1. Paso Conference Royalty policy committee update
February 2019

2. Disclaimer
The statements or opinions expressed in all ONRR presentations and panel discussions at the 2019 PASO-Tulsa Federal/Indian Royalty Compliance Workshop do not necessarily represent the views of ONRR or the Department of the Interior.

3. Committee Formation, Purpose
Committee formed by the Secretary on March 29, 2017 under the Federal Advisory Committee Act (FACA).
The Committee advises the Secretary on:
Current and emerging issues related to the determination of fair market value
Collection of revenue from energy and mineral resources on Federal and Indian lands
Potential impacts of proposed policies and regulations, including whether a need exists for regulatory reform.

4. Committee Members Federal
A representative of the Secretary’s Immediate Office
Assistant Secretary—Indian Affairs
Assistant Secretary—Land and Minerals Management
Director, Office of Natural Resources Revenue
Director, Bureau of Indian Affairs
Director, Bureau of Land Management
Director, Bureau of Ocean Energy Management
Director, Bureau of Safety and Environmental Enforcement

5. Committee Members Non-Federal
Six members representing the governors of States that receive more than $10,000,000 annually in royalty revenues from onshore and offshore Federal leases
Four members representing Indian Tribes.
Six members representing various mineral and/or energy stakeholders in Federal and Indian royalty policy
Four members representing academia and public interest groups

6. Committee Meetings Quarterly Full Committee Meetings
September 11, 2017
October 4, 2017
February 28, 2018
June 6, 2018
September 13, 2018
January 30, 2019, Postponed
Bi-Weekly Subcommittee and Work Group Meetings

7. Subcommittees and Work Groups
Tribal Energy
Planning, Analysis, and Competitiveness
Fair Return and Value
Index Pricing
Marketable Condition
Coal Benchmarks
Audit Process
Update Oil & Gas Payor Handbook
The Index Pricing work group and the Marketable Condition work group were combined.

8. RECOMMENDATIONS Index Pricing and Marketable Condition
Recommended by the Committee, February 2018:
Pursue rulemaking to define simplified index price rules for Federal gas.
Exclusively with regard to federal lands, Department of the Interior resolve an ambiguity in its current regulations by publishing a proposed rule to amend the regulation at 30 C.F.R (b) to reexamine language specific to the boosting of residue gas.
Recommended by the Committee, September 2018:
RPC recommends the DOI pursue rulemaking to define “Federal Gas Index Pricing” with a Marketable Condition Concept, consistent with the hypothetical presentation titled “Gas Index Pricing Options,” dated August 2018, as presented to the RPC meeting of September 13, 2018.

9. Hypothetical Producing Example
Gas Index Pricing Options – August 2018
Hypothetical Producing Example
2,500 mcf BTU 1,080 = 2,700 mmbtu
Gas Processing Plant
Residue/”Booster”
Compressor
200
psig
700
Royalty Measurement
Point (RMP)
Field
Compression
Mainline Pipeline
(Marketable Condition Point)
Producing Well
100
psig
System Throughput: 400 MMCF/d
Production Specifications
100 lbs psig
80 lbs water
4% Co2
<.25 gr H2s
Mainline Specifications
700 lbs psig
7 lbs water
2% Co2
.25 gr H2s
Required Valuation Components
Market Index Price $3.75/mmbtu D. BTU Bump Factor (from Table, based on BTU) 4%
Average Field Transportation ($0.35/mmbtu) E. Simple Published Price (A – (B * (1-C)) = $3.5925
Average Disallowed System UCA: 55% F. Marketable Condition Standardized Cost Table (see below)
Field Compressions
Rate per
MMBTU
Boosting
Compression
Dehydration
CO2 Treating
H2S Treating
0-100 psi
$0.020
$0.005
100,000
0-.5% gr
psi
$0.025
psi
$0.010
200,000
.6%-1.0% gr
$0.075
psi
$0.035
psi
300,000
1.0%-1.5% gr
$0.085
psi
$0.040
psi
400,000
1.6%-2.0%
$0.090
psi
$0.045
psi
$0.030
500,000
2.1%-2.5% gr
$0.095
psi
$0.050
psi
600,000
2.6%-3.0% gr
$0.100
Note: All of the Required
Valuation Components
to the right plus the
elements of the MC
Cost Table must be
calculated or
negotiated by the
RPC Team(s)
$ $ $ $ $ = $0.16
Valuation Options
Optional 1A 1B 2 3
Simple ONRR Published Price With BTU Bump
Formula: Volume X E X (1.0 + Bump)
2,700 X $ X 1.04 =$10,
X .125 Royalty Rate
$1, ONRR Royalty
Simple Industry Calculated Price With BTU Bump
Formula: Volume X (A – (B X (1-C) X (1.0 + Bump))
2,700 X ($3.75 – ($0.35 X 45%)) X 1.04 = $10,087.74
X .125 Royalty Rate
$1, ONRR Royalty
Calc’d Price using Standardized Table w/Bump
Formula: Volume X (A – (B - F) X (1.0 + Bump)
2,700 X ($3.75 – ($ $0.16 )) X 1.04 = $9,996.49
X .125 Royalty Rate
$1,249.56
Gross Proceeds
Calculate value
and allowances
per current
regulations

