Indian Example: Unprocessed Gas Reporting (Arm’s-Length Dedicated Contract) in an Index Zone with Alternative 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.” (Emphasis added)

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. 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. 

Assume, for this example, that the lessee chose alternative dual accounting.

If you elect 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 This example is guidance and not binding on ONRR. It does not provide legal advice and should not be construed as stating ONRR’s legal interpretation or position. Any reliance on this example does not limit ONRR in its compliance activities or in the appealable decisions and orders it may issue. 5/8/2023 4 regulatory requirements in this sections (§§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 royaltyvaluation@onrr.gov. 

When calculating royalties due for gas sold under an arm’s-length dedicated contract, you should follow this process:

• Part A: Calculate the gross proceeds received for the gas sale under §1206.174. 
• Part B: Calculate the alternative dual accounting value under §1206.172 and §1206.173. 
• Part C: Compare the values determined in steps 1 and 2 and report and pay on the higher value. 

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Part A – Calculate the Gross Proceeds, PC 04 – Unprocessed Gas

Under §1206.175(a), “[f]or unprocessed gas, you must pay royalties on the quantity and quality at the facility measurement point that BLM either allowed or approved.” Under §1206.171, ONRR defines the point of royalty measurement as the facility measurement point. In this example, we will use “RMP” to represent the approved royalty measurement point.

Step 1:

Determine the gas sales volume and heat content (MMBtu): 

• Identify the royalty-bearing gas volume and heat content measured at the royalty measurement point:
  In this example, the sample statement includes “Gross Wellhead Mcf” (volume) (A) and “Gross Wellhead MMBtu” (heat content) (B) measured at the RMP.
  Do not use the “Total Settled MMBtu.” That is not the full amount measured at the RMP because of the deductions of “Compressor Fuel” (D) and “System Fuel” (E). In our assumptions, we noted that these deductions are 100% disallowed because they are costs of placing the product in marketable condition.
  
• The sales volume is 261.95 Mcf and the Gas MMBtu is 274.08 MMBtu
  

Step 2:

Calculate the gas sale value:

• Multiply the gas MMBtu determined under Step 1 (274.08 MMBtu) (B) by the gas sales unit price ($1.50930/MMBtu) (C)
  The gas sales price may not be reduced by any costs of placing the gas into marketable condition under §1206.174(h)
• The total gas sales value is $413.67
  

Step 3:

Calculate the Royalty Value Prior to Allowances (RVPA):

• Multiply the gas sales value found under Step 2 ($413.67) by the royalty rate (18%)
• The total RVPA is $74.46
  

Step 4:

Calculate the Royalty Value Less Allowances (RVLA):

• In this example, we assume there are no transportation costs so the lessee may not take any allowances
• With no transportation allowances taken, the RVPA and RVLA are the same
  
• The RVLA is $74.46
  

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Part B - Alternative Dual Accounting Index Zone Calculations 

Having completed part A, you now calculate the alternative dual accounting value in part B:

• Part A: Calculate the gross proceeds received for the gas sale under §1206.174. (Complete)
• Part B: Calculate the alternative dual accounting value under §1206.172 and §1206.173.
• Part C: Compare the values determined in parts A and B and report and pay on the higher value.

Step 1:

The regulations at §1206.173 governing alternative dual accounting provide the following equation: 

Step 2:

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

• In this example, the “Gross Wellhead MMBtu” (B) at the royalty measurement point is 274.08 MMBtu 

• NOTE: You will need the “Gross Wellhead Mcf” (volume) (A) at the approved royalty measurement point for royalty reporting on the ONRR-2014. This volume is 261.95 Mcf

Step 3:

Locate the index zone price on the Indian Gas Index Zone 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 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, the weighted average Btu content calculated from the statement is 1046 Btu/Mcf (at 14.73 psi), 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 (274.08 MMBtu) (B) by the index zone price ($3.98/MMBtu) by 1 plus the increment (.0275)
• The alternative dual accounting value is $1,120.84
  

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 9 ($1,120.84) by the royalty rate (18%)
• The RVPA is $201.75
  

• 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 $201.75
  

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Part C – Comparing the Values Determined in Parts A and B

Having completed parts A and B, you now compare the values determined in parts A and B and report and pay on the higher value:

• Part A: Calculate the gross proceeds received for the gas sale under §1206.174. (Complete)
• Part B: Calculate the alternative dual accounting value under §1206.172 and §1206.173. (Complete)
  
• Part C: Compare the values determined in parts A and B and report and pay on the higher value.
  

Step 7:

Compare the alternative dual accounting RVLA calculated in Part B, Step 6 to the total RVLA of the gross proceeds under the arm’s-length dedicated sales contract from Step 4:

• The alternative dual accounting RVLA from Step 6b is $201.75
• The RVLA for the gross proceeds of the gas sold under the arm’s length dedicated contract from Step 4 is $74.46
  
• The alternative dual accounting RVLA is higher at $201.75. Therefore, you should report using this value
  

Here is what the final royalty reporting looks like: 

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