1. Accounting, Awareness, Clarity & Inconsistency Issues
Federal Oil & Gas Valuation - Final Rule
Accounting, Awareness,
Clarity & Inconsistency Issues
Bob Wilkinson
February 8, 2017 1 1

2. DISCLAIMER
This presentation only reflects the views of the author/presenter and is not intended as legal, tax or accounting advice.
Each recipient should solicit their own legal, tax or accounting counsel with respect to any of these issues.

3. PURPOSE
At the end of the presentation the attendees will understand industry’s main issues and concerns associated with the Final Federal Oil & Gas Valuation Rule.

4. Final Rule – Oil & Gas Valuation
Topics:
Industry/COPAS comments/ONRR Training
Eliminates/Caps actual transportation and processing costs
“Misconduct” & “Default Provision”
Sales Type Code
Contracts must be written & signed
S&P BBB Bond rate
No netting of “Transportation Factors”
Keepwhole Contracts
Index Pricing Option

5. Final Rule – Oil & Gas Valuation
Industry/COPAS Comments:
Industry comments did not have much impact to the final rule
Several of COPAS’s comments have been addressed in ONRR’s training
ONRR training slides are included in your handouts and are an excellent resource

6. Final Rule – Oil & Gas Valuation Transportation and Processing Costs
Eliminates/Caps Some
Transportation and Processing Costs
Eliminates Subsea transportation
Eliminates ability to exceed the 50% transportation cap
Eliminates ability to exceed the 66.67% processing cap
Eliminates extraordinary processing allowance
POP contracts now subject to 66.67% processing cap

7. Final Rule – Oil & Gas Valuation
Definition for “Misconduct”:
Does not have to be done willfully, intentionally, voluntary or knowingly
Enables ONRR to invoke Default provision

8. Final Rule – Oil & Gas Valuation
Default Provision:
To be used when:
Failure to provide documents;
ONRR unable to determine value;
Misconduct (broad); or
Breach in duty to market;
Will primarily be used during an audit
You still have the right to appeal an Order
Very broad on when ONRR can invoke and how they can revalue your royalties

9. Final Rule – Oil & Gas Valuation
New reporting requirements:
Sales Type Code (STC):
Field fuel (PC15)
Pre 1/1/2017 STC was NARMS
Beginning 1/1/2017 use code associated with valuation basis
NGL’s (PC7)
Pre 1/1/2017 STC was POOL
Most likely no ONRR edit check (yet)

10. Final Rule – Oil & Gas Valuation
All Contracts must be written & signed
“Failure” to provide a contract or documents is “misconduct” subject to default provision
“Refusal” to provide contracts other information may be subject to civil penalties for “Failure to permit an audit”
Positive - If company is unable to find 3rd party contract, ONRR now has way to determine royalty value
Industry practice that not all contracts are written or signed

11. Final Rule – Oil & Gas Valuation
Transportation Deductions:
Reduces 1.3 multiplier on Standard & Poor BBB Bond rate (drops to 1.0 multiplier)
Initially S&P BBB Bond rate was no longer available on ‘ad hoc’ extraction basis
Due to numerous calls, S&P providing again:
Roberta Sander
Lead Product Support Consultant
T: , Option 2

12. Final Rule – Oil & Gas Valuation
No Netting of Transportation Factors
In the final rule preamble and ONRR’s training, ONRR says you must report a reduction in the base price by the transportation costs incurred by the purchaser in your transportation allowance
New regulations only say you can not “improperly net a transportation allowance”
New regulations only allow a transportation allowance for reasonable, actual costs that you or your affiliate incur
FRN 7/1/2016 p

13. Final Rule – Oil & Gas Valuation
No Netting of Transportation Factors - NGLs
Transportation factors must be reported as transportation allowance
Fractionation fees must be reported as processing allowance
Marketing costs are not deductible
Not all contracts/settlement statements provide this T&F information
Factors must be split in “reasonable” manner

14. Final Rule – Oil & Gas Valuation
No Netting of Transportation Factors - Oil
Sales contracts will be accepted as support for transportation factors
Location and quality differentials can continue to be netted
Marketing costs are not deductible
Knowing whether a location/marketing differential is simply a pricing mechanism or reimbursement for the purchaser’s transportation costs is difficult/impossible

15. Final Rule – Oil & Gas Valuation
Keepwhole Accounting Issues 
Lessee does not usually have information to value in manner instructed by ONRR
Lessee only paid on mmbtu basis
ONRR training materials say “If you do not sell any liquids from the lease you must use the index method” for the ngls

16. Final Rule – Oil & Gas Valuation
Inconsistent Handling (volumes not sold):
Field fuel - value using the same valuation method used for valuing the rest of your gas
Keepwhole valuation - ngls – if you sell any ngls from the lease use that value, otherwise use index value
Royalty bearing vented, flared or avoidably lost volumes - value using index; if not in an index zone, ONRR will value under the default provision

17. Final Rule – Oil & Gas Valuation
Inconsistent Handling:
(e) – used, lost, unaccounted for, or retained as a fee – you should use the same value as the gas you sell
(f) – no written contract for sale of gas or no sale of gas subject to this section – use index or if no index, ONRR will use the default provision
If you sell other volumes from that lease, you should be able to use that value for vented, flared or avoidably lost

18. Final Rule – Oil & Gas Valuation
Index Pricing Option
Applies to only non-arms-length sales.
Election can be made at a property level
Must use the highest index, even if your gas cannot contractually flow on that pipeline
You must also value and pay royalties on all used or lost gas along a pipeline volumes and any disallowed plant fuel

19. Final Rule – Oil & Gas Valuation
Index Pricing Option
Standard Transportation/Processing Deducts
Don’t know when ONRR will adjust
Standard NGL deduction (based on average)
Does not include theoretical transportation allowance to get NGLs to the plant

20. Final Rule – Oil & Gas Valuation
Valuation Guidance versus Determinations
Distinguishes between the two
More companies may now want to seek valuation guidance

21. Final Rule – Oil & Gas Valuation
Questions?

22. Final Rule – Oil & Gas Valuation
Question
How are the transportation (50%) and processing (66.67%) caps to be applied in the following example:
Sales Price - $2.00/gallon
Field Transportation - $0.20/gallon
Processing (includes fractionation netted by purchaser) - $0.50/gallon
Post Plant Transportation (includes any transportation netted by purchaser) - $0.10/gallon