Valuation Resources for Indian Leases

Comparing Gross Proceeds and IBMP Prices

To calculate your gross proceeds, you first need to determine whether you are selling your oil under an arm’s-length or non-arm’s-length contract. If you sell your oil under an arm's-length contract, under §1206.52, the value of your Indian oil is the gross proceeds accruing to you under that arm's-length contract, less allowable transportation costs. Your oil may be subject to an exchange agreement and valued under §1206.52(h). If you sell your oil under a non-arm's-length contract, you should calculate your gross proceeds value based on downstream purchases or sales completed by you or your affiliate under arm's-length contracts per §1206.53. This value is the volume-weighted average price. Before calculating the volume-weighted average, you must normalize the quality of the oil comprising these purchases or sales to the gravity of the oil produced from the Indian lease under §1206.53(b). You may then reduce the gross proceeds from these sales or purchases for reasonable, actual transportation costs before calculating the volume-weighted average under §1206.53(a)(2).

Once you calculate your gross proceeds under the regulations above, you will compare those values with the IBMP price for the same crude type and designated area that ONRR published on its website for the same production month. 

If your per-barrel gross proceeds price, net of allowable transportation, is higher than the IBMP price, report and pay royalties on your gross proceeds. If the IBMP price is higher than your per-barrel gross proceeds price, report and pay royalties on the IBMP price, even if you did not (or could not) sell oil for that price.

Designated Areas

In most cases, the price you use to value your oil produced from Indian lands depends on the location of your lease. However, some reservations have two designated areas. Certain wells may produce from a lease in one designated area while the wellhead is in another designated area. In these situations, the surface location of the wellhead determines which designated area to use.

Generally, designated areas are identified by reservation boundaries, including any off-reservation allotments or dependent Indian communities where location and crude types are like each other.

There are 16 designated areas ONRR identifies as unique:

• Alabama/Coushatta
• Blackfeet
• Crow
• Fort Peck
• Jicarilla Apache
• North Fort Berthold
• Oklahoma (For Oklahoma IBMP price only, account for a plus/minus roll. The roll is defined under §1206.51.)
• Isabella (Saginaw Chippewa)
• South Fort Berthold
• Southern Ute
• The Navajo Nation
• Turtle Mountain
• Uintah & Ouray (Uintah & Grand)
• Uintah & Ouray (Duchesne)
• Ute Mountain Ute
• Wind River

If you have questions concerning which designated area your lease is in, please contact royaltyvaluation@onrr.gov.

Crude Type

ONRR calculates the IBMP prices for six different crude types. ONRR relies on lessees to report the type of oil produced from their Indian leases. The crude type is based on, among other things, API gravity and sulfur content. These six crude types are listed below, each with a unique product code:

Sales Type Codes

If your gross proceeds, less allowable transportation, are higher than the IBMP price, select either the ARMS (arm’s-length) or NARM (non-arm’s-length) sales type code based on your transaction.

If the IBMP price is higher than your gross proceeds, less allowable transportation, use OINX (oil valued using an index price) as your sales type code.

Examples

Oil examples are available on onrr.gov. For an example of how to work with volume-weighted averages, see the written examples in §1206.53(b).

Initial Valuation

Arm's-Length Sales

Once you determine that Indian gas is produced outside of an index zone, the next step is to identify whether your production is sold under an arm’s-length contract. If the gas is sold under an arm’s-length contract, you must further determine whether the production is processed or unprocessed, which impacts how royalty value is calculated.

The following example walks you through initial calculations for your Non-Index Zone (Major Portion) reporting:

• Initial Reporting Example: Processed Gas in Non-Index Zone Areas
• Initial Reporting Example: Unprocessed Gas in Non-Index Zone Areas

Additionally, ONRR’s regulations at §1206.174(g)(2) direct you to ensure the value of the NGLs meets or exceeds the regulatory minimum value for gas plant products (the Minimum NGL Value). More information is in the Minimum NGL section and included in the Indian Example: Minimum NGL Value.

Non-Arm's-Length Sales

If your gas, residue gas, or any gas plant product is not sold under an arm’s-length contract, then you must value the production using the first applicable of the following three methods (or benchmarks) under §1206.174I: 

1. Gross proceeds under the non-arm’s-length contract if equivalent to those from comparable arm’s-length contracts for like-quality gas in the same field or area (see §1206.174(c)(1) for additional factors).
2. A value determined by considering other information relevant in valuing like-quality gas, residue gas, or gas plant products (see §1206.174(c)(2) for additional factors); or
3. A net-back method or other reasonable method to determine value.

