Indian Example: Processed Gas Reporting (Arm’s Length Dedicated Contract) in an Index Zone with Alternative Dual Accounting

Determining Dual Accounting

Many Indian leases require accounting for comparison, or “dual accounting.” The following is one example of dual accounting language:

“… and that royalty will be computed on the value of gas or casinghead gas, or on the products thereof (such as residue gas, natural gasoline, propane, butane, etc.), whichever is the greater.” (emphasis added)

Dual accounting may not be the only requirement of your lease. Your reporting may also be subject to other requirements. Please read the complete text of your lease to be sure you meet all the provisions in it.

There are two choices for dual accounting – actual and alternative. You make this election using the Form ONRR-4410 Part B. Section 1206.173(a)(2)(ii) states:

You may elect to begin using the alternative methodology for dual accounting at the beginning of any month. The first election to use the alternative methodology will be effective from the time of election through the end of the following calendar year. Thereafter, each election to use the alternative methodology must remain in effect for 2 calendar years. You may return to the actual dual accounting method only at the beginning of the next election period or with the written approval of ONRR and the tribal lessor for tribal leases, and ONRR for Indian allottee leases in the designated area.  — Section 1206.173(a)(2)(ii)

Assume, for this example, that the lessee chose alternative dual accounting. If you need guidance on actual dual accounting, refer to the Processed Gas Reporting (Arm’s-Length Dedicated Contract) in an Index Zone Using Actual Dual Accounting example. 

When calculating royalties due for gas sold under an arm’s-length dedicated contract, you should follow this process:

   A.  Calculate the gross proceeds received for the gas sale under §1206.174.

   B.  Calculate the alternative dual accounting value under §1206.172 and §1206.173.

   C.  Compare the values determined in steps 1 and 2 and report and pay on the higher value. 

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Part A: Calculate the Gross Proceeds, PC 03 – Residue Gas 

Royalty is due on residue gas resulting from processing, including disallowed plant fuel.

Step 1:

In order to determine the disallowed plant fuel volume in Mcf, you need to calculate a residue Btu factor:

• The Btu factor is the heating value per volume of the residue gas, calculated by dividing the net residue gas MMBtu (1,922.39 MMBtu) (H) by the volume of the net residue gas Mcf (1,697.81 Mcf) (G)
• The Btu factor is 1.13228 MMBtu/Mcf

Step 2:

Calculate the disallowed plant fuel volume (Mcf):

• Identify the total MMBtu plant fuel reported on the plant statement

             -  In this example, the plant fuel is called “Contractual Allocated Fuel” and is 326.40 MMBtu (F).

• Determine the total plant fuel volume (Mcf)

             -  Divide the contractual allocated fuel (326.40 MMBtu) (F) by the Btu factor (1.13228 MMBtu/Mcf)

• The total disallowed plant fuel volume is 288.27 Mcf

Step 3:

Calculate the total residue gas sales volume: 

• Add the volume of the residue gas sales (1,697.81 Mcf) (G) to the disallowed plant fuel volume from Step 2 (288.27 Mcf)
• The total residue gas sales volume is 1,986.08 Mcf
  

Step 4:

Calculate the total residue gas sales MMBtu:

• Add the energy content of the residue gas sales (1,922.39 MMBtu) (H) to the energy content of the disallowed plant fuel, labeled “Contractual Allocated Fuel” (326.40 MMBtu) (F)
• The total residue gas sales energy content is 2,248.79 MMBtu
  

Step 5:

Calculate the residue gas sales value:

• Multiply the residue gas sales MMBtu determined under Step 4 (2,248.79 MMBtu) by the residue gas price ($3.13905/MMBtu) (J)
• The residue gas price may not be reduced by any costs of placing the gas into marketable condition as described in §1206.174(h)
  
• The total residue gas sales value is $7,059.06
  

Step 6:

Calculate the Royalty Value Prior to Allowances (RVPA):

• Multiply the residue gas sales value calculated under Step 5 ($7,059.06) by the royalty rate (18%)
• The total RVPA is $1,270.63
  

Here is what the calculated gross proceeds look like so far:

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Part A: Calculate the Gross Proceeds, PC 07 – Natural Gas Liquids (NGLs)

Royalty is due on any NGLs resulting from processing. In order to comply with the minimum NGL value provision (explained in greater detail in the Minimum NGL Value Example), you should:

1. calculate the regulatory minimum price (the published NGL price less the regulatory adjustment)
2. determine the price at the plant
   
3. compare the prices for each NGL component
   

If the regulatory minimum price is higher, you use that in calculating the sales value for that component. If the price at the plant is higher, you use the downstream sales price (post-fractionation) to calculate the sales value for that component. Because the price at the plant is net of T&F fees, you must add those fees back in to calculate the downstream sales price. As those fees cannot be netted against the sales value, they should instead be taken as allowances where appropriate. For a more in-depth explanation of why the NGL minimum value is calculated this way, please see our full Processed Gas Reporting: Minimum Value Provision for NGLs Example (refer to Scenario 2 for details pertaining to this example).

