1. Paso Conference Indian oil and Gas valuation
John Barder, Program Manager
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. Indian Trust Responsibilities
Why Do We Have Separate Indian Oil and Gas Rules?
Indian Trust Responsibilities
The Federal Indian trust responsibility is a legally enforceable fiduciary obligation on the part of the United States to protect tribal treaty rights, lands, assets, and resources, as well as a duty to carry out the mandates of Federal law with respect to American Indian and Alaska Native tribes and villages.
Law of Nations: During colonization, the British and many of the colonies treated Indian tribes as sovereign nations holding title to their lands and entered into treaties with the tribes recognizing their title.
• Early Supreme Court decisions defined the relationship between Indian tribes and the Federal Government. Johnson v. McIntosh (1823) Cherokee Nation v. Georgia (1831) Worcester v. Georgia (1832)
• These decisions acknowledge the sovereignty of Indian tribes, while at the same time acknowledging the obligation to protect the interests of Tribes, and defining the nature of Indian property interests
The Constitution establishes the primacy of federal authority over Indian affairs and both defines and limits that power
Treaties & Agreements: Recognition of title Acknowledgment of the protection of the US Specific rights secured – beneficial ownership of land, hunting and fishing rights, water rights, federal services like health and education services Other sources – congressionally approved agreements, executive orders
Specific Statutes: fiduciary duties necessarily arise when the gov’t. assumes control or supervision over tribal trust assets
In several cases discussing the trust responsibility, the Supreme Court has used language suggesting that it entails legal duties, moral obligations, and the fulfillment of understandings and expectations that have arisen over the entire course of the relationship between the United States and federally recognized tribes.

4. Indian Oil and Gas Valuation Regulations
30 CFR § 1206
Indian Gas Rules, January 1, 2000 § – §
Indian Oil Rules, February 1, 2008, § – §
Indian Oil Rules July, 1, 2015, § – §
Prior to 1996, Federal and Indian gas shared the same regs.
FERC Order 636
Was issued on April 8, 1992, and was designed to allow more efficient use of
the interstate natural gas transmission system by fundamentally changing the
way pipeline companies conduct business.
Order 636 required interstate pipeline companies to unbundle, or separate,
their sales and transportation services.
Required pipeline companies to provide open-access transportation services.
Provide customer with unbundled services and expanded access to interstate
storage capacity.

5. Indian Gas Rule

6. Indian Gas Valuation Regulations
Applicable to all gas production from Indian (tribal and allotted) leases except leases on the Osage Indian Reservation
If lease provisions, Federal statutes, treaties, or agreements are inconsistent with ONRR regulations, then statutes, treaties, or agreements will take precedence
Bullet 1:
The Indian gas rule is effective for gas production beginning January 2000.
The biggest change to the gas valuation regs … is the addition of the
index-based valuation method.
Indian gas valuation under the old regs was complex because of the
difficulties in getting the information needed to comply with the MP and
DA provisions in Indian leases. The new rule makes it much easier for
Payors to comply with the regs.
The process for developing the rule began in 1994 with the Advance Notice of
Proposed Rulemaking. A negotiated rule-making committee made up of
representatives from Industry, the Tribes and ONRR was formed in 1995.
It took about a year of meetings for the committee to come to agreement on
what the rule should look like. There was a proposed rule in 1996 … and the
final rule was published in Aug 10, 1999.
The rule does not apply to leases in the Osage Reservation.
Bullet 2:
As you know, lease terms, treaties, and agreements such as settlements,
override the regulations to the extent that there’s an inconsistency.

7. Gas Pricing Index zone areas Index zone pricing Non-index zone areas
Major Portion Pricing; or
Gross Proceeds Pricing
Bullets #1 & 2:
Valuation of non-hydrocarbon components in the gas stream …
(such as CO2, Nitrogen, or Sulfur) … that are sold separately from the
gas stream … are valued under the non-index-based valuation provision.
This provision is found in 30 CFR Section
SUMMARY POINT:
Now we have two valuation provisions:
Section – value … Index Zone Gas
Section – value … Non-Index Zone gas, as well as other
non-hydrocarbon substances.

8. How to Value Gas in an Index Zone
The valuation provision under 30 CFR § must be applied if the lease is in an index zone and:
has a major portion provision, or
does not have a major portion provision but lease provides for the Secretary to determine value
All leases which meet the above criteria and produce gas in an index zone, unless excluded by ONRR, are required to use the valuation provision under the rule
This will help us to understand when to value gas under Sec
Bullet 1:
If your Indian lease meets one of the two requirements
1.) Has a major portion provision … or …
2.) does not have a major portion provision but allows the Secretary to
determine value
THEN… the gas must be valued pursuant to this Section.
Bullet 2:
And … unless excluded by ONRR, all leases meeting these criteria are
required to use this valuation provision.