Additional Accounting

Major Portion Price

For Indian leases located outside of an index zone which contain either a major portion provision or provide for the Secretary to determine value, ONRR’s regulations under §1206.174(a)(4)(ii) direct you to pay on the higher of either:

• the value determined under §1206.174 (which you initially used to report and pay royalties), or
• the major portion value.

You calculate the royalty value by applying the higher of the initially reported price and the major portion price to the volumes of Indian gas produced on a MMBtu-basis. ONRR calculates and publishes major portion prices applicable to the prior calendar year in the Federal Register, along with the date by which you must report and pay any additional royalties due. When using the major portion price, you should not take a transportation allowance.

After ONRR publishes the major portion price, you must compare the residue sales price to the major portion price to fulfill the major portion requirement in your lease. You also need to complete any required dual accounting.

• Revised Reporting Using Alternative Dual Accounting for Unprocessed Gas in a Non-Index Zone.
• Revised Processed Gas in a Non-Index Zone (Major Portion) Using Alternative Dual Accounting.
• Revised Processed Gas in a Non-Index Zone (Major Portion) Using Actual Dual Accounting.

If you believe you are exempt from dual accounting for your gas (see §1206.176(e)), you should file Form ONRR-4410 Part A for each lease you believe to be exempt. Regardless of your dual accounting status, you still need to fulfill the major portion provision of your lease.  

If the major portion value is higher, you must report the higher value on an amended Form ONRR-2014 to ONRR using Adjustment Reason Code (ARC) 16 for both the reversal of the old reporting and entry of the revised royalty information by the due date specified in the Federal Register notice. Late-payment interest under §1218.54 on any underpayment will not begin to accrue until the date the amended Form ONRR-2014 is due to ONRR.

Dual Accounting

Many Indian leases require accounting for comparison, or “dual accounting.” Dual accounting is a requirement to report and pay royalties based on the higher of the value of unprocessed gas and the value of processed gas products less applicable allowances.  

You need to review your Indian lease instrument to determine whether you are required to perform dual accounting. The following lease language, with emphasis, requires accounting for comparison: 

“… 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.”

There are two methods of performing dual accounting: actual dual accounting and alternative dual accounting. If you elect to use alternative dual accounting, keep in mind that you must make a separate election for each ONRR-designated area and that the election applies to all Indian leases in that area.

Dual accounting may not be the only requirement of your lease. Please read the complete details of your lease to be sure you meet all its provisions.

Actual Dual Accounting

When your Indian gas is processed and dual accounting is required, you may perform actual dual accounting. You should already have determined the processed value of the Indian gas using either the primary valuation method for index-zone gas under §1206.172 or for non-index zone gas under §1206.174. Under actual dual accounting, you will need to report the higher of this processed value and the unprocessed value of the gas.  

In an index-zone, you determine the unprocessed value by taking the unprocessed gas volume on a MMBtu-basis and applying the index-based price. Each month, you can find the natural gas prices for Indian index zones on the ONRR.gov website. Please note that neither transportation nor processing allowances may be deducted from the index-based gas values.

In a non-index zone, you determine the unprocessed value in actual dual accounting by applying the major portion price to the unprocessed gas volume on a MMBtu-basis. ONRR calculates and publishes major portion prices applicable to the prior calendar year in the Federal Register, along with the date by which you must report and pay any additional royalties due. When using the major portion price, you should not take a transportation allowance.

You then report and pay royalties on the higher of the processed or unprocessed values.

Alternative Dual Accounting

When dual accounting is required, you may elect alternative dual accounting. To perform alternative dual accounting, you should determine the value of the unprocessed gas using the primary valuation method for either index-zone gas at §1206.172 or non-index zone gas under §1206.174, depending on your situation. This unprocessed value is then used in the following formula to determine a processed value:

PV_alt=UV x (1+I)

Where:

• PV_alt = Processed value under alternative dual accounting
• UV = Unprocessed value under §1206.172 or §1206.174
• I = Increment for alternative dual accounting

The first step to determine royalty due under alternative dual accounting is to calculate the value of gas before processing (see “UV” in the formula) under, depending on your situation, §1206.172 or §1206.174. This value is then adjusted to arrive at the processed value under alternative dual accounting.