Step 1:

Determine the NGL minimum value price for each NGL component:

• Under §1206.174(g)(2), the NGL value must not be less than the regulatory minimum value given in the regulations
  
• In this example, the minimum value for production in Utah (where our hypothetical lease is located) under §1206.174(g)(2)(i)(B), is the published NGL price at Conway, Kansas less seven cents. Below are the published NGL prices at Conway, Kansas:
  

Step 1a:

Calculate the regulatory minimum price by adjusting the published NGL component price. For Montana, reduce the published NGL price at Conway, Kansas by seven cents:

• Take the published NGL price for ethane ($0.24890/gallon) and subtract $0.07. The regulatory minimum price for ethane is $0.17890/gallon.
• Take the published NGL price for propane ($0.85283/gallon) and subtract $0.07. The regulatory minimum price for propane is $0.78283/gallon.
  
• Take the published NGL price for isobutane ($1.43603/gallon) and subtract $0.07. The regulatory minimum price for isobutane is $1.36603/gallon.
  
• Take the published NGL price for normal butane ($1.34133/gallon) and subtract $0.07. The regulatory minimum price for normal butane is $1.27133/gallon.
  
• Take the published NGL price for natural gasoline ($2.17513/gallon) and subtract $0.07. The regulatory minimum price for natural gasoline is $2.10513/gallon.
  

Step 1b:

Compare the regulatory minimum price from Step 1a to the price at the plant (which for this example is the price on the example gas plant statement (R)) and note which is higher

• For ethane, the price at the plant of $0.194145/gallon is higher than the regulatory minimum price of $0.17890/gallon
• For propane, the price at the plant of $0.810270/gallon is higher than the regulatory minimum price of $0.78283/gallon
  
• For isobutane, the regulatory minimum price of $1.36603/gallon is higher than the price at the plant of $1.365051/gallon
  
• For normal butane, the regulatory minimum price of $1.27133/gallon is higher than the price at the plant of $1.261770/gallon
  
• For natural gasoline (called “pentanes plus” on example statement), the regulatory minimum price of $2.10513/gallon is higher than the price at the plant of $2.049583/gallon
  

PC 07 Calculate Regulatory Minimum Price and Compare to Price at Plant (Steps 1a-1b):

Step 2:

Calculate the NGL sales value 

Step 2a:

Calculate the gross proceeds value of components where the price at the plant was higher than the regulatory minimum value (from Step 1b, ethane and propane). As discussed in Assumption #7 and the introduction to this section, the price at the plant is net of T&F fees, and we therefore cannot use it to calculate the sales value. Instead, we’ll use the downstream price, which is the price at the plant for each component plus the T&F fees.

• Take the price at the plant for ethane ($0.194145/gallon) and add the T&F fee ($0.12/gallon) to get the ethane downstream sales price of $0.314145/gallon
• Multiply the ethane downstream sales price ($0.314145/gallon) by the ethane gallons (2,684.22 gallons) (S) to get the ethane value. The ethane value is $843.23
  
• Take the price at the plant for propane ($0.810270/gallon) and add the T&F fee ($0.12/gallon) to get the propane downstream sales price of $0.930270/gallon
  
• Multiply the propane downstream sales price ($0.930270/gallon) by the propane gallons (2,038.99 gallons) (S) to get the propane value. The propane value is $1,896.81
  

Step 2b:

Calculate the value of NGL components where the regulatory minimum price was higher

• Take the regulatory minimum price for isobutane ($1.36603/gallon) and multiply by the isobutane gallons (367.74 gallons) (S). The isobutane value is $502.34
• Take the regulatory minimum price for normal butane ($1.27133/gallon) and multiply by the normal butane gallons (647.12 gallons) (S).  The normal butane value is $822.70
  
• Take the regulatory minimum price for natural gasoline ($2.10513/gallon) and multiply by the natural gasoline (pentanes plus) gallons (1,165.52 gallons) (S). The natural gasoline value is $2,453.57
  

PC 07 Value of Regulatory Minimum Price Components (Step 2b):

Step 2c:

Calculate the total NGL sales value

• Add the ethane value ($843.23), propane value ($1,896.81), isobutane value ($502.34), normal butane value ($822.70), and natural gasoline value ($2,453.57) for a total sales value of $6,518.65

Step 3: 

Determine the NGL sales volume:

• Locate the NGLs actually recovered by the plant on the plant statement under the Component Settlement section showing the “Allocated” amount (L)
• This is the NGL sales volume (6,903.59 gallons)
  

Step 4:

Determine the Royalty Value Prior to Allowances (RVPA/RVLA):

•  Multiply the sales value from Step 2c ($6,518.65) by the royalty rate (18%)
• The RVPA is $1,173.36

Here is what the royalty reporting looks like so far:

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Part A: Calculate the Gross Proceeds, PC 15 - Pipeline Fuel

Report gas used or lost along a pipeline using PC 15. The reporter letter dated December 18, 2014, addresses this topic in detail.