10. RECOMMENDATIONS UPDATE Index Pricing and Marketable Condition
The 2016 Valuation Rule—repealed in 2017—included an index-based valuation formula for Federal gas. While industry generally supported the concept of an index-based valuation formula, it did not support the formula in the Valuation Rule, stating:
The highest reported price was unachievable and reflected index points not representative of how the gas was actually marketed
Transportation cost deductions were unreasonably low
The resulting price could only be used for non-arms-length sales
Industry members of this RPC Work Group believe an acceptable index-based valuation formula may resolve many of the marketable condition disputes currently consuming significant resources. They are leading the Work Group’s efforts to explore the potential to combine the index price and a standard table for allowances.

11. RECOMMENDATIONS Coal Benchmarks
Recommended February 2018:
Reinforce the principle that arm’s length transactions are the best indication of market value by amending the regulation at 30 CFR (c)(2)(i) to read: “The gross proceeds accruing to the lessee pursuant to a sale under its non-arm’s-length contract (or other disposition by other than an arm’s-length contract), provided that those gross proceeds are the equivalent to the gross proceeds derived from, or paid under comparable arms-length contracts for sale, purchases, or other dispositions of like-quality coal in the area.”
Consider a Secretarial Order / Dear Payor Letter indicating that a company’s own arm’s length sales are preferential under coal benchmark 4.
Updated Solids Handbook indicating the same.
This is were my part of this presentation starts.

12. RECOMMENDATIONS UPDATE Coal Benchmarks
The Work Group is analyzing the economic impact of the RPC recommendation to use a lessee’s own arm’s-length gross proceeds to value that lessee’s non-arm’s-length production.
ONRR has asked the Solicitor’s Office to advise on the legality of a Secretarial Order or Dear Payor Letter that requires use of a lessee’s own arm’s-length gross proceeds as the preferred measure to value non-arm’s-length sales under coal benchmark 4.

13. RECOMMENDATIONS Coal – Audit and Appeals Periods
Recommended September 2018:
RPC recommends that the Secretary of the Interior pursue rulemaking to adopt all applicable provisions of the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA) and the Federal Oil and Gas Royalty Simplification Act of 1996 to include Federal coal by the provisions of each statute. The Secretary should also propose Federal coal be included in the statute in his legislative proposals to Congress as necessary.

14. RECOMMENDATIONS Update Oil & Gas Valuation Payor Handbook
Recommended February 2018: Create “evergreen” handbook which can be updated regularly
Status:
Creating two separate handbooks – Indian and federal
Work group provided feedback on first five chapters
Notice the picture of the previous Payor Handbook - a combined Federal and Indian handbook released in 2000!
In February 2018, the RPC gave us the go ahead to create an "evergreen" handbook that can be updated more easily and more frequently
Therefore, the ONRR Payor Handbook team is working on two handbooks - one for Indian oil and gas and one for Federal oil and gas
The RPC Subcommittee work group reviewed the first 5 chapters - 3 Indian chapters and 2 Federal chapters
The ONRR Payor Handbook team is grateful to the work group and our Indian partners who took the time to review and provide feedback on the chapters

15. RECOMMENDATIONS Update Oil & Gas Valuation Payor Handbook
Published first three Indian chapters on onrr.gov
The ONRR Payor Handbook team published the first two Indian Payor Handbook chapters last fall and just published chapter 3 - Indian oil
We include a "Last Updated" date to show when the last changes were made to each chapter
There's an option to easily navigate the chapters online or print a PDF of each chapter
There's also an easy way to find a brief history leading up to the current Indian oil rule
We welcome feedback on the chapters via the Royalty Valuation mailbox

16. RECOMMENDATIONS Update Oil & Gas Valuation Payor Handbook
Next steps:
Indian Gas
Include specific lease language
Detailed examples
Publish Federal Oil & Gas chapters
Introduction
Valuation Basics
Moving forward, the ONRR Payor Handbook team is working on two priorities - writing the Indian gas chapter with detailed examples and specific lease language and posting the first two chapters of the Federal Oil and Gas Handbook
Indian gas can be very complex, so there will be a base example used throughout the chapter showing different valuation scenarios
We're excited about our progress so far and look forward to publishing more chapters soon

17. RECOMMENDATIONS Fair Value and Return – Publish Data
Recommended September 2018:
To promote transparency, the RPC recommends that DOI publish well, lease, and monthly production data for royalty-bearing resources on Federal lands. Tribes should have the ability to opt-in. This information should not include data prohibited by law from being released.

18. Royalty Policy Committee More Information