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

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 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.

4. 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

5. 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

6. 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 §§ , (d)(8), (f)(7), (f)(9) 6

7. 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

8. 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%

9. 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

10. 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%

11. 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

12. 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

13. 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

14. 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

15. 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 ?

16. 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

17. 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

18. 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

19. 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 $

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. New Indian Oil Rule

28. New Indian Oil Rule

29. 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.