Indian Example: Initial Unprocessed Gas Reporting (Arm’s-Length Sale) in Non-Index Zone (Major Portion)

Overview

For Indian leases not located in an index zone, 30 CFR 1206.174(a)(4)(i) requires a lessee to initially value unprocessed gas under the appropriate paragraph of section §1206.174. For unprocessed gas sold under an arm’s-length contract, these regulations direct lessees to value the gas for royalty purposes based on the lessee’s gross proceeds. This example illustrates how you should calculate royalties for reporting for leases not in an index zone.

Important Note on Reporting Leases NOT in an Index Zone: 

Leases not in an index zone require at least two, and possibly three, calculations:

1. Initial calculations and reporting based on gross proceeds, as shown in this example, and
2. comparing the gross proceeds value to the major portion value which will be published at a later date, and if necessary,
3. adjusting your reporting. After the publication of the major portion price, you will need to complete this comparison as well as any required dual accounting.

This example applies when you meet all of the following circumstances:

• You value gas produced from an Indian oil and gas lease NOT located within an index zone.
• Your lease contains a major portion provision or provides for the Secretary to determine value.
• You initially value your gas for royalty purposes based on the gross proceeds under an arm’s-length contract under §1206.174(b).
• Your sales contract provides for payment on unprocessed gas.

If you have any questions regarding whether this example applies to your situation, please contact royaltyvaluation@onrr.gov. You can find a map of major portion areas on ONRR’s website: Indian Gas Major Portion Map.

Helpful Tips

Throughout this example, look for caution and info boxes to help you along the way.

Detailed Example

PC04 - Unprocessed Gas

Royalty is due on the full quantity and quality of unprocessed gas measured at the royalty measurement point (RMP) (see §1206.175(a)).

Step 1:

Determine the gas sales volume and heat content (gas MMBtu):

• Identify the royalty-bearing gas volume and heat content measured at the royalty meter:
  -  In this example, the sample statement includes “Gross Wellhead Mcf” (volume)
      (A) and “Gross Wellhead MMBtu” (heat content) (B) measured at the RMP
  -  Do not use the “Total Settled MMBtu.” That is not the full amount measured at the
      RMP because of the deductions of “Compressor Fuel” (D) and “System Fuel” (E).
      In our assumptions, we noted that these deductions are 100% disallowed because
      they are costs of placing the product in marketable condition
• The sales volume is 261.95 Mcf and the gas MMBtu is 274.08 MMBtu

Step 2:

Calculate the gas sales value:

• Multiply the gas MMBtu determined under Step 1 (274.08 MMBtu) (B) by the gas sales price ($1.50930/MMBtu) (C)
• The gas sales price may not be reduced by any costs of placing the gas into marketable condition under §1206.174(h)
• The total gas sales value is $413.67

Step 3:

Calculate the Royalty Value Prior to Allowances (RVPA):

• Multiply the gas sales value found under Step 2 ($413.67) by the royalty rate (18%)
• The total RVPA is $74.46 

Step 4:

Calculate the Royalty Value Less Allowances (RVLA):

• In this example, we assume there are no transportation costs so the lessee may not take any allowances
• When no allowances are taken, the RVPA and RVLA are the same
• The RVLA is $74.46

Here is what the initial royalty reporting looks like:

Step 5:

For leases in a non-index zone (major portion), initial reporting is only the first step in the process.

• After ONRR publishes the major portion price, you must compare the unprocessed sales price to the major portion price to fulfill the major portion requirement in your lease. You also need to complete any required dual accounting.
• If you elected alternative dual accounting for your unprocessed gas, view the Revised Unprocessed Gas in a Non-Index Zone (Major Portion) Using Alternative Dual Accounting example.You may elect alternative dual accounting using the ONRR Form-4410 Part B.
• If you elected actual dual accounting for your unprocessed gas, you must use §1206.181 to establish processing costs when neither you nor someone acting on your behalf processes the gas. Under §1206.181, you must use the first applicable of the four given methods to establish processing costs for dual accounting purposes. Please also be mindful of the additional regulatory requirements in this section (§§1206.176, 179, 180). Collectively, all of these obligations must be satisfied in order to use actual dual accounting. For assistance in ensuring you meet all these obligations, please contact Royalty Valuation at royaltyvaluation@onrr.gov.
• If you believe you are exempt from dual accounting for your unprocessed gas (see §§1206.176(c)-(e)), you still need to fulfill the major portion provision of your lease. If you need assistance with this comparison, please contact Royalty Valuation at royaltyvaluation@onrr.gov. An ONRR Form-4410 Part A needs to be filed for each lease you believe to be exempt. 

Indian Unprocessed Gas Example Statement

This example addresses reporting and calculations for the following product codes. The BLUE letters refer to fields on the sample statement. 

Download sample statement PDF

Product Codes

This example addresses reporting and calculations for various product codes. You can find more information about product codes and reporting in the ONRR Reporter and Payor Handbooks.