Indian Example: Revised Reporting Using Alternative Dual Accounting for Processed Gas in Non-Index Zone (Major Portion) Areas

Major Portion Value Requirement

Revised reporting in a non-index zone is based on the published major portion value. ONRR notifies lessees of the major portion values and due dates in the Federal Register, as well as through ONRR’s electronic messaging system. You can find the prices on the Indian Gas Major Portion web page. Section 1206.174(a)(iv)(ii) explains how to fulfill the Major Portion requirement:

"ONRR will determine the major portion value and notify you in the Federal Register of that value. The value of production for royalty purposes for your lease is the higher of either the value determined under this section which you initially used to report and pay royalties, or the major portion value calculated under this paragraph (a)(4). If the major portion value is higher, you must submit an amended Form ONRR-2014 to ONRR by the due date specified in the written notice from ONRR of the major portion value. Late-payment interest under § 1218.54 of this chapter on any underpayment will not begin to accrue until the date the amended Form ONRR-2014 is due to ONRR."

Major portion prices apply to unprocessed gas (Product Code 04), residue gas (Product Code 03), and, if applicable, pipeline fuel (Product Code 15).

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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 options 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."

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Dual Accounting Requirement

Assume, for this example, that the reporter chose alternative dual accounting. If you need guidance on actual dual accounting, proceed to the Revised Processed Gas Reporting in a Non-Index Zone (Major Portion) Using Actual Dual Accounting example.

Alternative dual accounting takes an unprocessed value and “bumps” that value to provide for a processed value. For processed gas, an unprocessed value is needed for the formula. Section 1206.174(c)(2) provides options for this value, in particular, “other reliable public sources of price or market information.” ONRR finds the major portion value to be a reasonable value under this regulation and will use it to calculate the alternative dual accounting value in this example.

Alternative dual accounting for revising reporting in a non-index zone (major portion) requires you to use the measurement at the approved royalty measurement point in the dual accounting equation (NOT the residue gas volume) as it represents the unprocessed gas Mcf and MMBtu. For this example, the “Gross Wellhead Mcf” (A) and “Gross Wellhead MMBtu” (B) meet this requirement.

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Minimum Value Requirement

After completing the dual accounting equation, compare the resulting value to the sum of the processed gas gross proceeds calculated in the Initial Reporting for Processed Gas in a Non-Index Zone (Major Portion) example to fulfill the minimum value of production requirement under §1206.174(g).

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Step 1

Alternative dual accounting requires an unprocessed gas price (UGP). As there is no unprocessed price in a processed gas sale, ONRR finds the major portion value to be a reasonable value (as discussed above, under §1206.174(c)(2)). Additionally, using this value fulfills the major portion requirement. You can find the prices on the Indian Gas Major Portion web page:

• In this example, assume the lease is on the Fort Peck Reservation 
• The production month is January 2019 
• The major portion price is $4.44/MMBtu

Step 2

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

Step 3

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

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

Step 4

Identify the increment (I) you need to use for the calculation (§1206.173(b)(2)(ii)). 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 own an interest in the plant.

• The statement shows that the Btu content is 1226 Btu/Mcf, calculated 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 MMBtu (3,013 MMBtu) (B) by the unprocessed gas price ($4.44/MMBtu) by 1 plus the increment (.0975) 
• The alternative dual accounting value is $14,682.05

Step 6

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

Step 6a

• Multiply the alternative dual accounting value calculated under Step 5 ($14,682.05) by the royalty rate (18%)
• The RVPA is $2,642.77

Step 6b

• When you value a gas product using the major portion value, you may not take a transportation allowance, because the calculated value is adjusted for these costs (61 FR 49899) 
• With no allowances, the RVLA will equal the RVPA 
• The alternative dual accounting RVLA is $2,642.77

Step 7

Compare the alternative dual accounting RVLA calculated in Step 6 to the total RVLA of the gross proceeds from the Initial Reporting for Processed Gas in a Non-Index Zone (Major Portion) example:

• The alternative dual accounting RVLA from Step 6 is $2,642.77 
• The total RVLA of the gross proceeds from all three products in the Initial Reporting example is $2,433.64 
• The alternative dual accounting value is higher and needs to be reported.

Step 8

Because the calculated alternative dual accounting value is higher than the initial gross proceeds, you need to report an adjustment reason code (ARC) of 16 on both the reversed lines and the new line. If you report using an ARC of 10, ONRR will calculate interest back to the original production date rather than only to the major portion adjustment due date. Because alternative dual accounting results in the reporting of unprocessed gas, the revised reporting will be for Product Code 04 only. As this is the case, you will also need to locate the “Gross Wellhead Mcf” sales volume of 2,458 Mcf (A) on the statement.

Here is what the final royalty reporting looks like:

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