Indian Example: Processed Gas Reporting (Non-Dedicated Contract) in an Index Zone Using Alternative Dual Accounting

Determining Dual Accounting

Many Indian leases require accounting for comparison, or “dual accounting” (ONRR added emphasis):

“… 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 details of your lease to be sure you meet all the provisions in it.

There are two calculation choices for dual accounting – actual and alternative. You make this election using the Form ONRR-4410 Part B. §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.

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Dual Accounting Requirement - Alternative

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 in an Index Zone (Non-Dedicated Contract) Using Actual Dual Accounting example.

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Calculations

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

• NOTE: We will need the “Gross Wellhead Mcf” (volume) (A) at the royalty measurement point for royalty reporting on the ONRR-2014. This volume is 2,458 Mcf.

Step 3:

Locate the index-zone price on the Indian Gas Index Prices web page. In this example, assume 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, assume the Btu content is 1226 Btu/Mcf, calculated from the statement, based on the regulations at §1206.173(b)(3)
• Assume no plant ownership
  
• The increment is .0975
  

Step 5:

Calculate the alternative dual accounting value:

• Multiply the RMP (3,013 MMBtu) (B) by the index zone price ($3.98/MMBtu) by 1 plus the increment (.0975)
• The alternative dual accounting value is $13,160.94

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
  

Here is what the final royalty reporting looks like:

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