9. How to Value Gas Not in an Index Zone
The valuation provision under 30 CFR § must be applied if the lease is not in an index zone and:
has a major portion provision, or
does not have a major portion provision but lease provides for the Secretary to determine value
All leases which meet the above criteria and produce gas not in an index zone, unless excluded by ONRR, are required to use the valuation provision under the rule
This slide should also look familiar. It’s the same slide we used for Index
Zone Gas Valuation … with 2 exceptions.
The Tile … reads NOT in and Index Zone
The CFR citation … from to
Summary:
So … the same rules apply with regard to MP language and exclusions.
We just use a different Section to value non-index zone gas.

10. How to Value Gas Not in an Index Zone
Lessees initially report current month’s value based on 30 CFR § (b) or (c) (arm’s-length or non-arm’s-length valuation)
This slide highlights royalty reporting in a Non-Index Zone Area,
more commonly referred to as a Major Portion Area.
Bullet #1:
Lessees initially report their royalties on the 2014 based on their
gross proceeds determined under this Section.
We refer to the initial royalties as the initial gross proceeds.
Bullet #2: READ bullet
Bullet #3: READ bullet
Initial gross proceeds can include deductions for applicable transportation
and processing)
INFO:
ARMS – gross proceeds accruing to you or your affiliate
NARMS – value using 1st applicable method …
1.) gas from same processing plant, 2.) like-quality gas from same or nearby field, 3) net-back method (transp., processing, & cost of manufacture are deducted from gross proceeds.
Liquids – monthly average minimum price reported in commercial bulletins – Conway, KS minus $0.07/gal; Mt Belvieu, TX minus $0.08/gal.

11. Index Zone and Major Portion Prices
ONRR provides the index zone prices at:
ONRR provides the major portion prices at:
Index zone values (prices) are published on MRM website.
New rule does not require ONRR to publish or calculate these values.
READ following
Navigate to the MRM web-page
Select the Tribal Services link (left-hand side of the page)
“Index Zone Prices” link (right-hand side of the page) (CYs )
In summary, index values are based on prices from two ONRR approved
3rd party publications:
Inside FERC’s Gas Market Report - Natural Gas Intelligence Weekly Gas Price Index
In a nutshell … Index-based values are determined as follows:
For each ONRR-approved publication, the average of the highest reported prices for all IPPs in the Index Zone is calculated.
The averages are summed and divided by the number of publications
This number is then reduced by 10 percent, (but not < $0.10/MMBtu or > $0.30/ MMBtu)
The result … is the index-based value for production from all leases in the index zone.

12. Dual Accounting Regulations
§ Alternative Method
§ § , , and Actual Dual Accounting Method
The new Rule amends March 1, 1988 rule on Indian Oil Valuation which was re-codified in 1996.
Detailed Background Information (For MMS and 202 Personnel only)
MMS published 2006 Indian Oil Proposed Rule in Federal Register on February 13, 2006
New rule amends existing regulations at 30 CFR through governing the valuation for royalty purposes of crude oil produced from Indian leases
Consultation and Coordination with Indian Tribal Governments
In accordance with Executive Order and Department policy, MMS consults with Indian tribes and individual Indian mineral owners on policy changes that may affect them
Before developing the proposed rule, MMS held a series of eight (8) public meetings in March and June 2005 to consult with Indian tribes and individual Indian mineral owners
Federal Register Reference
Public meetings were scheduled in three (3) different locations, announced in the 2005 Establishing Oil Value for Royalty Due on Indian Leases--Workshop
70 FR 8556, February 22, 2005, Public Workshop on Proposed Rule—Establishing Oil Value for Royalty due on Indian Leases
Rulemaking Activity
71 FR 7453, Feb 13, 2006
Indian Oil Valuation Proposed Rule
70 FR 8556, Feb 22, 2005
Public Workshop on Proposed Rule—
Establishing Oil Value for Royalty Due on Indian Leases
65 FR 58237, Sep 28, 2000
Proposed Rule
65 FR 10436, Feb 28, 2000
Supplementary Proposed Rule and
Notice of Extension of Comment Period
63 FR 7089, Feb 12, 1998
63 FR 17349, Apr 9, 1998
Extension of Public Comment Period
65 FR 403, Jan 5, 2000
Supplementary Proposed Rule

