Indian Example: Minimum Value Provision for NGLs (Arm’s-Length Sales)

Overview

When you report the value of natural gas liquids (NGLs) produced from Indian lands, ONRR’s regulations at 30 CFR §1206.174(g)(2) direct you to ensure the value of the NGLs meets or exceeds the regulatory minimum value. The regulatory minimum value is set by region as a minimum price, as explained in §1206.174(g)(2)(i)(A) and (B). This example demonstrates how to calculate and use the NGL minimum value when determining the royalty value for NGLs produced from Indian lands.

This example will:

calculate “ONRR’s regulatory minimum price” for each NGL component
determine the “lessee’s price at the plant” for each NGL component
compare the prices to determine which is higher

“ONRR’s regulatory minimum price” is the commercial price bulletin NGL component price (also called the published price) minus the adjustment specified in the regulations at §1206.174(g)(2)(i)(A) and (B). The adjustment represents “typical” transportation and fractionation (T&F) fees. Therefore, ONRR’s regulatory minimum price is the price of the NGL components upstream of the fractionation point, such as at a gas processing plant.

Since ONRR’s regulatory minimum price (index price less adjustment) represents an NGL component price at a gas processing plant, we will need to find and compare the lessee’s price at a similar location (at or near a gas processing plant in the field). A lessee may process, transport, fractionate, and sell NGLs in a variety of ways. Several different scenarios are discussed in more detail at the end of this example.

For Form ONRR-2014 reporting purposes, a lessee’s actual NGL transportation and fractionation costs should be reported separately as allowances (and not rolled into the NGL sales value). Alternatively, the adjustment used to calculate ONRR’s regulatory minimum price is not an actual transportation or processing cost and is therefore rolled into the NGL sales value. This difference in reporting methods adds some complexity to reporting Indian NGLs, which is further explained later in example.

This example is based on contractual Scenario 1 as described but the methods and calculations will be similar for other contractual scenarios.

The lease and contracts for this example meets all the following conditions:

NGLs produced from an Indian oil and gas lease
The terms of the lease require valuation under ONRR's regulations.

If you have any questions regarding whether this example applies to your situation, please contact royaltyvaluation@onrr.gov.

This example walks you through the royalty calculation (including the post-plant transportation and fractionation costs) for Product Code 07 ONLY and shows you how to complete the relevant fields on a sample Form ONRR-2014 after each step. This example only covers valuation-related fields in the order they appear on the Form ONRR-2014. You can find more information about product codes, complete instructions on filing the Form ONRR-2014, and other reporting topics in the ONRR Reporter and Payor Handbooks.

Please refer to our other Indian gas valuation examples for more information or email us at royaltyvaluation@onrr.gov.

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Detailed Example

The following is based on a sample statement. Statements may vary. Be sure to read carefully and contact royaltyvaluation@onrr.gov if you need further assistance!

The assumptions below are for purposes of this example only. The assumptions provide the basis to show you how to perform the necessary calculations. Your situation may vary from these assumptions. Please contact royaltyvaluation@onrr.gov with your specific questions.

Assumptions for this example:

The NGLs are produced from an Indian lease in the San Juan Basin requiring compliance with the minimum value provision for NGLs.
The royalty rate is 18%.
The NGLs are sold after fractionation at Napoleonville (the “downstream” location) under an arm’s-length contract.
The downstream sales price per gallon of NGL components and 100% of the allocated NGL gallons (not the net or settlement gallons) are given in the table after assumption 6.
Actual NGL post-plant transportation costs of $0.06/gallon and NGL fractionation costs of $0.04/gallon are incurred by the lessee (Scenario 1, described at the end of this document). Here, we assume the T&F fee; you need to check your contract or other sources for the amount. a. The transportation portion of the T&F fee does not include any costs of marketable condition or other disallowed costs and can be included in a transportation allowance. b. The fractionation fee for this example does not include costs of marketable condition or other disallowed costs and can be included in a processing allowance.
Because these NGLs are produced in the San Juan Basin, we will use Mt. Belvieu posted prices to calculate ONRR’s regulatory minimum value (§1206.174(g)(2)(i)(A)). In this example we use the assumed Mt. Belvieu prices in the table:

