Indian Example: Unprocessed Gas Reporting (Non-Dedicated Contract) in an Index Zone with 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. 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 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 royaltyvaluation@onrr.gov.

Alternative Dual Accounting under a Non-Dedicated Contract for Unprocessed Gas in an Index Zone 

Under §1206.175(a), “[f]or unprocessed gas, you must pay royalties on the quantity and quality at the facility measurement point that Bureau of Land Management (BLM) either allowed or approved.” Under §1206.171, ONRR defines the point of royalty measurement as the facility measurement point. 

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Calculations

In this example, we will use “RMP” to represent the approved royalty measurement point.

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 MMBtu” (B) at the royalty measurement point is 274.08 MMBtu
• For later reporting, you also need to locate the “Gross Wellhead Mcf” sales volume of 261.95 Mcf (A) on the statement.
  

Step 3:

Locate the index zone price on the Indian Gas Index Zone Prices page. In this example, assume the lease is in the Central Rocky Mountains 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 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 1,046 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 (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 5 ($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
  

Here is what the final royalty reporting looks like:

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