Step 1:

Determine the pipeline fuel sales value:

• Locate the “Contractual Field Deducts” MMBtu amount on the plant statement and report as a positive number for the Gas Sales MMBtu (162.20 MMBtu) (D)
• Also locate the pipeline fuel volume to report as the Sales Volume (129.75 Mcf) (C)
  
• Multiply the pipeline fuel MMBtu (162.20 MMBtu) (D) by the residue gas unit price ($3.13905/MMBtu) (J)
  
• Since there is no sale of the pipeline fuel, you value the pipeline fuel as a no-sale situation under §1206.174(c), and specifically §1206.174(c)(2), using the residue gas sales price (ensuring it is not reduced by marketable condition costs, per §1206.174(h)) to value like-quality gas
• The pipeline fuel sales value is $509.15
  

Step 2:

Determine the Royalty Value Prior to Allowances (RVPA):

• Multiply the pipeline fuel sales value from Step 1 ($509.15) by the royalty rate (18%)
• The RVPA is $91.65

Here is what the gross proceeds look like so far:

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Part A: Calculate the Gross Proceeds, Royalty Value Less Allowances

Lease terms dictate if you can take allowances. If you have questions about unbundling or allowances, you may contact us at onrrunbundling@onrr.gov or royaltyvaluation@onrr.gov. If you choose to unbundle the costs of transportation and processing to ensure marketable condition costs are not included, you may be able to calculate allowances for transportation and processing.

In this example, we assume our lease instrument does not allow deductions for transportation or processing costs (Assumption #8). Therefore, no allowances may be taken. Thus, the Royalty Value Prior to Allowances (RVPA) and Royalty Value Less Allowances (RVLA) are the same for all 3 product codes.

The final calculated gross proceeds look like this:

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Part B: Alternative Dual Accounting Index Zone Calculations

Having completed part A, you now calculate the alternative dual accounting value in part B:

   A.  Calculate the gross proceeds received for the gas sale under §1206.174.
   B.  Calculate the alternative dual accounting value under §1206.172 and §1206.173.
   C.  Compare the values determined in parts A and B and report and pay on the higher value.

Step 1:

The regulations at §1206.173 governing alternative dual accounting use the following equation:

Step 2: 

Identify the MMBtu at the approved royalty measurement point (RMP):

• In this example, the “Gross Wellhead MMBtu” (B) is 3,013 MMBtu

Step 3:

Locate the index zone price on the Indian Gas Index Prices web page. In this example, the lease is in the Central Rocky Mountain index zone.

• The production month is January 2019
• The index zone price is $3.98/MMBtu
  

Step 4:

Identify the increment (I) you need to use for the calculation (see §1206.173(b)(2)(ii) for the published copy of the sample chart below). The applicable Btu is the volume-weighted-average Btu for the property computed from measurements at the facility measurement point(s) for gas production from the lease (§1206.173(b)(3)). The increment also depends on whether or not you have plant ownership interest.

• In this example, the Btu content calculated from the statement is 1226 Btu/Mcf, calculated based on the regulations at §1206.173(b)(3)
• Assume NO plant ownership
  
• The increment is 0.0975
  

Step 5: 

Calculate the alternative dual accounting value:

• Multiply the RMP (3,013 MMBtu) (B) by the price ($3.98/MMBtu), by 1 plus the increment (0.0975)
• The alternative dual accounting value is $13,160.93
  

Step 6:

Calculate the Royalty Value Prior to Allowances (RVPA) and the Royalty Value Less Allowances (RVLA) of the alternative dual accounting value:

• Multiply the alternative dual accounting value calculated under Step 5 ($13,160.93) by the royalty rate (18%)
• The RVPA is $2,368.97
  

• When you value a gas product using the index zone price, you may not take a transportation allowance (§1206.172(d)(8))
• With no allowances, the RVLA will equal the RVPA
  
• The alternative dual accounting RVLA is $2,368.97
  

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Part C: Comparing the Values Determined in Parts A and B

Having completed parts A and B, you now compare the values determined in parts A and B and report and pay on the higher value:

   A.  Calculate the gross proceeds received for the gas sale under §1206.174.
   B.  Calculate the alternative dual accounting value under §1206.172 and §1206.173.
   C.  Compare the values determined in parts A and B and report and pay on the higher value.

Step 1:

Compare the alternative dual accounting RVLA calculated in Part B to the total RVLA of the gross proceeds in Part A:

• The alternative dual accounting RVLA from Part B, Step 6 is $2,368.97
• The total RVLA of the gross proceeds from all three products, calculated earlier in Part A, Step 2 of the total RVLA section, is $2,535.64
  
• The total gross proceeds RVLA is the higher value
  

Because the gross proceeds value is higher, the final royalty reporting will use the gross proceeds values calculated in Part A, Step 2 Royalty Value Less Allowances:

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