Component	Purity Ethane (C2)	Propane (C3)	Isobutane (iC4)	Normal Butane (nC4)	Natural Gasoline (C5+)
Downstream sales price ($/gallon)	0.19	0.56	0.81	0.84	1.03
100% allocated gallons	11,245	6,774	1,089	2,772	4,236
Mont Belvieu ($/gallon)	0.23	0.48	0.88	0.90	0.98

This example only addresses calculating the NGL Value for your reporting. You may have other product codes to calculate and report as well ass other transportation and/or processing allowances (which require unbundling) related to them. Please refer to our other Indian gas valuation examples for more information or email us at royaltyvaluation@onrr.gov.

PC 07 – Natural Gas Liquids (NGLs)

Step 1:

Determine which is higher: ONRR’s regulatory minimum price or the lessee’s price at the plant for each NGL component.

Under §1206.174(g)(2), the reported NGL value must not be less than the regulatory minimum price given in the regulations

Step 1a:

Calculate ONRR’s regulatory minimum price by adjusting the published price for each NGL component. For the San Juan Basin, the regulations at §1206.174(g)(2)(i)(A) specify the minimum price is the commercial price bulletin NGL price at Mt. Belvieu, TX less eight cents:

Subtract $0.08 from the published price for ethane ($0.23/gallon). The regulatory minimum price for ethane is $0.15/gallon.
Subtract $0.08 from the published price for propane ($0.48/gallon). The regulatory minimum price for propane is $0.40/gallon.
Subtract $0.08 from the published price for isobutane ($0.88/gallon). The regulatory minimum price for isobutane is $0.80/gallon.
Subtract $0.08 from the published price for normal butane ($0.90/gallons). The regulatory minimum price for normal butane is $0.82/gallon.
Subtract $0.08 from the published price for natural gasoline ($0.98/gallon). The regulatory minimum price for natural gasoline is $0.90/gallon.

For step 1a, calculate ONRR’s regulatory minimum price by using the formula of published price minus the regulatory adjustment. If the ethane published price is 23 cents per gallon and you subtract the regulatory adjustment of 8 cents per gallon then the ONRR regulatory minimum price is then 19 cents. If the propane published price is 48 cents per gallon and you subtract the regulatory adjustment of 8 cents per gallon then the ONRR regulatory minimum price is then 40 cents. If the isobutane published price is 88 cents per gallon and you subtract the regulatory adjustment of 8 cents per gallon then the ONRR regulatory minimum price is then 80 cents. If the normal butane published price is 90 cents per gallon and you subtract the regulatory adjustment of 8 cents per gallon then the ONRR regulatory minimum price is then 82 cents. If the natural gasoline published price is 98 cents per gallon and you subtract the regulatory adjustment of 8 cents per gallon then the ONRR regulatory minimum price is then 90 cents.

Step 1b:

Calculate the lessee’s price at the plant by subtracting the assumed T&F fees from the assumed downstream sales price for each component. (see Scenario 1 for more information)

Subtract the T&F fees ($0.10/gallon) from the downstream sales price for ethane ($0.19/gallon). The lessee’s price at the plant for ethane is $0.09/gallon.
Subtract the T&F fees ($0.10/gallon) from the downstream sales price for propane ($0.56/gallon). The lessee’s price at the plant for propane is $0.46/gallon.
Subtract the T&F fees ($0.10/gallon) from the downstream sales price for isobutane ($0.81/gallon). The lessee’s price at the plant for isobutane is $0.71/gallon.
Subtract the T&F fees ($0.10/gallon) from the downstream sales price for normal butane ($0.84/gallon). The lessee’s price at the plant for normal butane is $0.74/gallon.
Subtract the T&F fees ($0.10/gallon) from the downstream sales price for natural gasoline ($1.03/gallon). The lessee’s price at the plant for natural gasoline is $0.93/gallon.

