500 Product Code Sales Volumes Sales Values 03 700 MMBtu $2,800 07 1500 gal $1,500 15 90 MMBtu ?

Example 3: Index Zone Actual Dual Accounting Processed Gas Value PC 15 Sales Value: PC 15 = (Pipeline Fuel + Pipeline Loss) x Index-zone Price PC 15 = (80 MMBtu + 10 MMBtu) x $4.00 PC 15 = $360 Product Code Sales Volumes Sales Values 03 700 MMBtu $2,800 07 1500 gal $1,500 15 90 MMBtu $360 Total $4,660

Example 4: Non-Index Zone Actual Dual Accounting Initial Reporting 90 MMBtu used for fuel to run the compressor Indian Lease 1,000 MMBtu BLM-Approved Royalty Measurement Point 10 MMBtu L&U 2,000 gal NGLs 900 MMBtu enters plant 800 MMBtu residue gas *Actual sale under the contract is a sale of processed gas

Example 4: Non-Index Zone Actual Dual Accounting Assumptions: Measured roy volume Residue sold Residue price NGLs sold NGL price NGL shrink = 1,000 MMBtu = 800 MMBtu = $4.00/MMBtu = 2,000 gal = $1.00/gal = 100 MMBtu More assumptions: Transport Fuel Line Loss Transport charge UCA (allowed %) Plant Fuel Royalty Rate = 90 MMBtu = 10 MMBtu = $0.40/MMBtu = 30% = 0 MMBtu = 12.5% Initial Royalty Reporting Prod Code Sales Vol Sales Value Roy Val Before Allow Transport Allow Roy Val After Allow 03 800 MMBtu $3,200 $400 See Next Pg 07 2,000 gal $2,000 $250 15 100 MMBtu $50 18

Example 4: Non-Index Zone Actual Dual Accounting Calculation of Total Transportation Allowance: Assumptions: 10 MMBtu lost (L&U) in transportation Fuel = 90 MMBtu Gas Price = $4.00/MMBtu Pre-plant Transportation = $0.40/MMBtu UCA (allowed %) = 30% NGL Shrink = 100 MMBtu No plant fuel No NGL transportation or fractionation Pre-plant Transportation = 1,000 MMBtu x $0.40 x 30% = $120 x 12.5% = $15 Line Loss = 10 MMBtu x $4.00 = $40 x 12.5% = $ 5.00 Allowable Fuel = 90 MMBtu x $4.00 x 30% = $108 x 12.5% = $13.50 Total Transportation = $268 x 12.5% = $33.50 Allocation of Total Transportation Allowance: PC 03 = 800/1,000 x $33.50 = $26.80 PC 07 = 100/1,000 x $33.50 = $ 3.35 PC 15 = 100/1,000 x $33.50 = $ 3.35 Initial Royalty Reporting Prod Code Sales Vol Sales Value Roy Val Before Allow Transport Allow Roy Val After Allow 03 800 MMBtu $3,200 $400 $26.80 $373.20 07 2,000 gal $2,000 $250 $ 3.35 $246.65 15 100 MMBtu $50 $ 46.65

Example 4: Non-Index Zone (Major Portion Adjustment) Companies can not fulfill their dual accounting requirement until after the major portion prices are published Published major portion price for this example is $4.10/MMBtu Unprocessed gas value (wellhead value) = 1000 MMBtu X $4.10/MMBtu = $4,100 The royalty value will be the higher of the unprocessed value or the processed value

Example 4: Non-Index Zone (Major Portion Adjustment) Adjust for MP Price of $4.10 PC 03 Sales Value: PC 03 = Volume x MP Price PC 03 = (800 MMBtu) x $4.10 PC 03 = $3,280 PC 15 Sales Value: PC 15 = Volume x MP Price PC 15 = (100 MMBtu) x $4.10 PC 15 = $410 Major Portion Adjusted Royalty Reporting Prod Code Sales Vol Sales Value 03 800 MMBtu $3,280 07 2,000 gal $2,000 15 100 MMBtu $410 Total $5,690

Indian Gas Major Portion Indian gas major portion pricing will continue to be published in the summer CY2015 major portion prices will be published in the summer of CY2017 Because a large majority of royalty adjustments are made within the first year after the initial royalty reporting, ONRR waits a year to start the process of calculating major portion prices

Indian Gas Major Portion It takes ONRR approximately three to five months to: Analyze the data used to calculate all major portion prices; Calculate the major portion prices for each month for each non-index designated area; and Publish the major portion prices in the Federal Register and to our web site Because of the reasons above, Indian gas major portion will continue to be published approximately one and a half years after the end of the year for which the prices are calculated

Indian Oil Major Portion January 2002 - June 2015 Audit and Compliance Management (ACM) has already issued “Orders to Pay” for Indian oil major portion for Fort Berthold for the period April, 2009 through December, 2013 ACM will issue “Orders to Pay” for Indian oil major portion sometime this summer to early fall This will include all other Indian oil producing areas as well as Ft. Berthold for the remaining period of January 2014 through June 2015

New Indian Oil Rule New Indian Oil Rule was based on the consensus of a Negotiated Rulemaking Committee, effective July, 2015 production month Under the rule, royalties are calculated based on the higher of a calculated index based major portion (IBMP) price or gross proceeds under the actual sales contract Index Based Major Portion (IBMP) price fatal upfront edit put in place January 2016

New Indian Oil Rule, cont’d Orders were issued under the new rule for the time period July – December, 2015, (prior to the fatal upfront edit) No orders will be rescinded; however, some companies were supplied with a replacement liability enclosure due to a correction for a taken transportation allowance If you were notified of a liability, then you are required to reverse and rebook your royalty lines and pay the additional royalty

New Indian Oil Rule

New Indian Oil Rule

Additional Industry Question Is ONRR planning on changing CRs and/or Audits as a result of the new valuation regulations? Answer: ACM will follow the rules that apply to the time period that the CR or audit is addressing. When there is a change in the regulations, it is not uncommon for a CR, or especially an audit, to overlap the time period before the rule change and after the rule change. If this happens, ACM will apply the appropriate rule for each time period in the compliance review or audit.