Indian Example: Processed Gas Reporting (Non-Dedicated Contract) in an Index Zone Using Actual 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.”

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.

Assume, for this example, that the lessee chose actual dual accounting. If you need guidance on alternative dual accounting, proceed to the Processed Gas Reporting (Non-Dedicated Contract) in an Index Zone Using Alternative Dual Accounting example. 

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Actual Dual Accounting Index Zone Calculations

Actual dual accounting for reporting in an index zone requires you to determine which is higher: the royalty value of the processed gas or the royalty value of the unprocessed gas. 

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PC 03 - Residue Gas

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

Step 1:

In order to determine the 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 plant fuel volume (Mcf):

• Identify the total 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 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 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 plant fuel, here the “Contractual Allocated Fuel” (326.40 MMBtu) (F)
• The total residue gas sales energy content is 2,248.79 MMBtu

Step 5:

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

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

Step 6:

Calculate the residue gas sales value using the index-zone value: 

• Multiply the residue gas sales MMBtu determined under Step 4 (2,248.79 MMBtu) by the index-zone price ($3.98/MMBtu)
• The residue gas index-zone value is $8,950.18

Step 7: 

Determine the Royalty Value (RVPA/RVLA):

• Multiply the sales value from Step 6 ($8,950.18) by the royalty rate (18%). 
• The RVPA is $1,611.03. 
• When you value a gas product using the index-zone price, you may not take a transportation allowance, because the calculated price is adjusted for this cost (§1206.172(d)(8)). 
• With no allowance, the RVLA equals the RVPA. 
• The RVLA for PC 03 is $1,611.03

Here is what the processed value of PC 03 looks like so far:

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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, under §1206.174(g). For production in Utah, 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.
  

PC 07 Value of Price at the Plant Components (Step 2a):

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 lease instrument in this example does not allow deductions for transportation or processing, so no allowances may be taken on PC 07 (NGLs)
  
• Therefore the RVPA and RVLA are the same: $1,173.36
  

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

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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 volume:

• 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)
  

Step 2:

Determine the pipeline fuel value using the index-zone price:

• Multiply the pipeline fuel MMBtu (162.20 MMBtu) (D) from Step 1 by the index price from Step 5 of PC 03 – Residue Gas ($3.98/MMBtu)
• The pipeline fuel index value is $645.56 

Step 3:

Determine the Royalty Value (RVPA/RVLA): 

• Multiply the sales value from Step 2 ($645.56) by the royalty rate (18%)
• The RVPA is $116.20
• When you value a gas product using the index-zone price, you may not take a transportation allowance, because the calculated price is adjusted for this cost (§1206.172(d)(8))
• With no allowances, the RVLA equals the RVPA
  
• The RVLA is $116.20

The place holder Form ONRR-2014 lines for the processed value using the index price are:

Before those lines can be the final reporting on this lease, you need to calculate the unprocessed value at the royalty measurement point using the index-zone price and confirm that this processed reporting represents the highest Royalty Value Less Allowances (RVLA) in order to satisfy the dual accounting requirement. 

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Actual Dual Accounting Fulfillment

Step 1:

Find the total processed RVLA:

• Add the royalty value for PC 03 ($1,611.03), PC 07 ($1,173.36), and PC 15 ($116.20)
  
• The RVLA for the processed gas value is $2,900.59
  

Step 2:

Calculate the unprocessed gas MMBtu value at the royalty measurement point (RMP) using the index-zone price: 

• Multiply the RMP MMBtu (3,013 MMBtu) (B) by the index-zone price ($3.98/MMBtu)
• The RMP value is $11,991.74

Step 3:

Calculate the RMP RVPA and RVLA:

• When you value a gas product using the index zone price, you may not take a transportation allowance, because the calculated price is adjusted for this cost (§1206.172(d)(8))
• With no allowances, the RVLA equals the RVPA
• Multiply the RMP value calculated under Step 4 ($11,991.74) by the royalty rate (18%)
• The RMP RVPA/RVLA is $2,158.51

Step 4:

Compare the processed gas RVLA from Step 1 to the RMP RVLA from Step 3: 

• The processed gas RVLA from Step 1 is $2,900.59
• The unprocessed gas RVLA from Step 3 is $2,158.51
• The processed gas RVLA is the higher value, so it will be reported on the ONRR-2014

Here is what the final royalty reporting looks like:

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