For step 1b, calculate the lessee's price at the plant. The lessee's price at the plant equals the downstream sales price minus the T&F fees. If the downstream sales price for ethane is 19 cents per gallon minus the 10 cents for T&F fees then the ethane price at the plant equals 9 cents per gallon. If the downstream sales price for propane is 56 cents per gallon minus the 10 cents for T&F fees then the ethane price at the plant equals 46 cents per gallon. If the downstream sales price for isobutane is 81 cents per gallon minus the 10 cents for T&F fees then the ethane price at the plant equals 71 cents per gallon. If the downstream sales price for normal butane price is 84 cents per gallon minus the 10 cents for T&F fees then the ethane price at the plant equals 74 cents per gallon. If the downstream sales price for natural gasoline price is $1.03 per gallon minus the 10 cents for T&F fees then the ethane price at the plant equals 93 cents per gallon.

Step 1c:

Compare ONRR’s regulatory minimum price to the lessee’s price at the plant and note which is higher:

For ethane, ONRR’s regulatory minimum price of $0.15/gallon is higher than the price at the plant of $0.09/gallon
For ethane, ONRR’s regulatory minimum price of $0.15/gallon is higher than the price at the plant of $0.09/gallon
For propane, the lessee’s price at the plant of $0.46/gallon is higher than the regulatory minimum price of $0.40/gallon
For isobutane, ONRR’s regulatory minimum price of $0.80/gallon is higher than the price at the plant of $0.71/gallon
For normal butane, ONRR’s regulatory minimum price of $0.82/gallon is higher than price at the plant of $0.74/gallon
For natural gasoline, the lessee’s price at the plant of $0.93/gallon is higher than the regulatory minimum price of $0.90/gallon

NGL Component	ONRR’s Regulatory Minimum Price ($/gal)	Lessee’s Price at the Plant ($/gal)	Higher Price
Ethane	$0.15	$0.09	ONRR’s regulatory minimum price
Propane	$0.40	$0.46	Lessee’s price at plant
Isobutane	$0.80	$0.71	ONRR’s regulatory minimum price
Normal Butane	$0.82	$0.74	ONRR’s regulatory minimum price
Natural Gasoline	$0.90	$0.93	Lessee’s price at plant

Step 2:

Calculate the NGL sales value. The total NGL sales value reported on the Form ONRR-2014 is composed of the sales value for each NGL component added together. In this example, some NGL components are valued using ONRR’s regulatory minimum price, while others are valued using the lessee’s price at the plant.

When an NGL component is valued using the lessee’s price at the plant, that component’s value (for reporting the Form ONRR-2014 sales value field) should not be reduced by any of the lessee’s actual NGL transportation and fractionation costs. These actual costs should be reported separately as allowances.

Alternatively, when an NGL component is valued using ONRR’s regulatory minimum price, the regulatory adjustment ($0.07/gal or $0.08/gal, see §1206.174(g)(2)(i)) is not an actual transportation or processing cost and is therefore included in the NGL sales value.

Step 2a:

Calculate the value of NGL components where ONRR’s regulatory minimum price was higher than the lessee’s price at the plant.

Identify the components in Step 1c for which ONRR’s regulatory minimum price is higher. Ethane, isobutane, and normal butane have an ONRR’s regulatory minimum price that is higher than the lessee’s price at the plant.
Multiply ONRR’s regulatory minimum price for ethane ($0.15/gallon) by the ethane gallons (11,245 gallons). The ethane value is $1,686.75.
Multiply ONRR’s regulatory minimum price for isobutane ($0.80/gallon) by the isobutane gallons (1,089 gallons). The isobutane value is $871.20.
Multiply ONRR’s regulatory minimum price for normal butane ($0.82/gallon) by the normal butane gallons (2,772 gallons). The normal butane value is $2,273.04.