The applicable increment for the processing adjustment (see “I” in the formula) should be selected from the table below based on the gas’ heat value measured in British thermal units (Btu) and whether the lessee has an ownership interest in the processing plant. The applicable Btu is the volume-weighted average Btu for the lease. Your relationship with the owner(s) of the plant where the gas is processed also determines which increment you must use. If you have no direct or indirect ownership interest in the processing plant, then the increment is lower, as provided in the table.

Once the appropriate increment has been selected, multiply the unprocessed gas value by (1 + increment for dual accounting) to arrive at the value of processed gas. The value under alternative dual accounting is then the greater of the value of gas after processing and the calculated unprocessed gas value.

Dual Accounting Exemptions

If either you are not required to perform dual accounting or are exempt from the dual accounting requirement, you must submit Form ONRR-4410 to ONRR. You should submit the form by mailing it to the address listed on the form or by emailing it to ONRRindianforms@onrr.gov.

You use the Form ONRR-4410 to certify that lease production is not subject to dual accounting, such as when it is not required under your lease terms or when none of the gas from your lease is ever processed.

Additionally, you may also use Form ONRR-4410 to claim an exemption from the dual accounting requirement. There are two instances in which a lessee is exempt from dual accounting requirements for processed gas.

The first case is when gas from an Indian lease is not processed until after the gas flows into either:

1. a pipeline with an index located in an index zone; or
2. into a mainline pipeline not in an index zone.

If you claim this exemption, you must certify to ONRR that gas flows into such a pipeline before it is processed.

The second case in which an exemption to the dual accounting requirement may be applicable is when weighted-average Btu content of your gas is less than or equal to 1,000 Btu per cubic foot of gas. When the weighted-average Btu value for your lease is above 1,000 Btu/c.f., none of your gas is exempt. However, if the weighted-average Btu value is less than or equal to 1,000 Btu/c.f., only the volumes of lease production measured at facility measurement points whose heat content exceeds 1,000 Btu/c.f. are subject to dual accounting.

Minimum Value Tests

The royalty valuation regulations under §1206.170-181 require that the value of Indian gas be tested against several alternative valuation measures. These measures protect the Indian lessor’s rights to full valuation of their minerals production. 

Gross Proceeds Test

The regulations at §1206.174(g) ensure a minimum value of production for Indian lessors. When gas, residue gas, and gas plant products are valued under the non-index-zone regulations, the value of production for royalty purposes may not be less than the gross proceeds accruing to you and your affiliates less applicable allowances.

NGL Minimum Value Test

The regulations at §1206.174(g)(2) establish an additional minimum value test for NGLs produced from Indian leases. When gas plant products are valued under this section and you do not elect alternative dual accounting, then the NGL minimum value is:

You must adjust the index priced based on the frequency with which the bulletin is published as follows:

You may use any commercial price bulletin, but you must use the same bulletin for the full calendar year. If the commercial price bulletin you are using stops publication, you may use a different commercial price bulletin for the remaining part of the calendar year.

An example of applying the Minimum Value NGL provision is here: Minimum NGL Value.

Safety Net Test

The final safeguard built into the index-zone valuation regulations is the provision under §1206.172(e) that sets a safety net value. The safety net test applies when gas is sold beyond the first index pricing point that it passes. The safety net calculation is designed to identify potential additional royalty value when the first arm’s-length sale by you or your affiliate takes place downstream of the first index pricing point (generally outside of the index zone).

When the criteria above are met, you must compare the safety net price to the index price using the formula shown below. Any positive differences are known as the safety net differential. The safety net differential is a unit-based measure of value that is applied to the MMBtus of production to determine whether additional royalties are due. You must perform the safety net calculation for each month that the criteria are met for each index zone.

The formula for calculating the safety net differential (SND) is:

SND=[(0.80 x S)-(1.25 x I)]

Where:

• SND = Safety Net Differential
• S = Safety Net Price
• I = Index-zone price

The safety net price is the volume-weighted average contract price per delivered MMBtu based only on arm’s-length sales beyond the first index-pricing point. You should calculate the safety net price only using production from leases in the same index zone and it should not be reduced by transportation costs, costs associated with placing production into marketable condition, or marketing costs.