13. Part A Certification 1) Lease terms do not require it
2) Gas is never processed
3) Btu quality of gas is <= 1000 Btu/cf
4) Gas is not processed until after the gas flows into a pipeline with an index located in an index zone, or
5) … into a mainline pipeline not in an index zone
There are 5 reasons included in Part A of the 4410 which exempt Lessees from
performing DA:
READ following:
- Lease terms do not require dual accounting.
- The gas is never processed.
- The Btu content of the gas is <= 1000 Btu/cf at the lease measurement pt
- Gas from the lease is never processed … until after it enters a pipeline with an index located in an index zone
- Gas from the lease is never processed … until after it enters a mainline pipeline not located in an index zone.
NOTE:
“Pipeline quality gas”
gas came to be defined as natural gas (1) within + / - 5 percent of
the heating value of pure methane, or 1,010 Btu per cubic foot under
standard atmospheric conditions, and (2) free of water and toxic or corrosive
contaminants.

14. Indian Oil Rule

15. Indian Oil Valuation Regulations
The current Indian Oil Valuation Rule was published in Federal Register on May 1, 2015.
Effective date of the Rule was July 1, 2015
30 CFR § – §
The new Rule amends March 1, 1988 rule on Indian Oil Valuation which was re-codified in 1996.
Detailed Background Information (For MMS and 202 Personnel only)
MMS published 2006 Indian Oil Proposed Rule in Federal Register on February 13, 2006
New rule amends existing regulations at 30 CFR through governing the valuation for royalty purposes of crude oil produced from Indian leases
Consultation and Coordination with Indian Tribal Governments
In accordance with Executive Order and Department policy, MMS consults with Indian tribes and individual Indian mineral owners on policy changes that may affect them
Before developing the proposed rule, MMS held a series of eight (8) public meetings in March and June 2005 to consult with Indian tribes and individual Indian mineral owners
Federal Register Reference
Public meetings were scheduled in three (3) different locations, announced in the 2005 Establishing Oil Value for Royalty Due on Indian Leases--Workshop
70 FR 8556, February 22, 2005, Public Workshop on Proposed Rule—Establishing Oil Value for Royalty due on Indian Leases
Rulemaking Activity
71 FR 7453, Feb 13, 2006
Indian Oil Valuation Proposed Rule
70 FR 8556, Feb 22, 2005
Public Workshop on Proposed Rule—
Establishing Oil Value for Royalty Due on Indian Leases
65 FR 58237, Sep 28, 2000
Proposed Rule
65 FR 10436, Feb 28, 2000
Supplementary Proposed Rule and
Notice of Extension of Comment Period
63 FR 7089, Feb 12, 1998
63 FR 17349, Apr 9, 1998
Extension of Public Comment Period
65 FR 403, Jan 5, 2000
Supplementary Proposed Rule

16. 30 CFR§ How do I fulfill the lease provision regarding valuing production on the basis of the major portion of like-quality oil?
This section applies to any Indian lease that:
Contain a major portion provision for determining value for royalty purposes, or;
Provide that the Secretary may establish value for royalty purposes.
The value of production for royalty purposes for your lease is the higher of either the value determined under this section [Index Based Major Portion (IBMP) value] or the gross proceeds value you calculate under sections or , as appropriate.

17. Index-Based Major Portion (IBMP) Price
ONRR will calculate the IBMP value using the NYMEX CMA for each designated area, adjusted for an LCTD
(NYMEX CMA Price) X (1 – LCTD)
Or,
Oklahoma only = (NYMEX CMA Price +/- Roll) X (1 – LCTD)
ONRR will publish the IBMP prices for each designated area and crude oil type on its website,
We will publish the IBMP prices by the middle of the month for reporting at the end of the month
Use of estimates gives an additional month to report. Contact your “Reporter Contact” person for help setting up an estimate

18. How ONRR Adjusts the LCTD
ONRR will monitor the reported monthly oil volumes for gross proceeds sales (non-OINX) and adjust the LCTD 10% if necessary
Scenario 1
Reported Gross Proceeds Sales Volumes are below 22% of total volume
Increase the LCTD by 10%
Scenario 2
Reported Gross Proceeds Sales Volumes are between 22% - 28% of total volume
LCTD does not change
Scenario 3
Reported Gross Proceeds Sales Volumes are above 28% of total volume
Decrease the LCTD by 10%

19. Location and Crude Type Differential (LCTD)
Captures the difference in value due to location and quality differences between Light Sweet Crude (WTI) at Cushing, Oklahoma (NYMEX) and other crude oil types in each designated area.
Ensures that the IBMP price closely reflects a 75% major portion value of a particular crude type within the applicable designated area.
ONRR will monitor the LCTD for each designated area on a monthly basis to ensure tribes continue to receive a 25% from the top major portion.

26. Questions?