Step 2b:

Calculate the value of NGL components where the lessee’s price at the plant was higher than the regulatory minimum price.

Identify the components in Step 1c for which the lessee’s price at the plant is higher. Propane and natural gasoline have a lessee’s price at the plant higher than the regulatory minimum price.
Multiply the downstream sales price for propane ($0.56/gallon) by the propane gallons (6,744 gallons). The propane value is $3,776.64.
Multiply the downstream sales price for natural gasoline ($1.03/gallon) by the natural gasoline gallons (4,236 gallons). The natural gasoline value is $4,363.08.

For step 2b, calculate the value of components with a higher lessee's price at the plant. The value of component equal the lessee's price at the plant multiplied by gallons. The value of propane is $0.56 per gallon multiplied by 6,744 gallons, which equals $3,776.64. The value of natural gasoline is $1.03 per gallon multiplied by 4,236 gallons, which equals $4,363.08.

Step 2c:

Calculate the total NGL sales value:

Add the values for the ethane ($1,686.75), propane ($3,776.64), isobutane ($871.20), normal butane ($2,273.04), and natural gasoline ($4,363.08). The total NGL sales value is $12,970.71.

Step 3:

Calculate the total NGL sales volume:

Add the 100% allocation gallon volumes for the ethane (11,245 gallons), propane (6,774 gallons), isobutane (1,089 gallons), normal butane (2,772 gallons), and natural gasoline (4,236 gallons). The total NGL sales value is 26,086 gallons.

Note: Royalty is due on the NGLs actually recovered, not on the theoretical NGLs or the NGLs on which the lessee is actually paid.

Step 4:

Multiply the sales value from Step 2c ($12,970.71) by the royalty rate (18%). The RVPA is $2,334.73.

Here is what the royalty reporting looks like so far:

Prod Code	Sales Volume	Gas MMBtu	Sales Volume	RVPA	Trans Allow	Proc Allow	RVLA
07	26,086		$12,970.71	$2,334.73

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Transportation Allowance

In this example, we assume there are no pre-plant transportation costs. Also, we assume the post-plant transportation fee does not include marketable condition or other disallowed costs and can be claimed as an allowance.

Only the post-plant transportation costs for NGL components with a higher lessee’s price at the plant will contribute to the transportation allowance. In this example, those components are propane and natural gasoline. The lessee’s actual transportation costs for moving these components may be included in a transportation allowance. The other components, however, will have no transportation allowance reported, because they are valued using ONRR’s regulatory minimum price (which already includes an adjustment).

Step 1

Determine the gallons of NGLs where the lessee’s price at the plant is higher:

Locate the components from Step 2a in the PC 07 - NGLs section where the lessee’s price at the plant is higher. These components are propane and natural gasoline.
Add the gallons of propane (6,774 gallons) and gallons of natural gasoline (4,236 gallons) to get the total gallons where the lessee’s price at the plant is higher.
The total gallons with a higher lessee’s price at the plant is 11,010 gallons.

Note: If your contract does not specify a T&F split, you can see if the plant can provide information or you can look at other relevant information (such as FERC tariffs) to produce a reasonable split value.

For step 1, first determine the gallons of NGLs where the lessee’s price at the plant is higher. Add the gallons of propane (6,774 gallons) and gallons of natural gasoline (4,236 gallons) to get the total gallons where the lessee’s price at the plant is higher. The total gallons with a higher lessee’s price at the plant is 11,010 gallons.

Step 2:

Calculate the transportation allowance:

In this example, we assume that NGL post-plant transportation fee is allowable, so costs associated with this fee can be included in the transportation allowance for components with a higher lessee’s price at the plant.
Multiply the total NGL gallons from Step 1 (11,010 gallons) by the NGL post-plant transportation fee ($0.06/gallon), and then by the royalty rate (18%)
The transportation allowance is $118.91

Step 3:

Ensure the transportation allowance does not exceed the 50% transportation allowance limit under §1206.177(c)(1):

Except as provided in paragraphs (c)(2) and (3) of this section, your transportation allowance deduction for each sales type code may not exceed 50 percent of the value of the unprocessed gas, residue gas, or gas plant product. For purposes of this section, natural gas liquids are considered one product.

