1. Federal Oil and Gas Valuation – New Rule
Presented By:
Amy Lunt
Supervisor, Royalty Valuation

2. 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.

3. Learning Objective
The attendee will gain knowledge about the Final Federal Oil and Gas Valuation Rule, including key changes, the Default Provision, and major accounting changes, after completion of this course.

4. New Rule Key Changes Changes to both Federal oil and Federal gas
Consolidated definitions
Added, modified, and removed some definitions
Rescinded Deep Water Policy
Instituted default provision
Transportation
Disallowed pipeline loss in non-arm’s-length transportation
All transportation costs reported as allowances (no “transportation factors”)
Removed provision allowing lessees to exceed 50% limit
Adjusted Standard & Poor’s BBB bond rate multiplier from 1.3 to 1
Clarified guidance and determination practices 4

5. New Rule Key Changes Changes to Federal gas
Removed gas non-arm’s-length valuation benchmarks – value is now based on:
Affiliate’s first arm’s-length sale or
Index-based option
Expanded application of processed gas valuation and reporting
Removed provision allowing lessees to exceed the 66 2/3 % processing-allowance limit
Removed extraordinary processing allowance provision
Removed accounting for comparison 5

6. Effective Date
The rule is effective for production on or after January 1, 2017.
Royalty reporting and payment for January, 2017 production is due February 28, 2017.

7. Default Provision Before After
(b)(1)(iii) If the ONRR determines that the gross proceeds accruing to the lessee….do not reflect the reasonable value of the production because of misconduct…. Or because the lessee… has breached its duty to the lessor to market the production…. then ONRR shall require that the gas production be valued pursuant to paragraph (c)(2) or (c)(3) of this section
(c) ONRR may decide your value under § if… the gross proceeds accruing to you… do not reflect reasonable consideration because:
There is misconduct …
You have breached your duty to market…. ONRR may consider a sales price unreasonably low if it is 10 percent less than the lowest reasonable measures of market price…
(3) ONRR cannot determine if you properly valued your gas….
Regs: 30 CFR §§ (2016), (2017)

8. Default Provision
Default provision clarifies the Secretary’s authority to determine value
ONRR intends to use the default provision in very specific cases where we cannot determine proper royalty values through standard procedures
ONRR may use the default provision for any of the following reasons including, but not limited to:
Failure to provide documents, including signed written contracts
Misconduct
Breach of your duty to market the commodity for the mutual benefit of yourself and the lessor
Regs: 30 CFR §§ , ,

9. Procedurally, how will ONRR implement the default provision?
Answer: In two ways.
ONRR-Initiated
Industry-Initiated
ONRR generates the value
The lessee proposes a method that ONRR approves or denies
Usually resulting from an ONRR compliance activity
Initiated by the lessee before compliance activities
Example: misconduct or a breach of the duty to market
Example: valuing flared gas where an index is not available

10. Reasonable Measures of Value – Key Points
ONRR may…
This doesn’t mean ONRR necessarily will implement the default provision
10 percent lower than the lowest reasonable measures
Measures is plural, so ONRR can’t pick just one if more than one reasonable measure exists
It is not 10 percent lower than the average market value
This is a guideline for what ONRR might consider a breach of duty to market.
$40
$60
Oil Prices
Average Market Price
Lowest Reasonable Price
Possible breach of duty to market
$30
$27
Highest Market Price
Regs: 30 CFR §§ , , , ,

11. Written and Signed Contracts
Language from the rule: “You or your affiliate must make all contracts, contract revisions, or amendments in writing, and all parties to the contract must sign the contract, contract revisions, or amendments.”
Regs: 30 CFR §§ (g), (g)

12. Written and Signed Contracts
The following are examples of what ONRR considers written and signed contracts:
Transaction confirmations supported by a signed base contract
An agreement with electronic signatures

13. Written and Signed Contracts
What will ONRR do if a lessee does not have a written and signed contract?
Answer: ONRR may decide your value under the default provision.
Regs: 30 CFR §§ (g), (g)

14. Major Accounting Changes
All transportation costs must be reported as allowances. No more “transportation factors.”
Any gas that is valued based on the processed products must now be reported and valued as processed gas.
See the Dear Reporter Letter.

15. Transportation Factors – Gas
How does the elimination of transportation factors affect my gas reporting?
Transportation and fractionation (T&F) fees – report transportation and fractionation (processing) separately unless you elect to use the index-based option for your non-arm’s-length transactions
Other contracts – including those
with transportation factors –
report transportation costs as
allowances
Regs: 30 CFR §§ (c), (c) 15

16. Location Differentials vs. Transportation Factors
Eliminated from the regulations
Defined in 30 CFR §
Related to actual transportation costs
Not actual transportation costs
Reduces the contract price paid to seller
Either published, or based on a buy/sell or exchange agreement (+ or -)
Regs: 30 CFR §§ , , (b) 16

17. Oil Location Differential
Location differential means an amount paid or received (whether in money or in barrels of oil) under an
exchange agreement that results from differences in location between oil delivered
in exchange and oil received
in the exchange. A location
differential may represent all
or part of the difference
between the price received
for oil delivered and the price
paid for oil received under a
buy/sell exchange agreement.
Regs: 30 CFR §§ , 17

18. Oil Location Differentials
No change from previous regulations
Apply to:
Arm’s-length dispositions of oil under an exchange agreement
Non-arm’s-length dispositions of Federal oil valued under an index option (NYMEX or ANS)
Regs: 30 CFR §§ (c), 18

19. Reporting Oil Price Adjustments
What should I do if my oil purchase contract does not explain whether the price adjustment is for transportation costs or a differential?
Answer: You should use a reasonable method to separate the location or quality differential from the transportation cost. Then, the location or quality differential should be included in the sales value, and the transportation cost reported as an allowance.

