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

Major Portion 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 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 reporter chose alternative dual accounting.

If you elected actual dual accounting for your unprocessed gas, you must use §1206.181 to establish processing costs when neither you nor someone acting on your behalf processes the gas. Under §1206.181, you must use the first applicable of the four given methods to establish processing costs for dual accounting purposes. Please also be mindful of the additional regulatory requirements in this section (§§1206.176, 179, 180). Collectively, all of these obligations must be satisfied in order to use actual dual accounting. For assistance in ensuring you meet all these obligations, please contact Royalty Valuation at royaltyvaluation@onrr.gov.

Alternative dual accounting takes an unprocessed value and “bumps” that value to provide for a processed value. This requires you to take the highest value for unprocessed gas (whichever value fulfilled the major portion requirement), multiply by an increment, and multiply by the royalty measurement point volume to find a total value for the gas.

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Minimum Value Requirement

After completing the dual accounting equation, compare the resulting value to the sum of the unprocessed gas gross proceeds (the arm’s-length contract value of PC 04) calculated in the Initial Reporting for Unprocessed 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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Calculations

Step 1:

• To fulfill the major portion requirement, determine which is higher between the gas sales price received and the major portion price.
  
• Locate the the gas sales price (GSP) on the statement ($1.50930/MMBtu) (C)
  
• Locate the major portion price (MPP). You can find the prices on the Indian Gas Major Portion web page:
  
• In this example, assume the lease is on the Fort Berthold Reservation. The production month is January 2019. The MPP is $3.48/MMBtu.
• The major portion price is higher than the gas sales price and will be used in the alternative dual accounting equation.
  

Step 2

• To fulfill the dual accounting requirement, the regulations at §1206.173 governing alternative dual accounting, use the following equation:

Step 3

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

• In this example, the gross MMBtu (B) at the royalty measurement point is 274.08 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 chart below). The applicable Btu is the volume-weighted-average Btu for the property computed from measurements at the royalty 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 weighted average Btu content is 1046 Btu/Mcf, calculated based on the regulations at §1206.173(b)(3)
• Assume no plant ownership
  
• The increment is .0275
  

Step 5:

Calculate the alternative dual accounting value:

• Multiply the RMP MMBtu (274.08 MMBtu) (B) by the unprocessed gas value ($3.48/MMBtu) by 1 plus the increment (.0275)
• The alternative dual accounting value is $980.03
  

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 ($980.03) by the royalty rate (18%)
• The RVPA is $176.41
  

• When you value a gas product using the major portion value, you may not take a transportation or processing allowance, because the calculated price is adjusted for these costs (61 FR 49899)
• With no allowances, the RVLA will equal the RVPA
  
• The alternative dual accounting RVLA is $176.41
  

Step 7:

To fulfill the minimum value of production requirement, compare the alternative dual accounting RVLA calculated in Step 6 to the total RVLA of the gross proceeds from the Initial Reporting for Unprocessed Gas in a Non-Index Zone (Major Portion) example:

• The alternative dual accounting RVLA from Step 6 is $176.41
• The RVLA for the unprocessed gas in the Initial Reporting example is $74.46
  
• The alternative dual accounting RVLA is higher at $176.41. Therefore, you should report the higher value.
  

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 line 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 due date.

The product code, sales volume, gas MMBtu, and sales type code do not change. Here is what the final royalty reporting looks like:

Form ONRR-2014

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