You may only take your reasonable, actual, allowed costs up to 50% of the value of the transported product.

Step 3a:

Calculate the 50% transportation allowance limit for NGLs:

Locate the NGL Royalty Value Prior to Allowances (RVPA) amount from Step 5 of PC 07 - NGLs ($2,334.73)
Multiply the RVPA of the NGLs ($2,334.73) by 50% to find the limit of $1,167.37

For step 3a, calculate the transportation allowance limit for NGL by multiplying the NGL Royalty Value Prior to Allowances by the limit percentage. The RVPA of the NGLs ($2,334.73) is multiplied by 50%. The limit equals $1,167.37.

Step 3b:

Compare the transportation allowance for NGLs to the 50% limit calculated above:

Locate the transportation allowance for NGLs from Step 2 ($118.91)
$118.91 is less than $1,167.36 and is therefore within the transportation allowance limit

For step 3b, compare the transportation allowance for NGLs to the 50% limit calculated previously. Locate the transportation allowance for NGLs ($118.91) and compare to the transportation allowance limit ($1,167.36) to find that the NGL allowance is less than the transportation allowance limit. It is within the transportation allowance limit.

Here is what the royalty reporting looks like at this point:

Prod Code	Sales Volume	Gas MMBtu	Sales Value	RVPA	Trans Allow	Proc Allow	RVLA
07	26,086		$12,970.71	$2,334.74	-$118.91

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Processing Allowance

You may only take a processing allowance against PC 07 – NGLs or other gas plant products, if recovered. In this example, we assume the only processing costs are the fractionation costs. Also, we assume the fractionation fee does not include marketable condition or other disallowed costs and can be claimed as an allowance.

Only the fractionation costs for NGL components with a higher lessee’s price at the plant will contribute to the processing allowance. In this example, those components are propane and natural gasoline. The lessee’s actual costs for fractionating these components may be included in a processing allowance. The other components, however, will have no processing allowance reported, because they are valued using ONRR’s regulatory minimum price (which already includes an adjustment).

Step 1:

Determine the gallons of NGLs with a higher lessee’s price at the plant:

Locate the total gallons valued using the downstream sales prices from Step 1 of the Transportation Allowance (11,010 gallons)

Step 2:

Calculate the processing allowance

In this example, we assume that fractionation costs are allowable, so the cost of the fractionation can be included in the processing allowance for components with a higher lessee’s price at the plant.
Multiply the total NGL gallons from Step 1 (11,010 gallons) by the NGL fractionation fee ($0.04/gallon), and then by the royalty rate (18%)
The processing allowance is $79.27

Step 3:

Ensure the processing allowance does not exceed the 66 2⁄3% processing allowance limit under §1206.179(c):

The processing allowance deduction based on an individual product may not exceed 662⁄3 percent of the value of each gas plant product determined under §1206.174. Before you calculate the 662⁄3 percent limit, you must first reduce the value for any transportation allowances related to post-processing transportation authorized under §1206.177.

Note: Under 30 CFR §1206.179(b) "ONRR considers NGLS to be one product" and therefore the allowance limit is on the total NGL value.

You may only take your reasonable, actual, allowed costs up to 66 2⁄3% of the total NGL value, first reduced for post-plant transportation.

Step 3a:

Reduce the NGL value for post-processing (post-plant) transportation costs and calculate the limit:

Subtract the post-plant NGL transportation ($118.91) from the NGL Royalty Value Prior to Allowances from Step 5 of PC 07 - NGLs ($2,334.73) to get $2,215.82
Multiply the reduced amount ($2,215.82) by 66 2⁄3% (0.66667)
The limit is $1,477.22

Step 3b:

Compare the processing allowance to the limit calculated above:

Compare the processing allowance limit from Step 3a ($1,477.22) to the processing allowance in Step 2 ($79.27)
$79.27 is less than $1,477.22 and is therefore within the processing allowance limit

For this step, compare the processing allowance to the limit calculated previously. Compare the processing allowance limit ($1,477.22) to the processing allowance ($79.27). $79.27 is less than $1,477.22 and is therefore within the processing allowance limit.