20. Standard Deductions
Is ONRR developing standard transportation and processing deductions that companies can use if they have arm’s-length sales?
Answer: No. The closest thing are the standardized UCAs that ONRR is developing. And you should not use the processing or T&F rates used for the index-based method for your arm’s-length allowances.

21. Low Volume Fees
Are low volume fees I incur under my transportation contract allowable costs of transportation?
Answer: The regulations do not directly address low volume fees. But they do allow firm demand charges or capacity reservations fees, and they do not allow measurement costs or any type of penalty.
Regs: 30 CFR § (b)-(c)

22. Gas Valuation and Reporting
Unprocessed Gas
Only valuing one commodity (wet gas) on a $/Mcf or $/MMBtu basis and one product code:
Unprocessed gas
(PC 04) or
Coalbed methane
(PC 39)
Processed Gas
Valuing multiple commodities and multiple product codes:
Pipeline condensate (PC 05)
Pipeline fuel (PC 15)
Coalbed methane (PC 39)
Residue gas (PC 03)
NGLs (PC 07)
Possibly others (plant inlet scrubber, CO2, sulfur, etc)
Regs: 30 CFR §§ , 22

23. Processed Gas Reporting
In what situations should I report my gas as unprocessed gas?
Answer: When the gas is never processed (for example – gas plant bypass). Or, when the gas is sold before processing and the value is based on a price per MMBtu or Mcf.
Regs: 30 CFR §

24. Percentage-of-Proceeds (and similar) Contracts
If the value of your gas is based on processed products, you must report and value it as processed gas. This includes:
Arm’s-length POP contracts previously reported as unprocessed gas (PC 04)
Gas sales based on processed products even when the sales point is before processing occurs
Regs: 30 CFR §

25. Considerations for Processed Gas Valuation
1) The total volumes reported on the form ONRR-2014 should tie back to the gas volume on the OGOR (except for allowed plant fuel)
Federal Lease
Gas Well
Compressor Station
Gas Processing Plant
BLM or BSEE-Approved Royalty Measurement Point
2) Royalty is due on pipeline fuel and any drip condensate recovered along the pipeline
3) Transportation and processing costs should be unbundled and only allowable costs taken as allowances
Regs: 30 CFR §§ (b), (b), ,

26. Keepwhole Gas Processing Contracts
Still reported and valued as processed gas
Calculations for theoretical NGL volumes and values is still required
NGL valuation has changed – value is no longer determined under the gas benchmarks
NGLs
Residue gas
All residue gas
Regs: 30 CFR § (a)(3)

27. Keepwhole Gas Processing Contracts – NGL Valuation
If you sell some NGLs from the same lease, you may use the same valuation method to value the keepwhole NGLs (uncommon)
Value will usually be determined under the index-based option or the default provision
When using the index-based option:
You are not required to unbundle
You should not take any transportation or processing allowances against the NGL value because the index-based calculation accounts for all allowable costs
Regs: 30 CFR § (e)-(f)

28. Flared or Vented Gas Valuation
If your flared or vented gas is deemed royalty-bearing by BLM or BSEE, value is:
Determined under the index-based option
If a valid index price point is not available, value is determined under the default provision
Regs: 30 CFR § (f)

29. Gas Index-Based Option Election Rules
You may not change your election more often than once every two years
For processed gas, the residue and NGL elections are independent of one another
No form-filing requirement
Your first election for the index-based option after January 1, 2017 starts the two-year cycle.
Regs: 30 CFR § (c), (d)

30. Gas Index-Based Option Election Rules (cont’d)
No retroactive elections
Generally, the election is made at the lease/agreement level
If you have multiple leases in the same area coming online in different months, please contact us to discuss options for getting all the leases on the same election schedule
Regs: 30 CFR § (c), (d)

31. Guidance vs. Determinations
ONRR Guidance
ONRR Determination
ASPMB Determination
Answers your questions about regulations and statutes
Approves or denies a method you propose
Quicker turnaround, usually between 1 week and 2 months
Longer response time, expected to be between 3 -9 months
Very long response time – usually longer than 1 year
No specific reference or regulatory constraint
Requested under the default provision (various reg sections)
Requested under 30 CFR §§ or
Can be requested via , letter, or phone
Request must be in writing
Regs: 30 CFR §§ , , (e)(2), (f)(2)

32. Questions? ? 32