Indian Example: Processed Gas Reporting (Non-Dedicated Contract) in an Index Zone Using Alternative Dual Accounting
Overview
The lease and contracts for this example meet all the following conditions:
- The gas produced is from an Indian oil and gas lease located within an index zone.
- The lease contains a major portion provision (or provides for the Secretary to determine value) and requires accounting for comparison.
- Gas value for royalty purposes is based on the index zone price under 30 CFR §1206.172(a).
- The sales contract is for processed gas and is NOT an arm’s-length dedicated contract.
- The lessee elected alternative dual accounting to satisfy the “accounting for comparison” lease provision.
If you have any questions regarding whether this example applies to your situation, please contact royaltyvaluation@onrr.gov. You can find a map of index areas on Indian Gas Index Zone Prices.
NOTE: As this example proceeds, “you” refers to the lessee or their designee as defined in §1206.20: “the person whom the lessee designates to report and pay the lessee's royalties for a lease.”
This example walks you through the royalty calculation and reporting for each product code and completes the relevant fields on a sample Form ONRR-2014 after each step. This example only covers the 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.
Locating the Indian Index Zone Price
Each month ONRR publishes natural gas prices for six Indian Index Zones as referenced in §1206.172. You can find the prices on Indian Gas Index Zone Prices.
Helpful Tips
Throughout this example, look for caution and info boxes to help you along the way.
Downloadable Example
Cautions are things that are important to get right.
Info is information that is helpful to have or gives you a heads up.
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 gas is produced from an Indian lease in the Central Rocky Mountain (CRM) index zone.
- The gas is valued as processed gas.
- The gas is transported, processed, and sold under arm’s-length contracts.
- The royalty rate is 18%.
- The production month is January 2019 (as shown on the sample statement).
- The index-zone price is the January 2019 price for Central Rocky Mountain found on ONRR.gov.
- The lessee has NO ownership in the plant.
- The volume-weighted-average Btu content, calculated from the statement, is 1226 Btu/Mcf.
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.
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.
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
| BTU Range | No Plant Ownership | Yes Plant Ownership |
|---|---|---|
| 1001 to 1050 | .0275 | .0375 |
| 1051 to 1100 | .0400 | .0625 |
| 1101 to 1150 | .0425 | .0750 |
| 1151 to 1200 | .0700 | .1125 |
| 1201 to 1250 | .0975 | .1700 |
| 1251 to 1300 | .1175 | .2050 |
| 1301 to 1350 | .1400 | .2400 |
| 1351 to 1400 | .1450 | .2500 |
| 1401 to 1450 | .1500 | .2600 |
| 1451 to 1500 | .1550 | .2700 |
| 1501 to 1550 | .1600 | .2800 |
| 1551 to 1600 | .1650 | .2900 |
| 1601 to 1650 | .1850 | .3225 |
| 1651 to 1700 | .1950 | .3425 |
| 1701+ | .2000 | .3550 |
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:
| PC | Sales Volume | Gas MMBtu | Sales Value | RVPA | TA | PA | RVLA |
|---|---|---|---|---|---|---|---|
| 04 | 2,458.00 | 3,013.00 | $13,160.93 | $2,368.97 | $2,368.97 |
This example addresses reporting and calculations for the following product codes. The BLUE letters refer to fields on the sample statement.
| Products/Items: | Location in Statement: |
|---|---|
| PC 04 Unprocessed Gas | “Gross Wellhead Mcf” (A) and “Gross Wellhead MMBtu” (B) in the statement’s “Wellhead Information” section |
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.