Here is what the royalty reporting looks like at this point:

Prod Cod	Sales Volume	Gas MMBtu	Sales Value	RVPA	Trans Allow	Proc Allow	RVLA
07	26,086		$12,970.71	$2,334.73	-$118.91	-$79.27

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Prod Code	Sales Volume	Gas MMBtu	Sales Value	RVPA	Trans Allow	Proc Allow	RVLA
07	26,086		$12,970.71	$2,334.73	-$118.91	$179.27	$2,136.55

Scenarios

There are three common contractual scenarios, and determining which scenario applies to your situation will help determine how to calculate the lessee’s price at the plant (which is then compared to ONRR’s regulatory minimum price). Depending on the scenario, you may need to gather several documents, which may include contracts and/or statements from the gas plant, the NGL purchaser, the NGL transporter, and/or the NGL fractionator.

Scenario 1:

The lessee retains title to its NGLs extracted at a gas plant.
The lessee pays actual costs of post-plant transportation and fractionation (T&F fees) from the gas plant to a downstream sales point.
The lessee sells the NGLs at a point downstream of the gas processing plant (e.g., Mt. Belvieu).
The lessee's price at the gas plant is the downstream sales price minus the actual T&F fees.
If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the downstream sales price. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as previously calculated.

In this first scenario, the lessee retains title to its NGLs extracted at a gas plant. The lessee pays actual costs of post-plant transportation and fractionation (T&F fees) from the gas plant to a downstream sales point. The lessee sells the NGLs at a point downstream of the gas processing plant (e.g., Mt. Belvieu). The lessee’s price at the gas plant is the downstream sales price minus the actual T&F fees. If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the downstream sales price. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as calculated above.

Scenario 2:

The lessee sells the NGLs to the processor at the gas plant.
The lessee’s proceeds are based on the processor’s arm’s-length sales price at a downstream location less the processor’s transportation and fractionation (T&F) fees.
The lessee's price at the gas plant is the price shown on the gas plant statement, since the T&F fees have already been netted out from the downstream sales price.
If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the downstream sales price. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as previously calculated

In this second scenario, the lessee sells the NGLs to the processor at the gas plant. The lessee’s proceeds are based on the processor’s arm’s-length sales price at a downstream location less the processor’s transportation and fractionation (T&F) fees. The lessee’s price at the gas plant is the price shown on the gas plant statement, since the T&F fees have already been netted out from the downstream sales price. If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the downstream sales price. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as calculated above.

Scenario 3:

The lessee sells the NGLs to the processor at the gas plant.
The lessee sells the NGLs to the processor at the gas plant.
The lessee's proceeds are based on the arm’s-length contract price at the plant.
The lessee's price at the gas plant is the price shown on the gas plant statement.
The processor provides no breakdown of how it calculates the contract price.
If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the sales price at the gas plant. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as previously calculated

For this third scenario, the lessee sells the NGLs to the processor at the gas plant. The lessee’s proceeds are based on the arm’s-length contract price at the plant. The lessee’s price at the gas plant is the price shown on the gas plant statement. The processor provides no breakdown of how it calculates the contract price. If the lessee’s price at the gas plant is higher than ONRR’s regulatory minimum price for an NGL component, the price used to calculate the sales value of that NGL component is the sales price at the gas plant. However, if ONRR’s regulatory minimum price is higher, it is used to calculate the sales value of that component. The Form ONRR-2014 Sales Value for PC 07 NGLs is the combined sales value of the individual NGL components as calculated above.

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Indian Example: Minimum Value Provision for NGLs (Arm’s-Length Sales)