The index-zone price is the value determined under §1206.172(d) and posted on ONRR.gov: Indian Gas Index Zone Pricing.

By June 30, you must calculate a safety net price and safety net differential for each month of the prior calendar year. Additional royalties are due if the safety net differential is positive. You must submit the results to of the safety net analysis to ONRR using the Safety Net Report (Form ONRR-4411).

Arm’s-Length Transportation

A transportation contract is arm’s-length when it meets the definition in §1206.51. You have the burden of demonstrating that your transportation contract is arm's-length and that the determination is independent of whether the sales contract for the production is arm’s-length.

To calculate an arm’s-length transportation allowance, you should:

1. Confirm that you are valuing oil using gross proceeds;
   1. Under §1206.54(d), ONRR incorporates location differentials when calculating the IBMP and a separate, incremental transportation allowance may not be claimed.
2. Gather and validate your reasonable, actual costs of transportation;
   1. Costs must not include those for movement prior to the royalty measurement point or other costs of gathering, as defined in §1206.51;
   2. Unless ONRR approves otherwise, costs must exclusively reflect transportation services for royalty-bearing Indian production per §1206.57(a)(4)(i); and
   3. Transportation costs must not be based on a transportation factor under §1206.57(a)(6).
3. Multiply the costs identified by the lease’s royalty rate;
4. Allocate the total to each product and transportation system; and
   1. Transportation costs must be allocated among all royalty-bearing products you produce and transport.
   2. See §§1206.57(a)(4) and (5) for allocation procedures.
5. Limit any transportation allowance to 50 percent of the royalty value of each product under §1206.56(b) without ONRR’s approval.

You are required to submit a copy of your arm’s-length transportation contract(s) and all subsequent amendments to the contract(s) to ONRR within two months of the date ONRR receives your report which claims the allowance on the Form ONRR-2014. You can email contracts and amendments to ONRRindianforms@onrr.gov.  

Non-Arm’s-Length or No-Contract Transportation

When Indian oil production is transported under a non-arm’s-length contract or without a contract, you should calculate a non-arm’s-length transportation allowance using your reasonable, allowable, and actual costs of transportation. Under §1206.58(a)(3), actual costs may include the allowable portion of

1. Certain operating expenses of the transportation system;
2. Certain maintenance expenses of the transportation system;
3. Overhead directly attributable and allocable to the operation and maintenance of the transportation system; and
4. A return of and/or on capital for certain capital costs as described below.

You should only include costs for allowable capital assets. Allowable capital assets are generally depreciable, fixed, and integral to the transportation system under §1206.58(a)(3). You may include either depreciation and a return on undepreciated capital or a return on the initial depreciable capital investment in the transportation allowance.

As with arm’s-length transportation, your reasonable, actual costs of transportation must:

1. Not include those for movement prior to the royalty-measurement point or other costs of gathering, as defined in §1206.51;
2. Exclusively reflect transportation services for royalty-bearing Indian production; and
3. Include only allowable costs under §1206.58.

Required Forms for Non-Arm’s-Length Transportation Allowances

You must submit the actual cost information to support your allowance to ONRR on Form ONRR-4110, Oil Transportation Allowance Report, within three months after the end of the 12-month period to which the allowance applies. You can submit the Form ONRR-4110 by mailing it to the address listed on the form or by emailing it to ONRRindianforms@onrr.gov.

Arm’s-Length Transportation

A transportation contract is arm’s-length when it meets the definition in §1206.171. You have the burden of demonstrating that your transportation contract is arm's-length and that the determination is independent of whether the sales contract for the production is arm’s-length.

To calculate an arm’s-length transportation allowance, you should:

1. Confirm that you are valuing gas using gross proceeds;
   1. Under §1206.172(d)(8), deductions for transportation or processing may not be applied against index-based values.
2. Gather and validate your reasonable, actual costs of transportation;
   1. Costs must not include those for movement prior to the royalty measurement point or other costs of gathering, as defined in §1206.171.
   2. Costs must exclusively reflect transportation services for royalty-bearing Indian production.
   3. See §§1206.178(f) and (g) for more detail regarding allowable and non-allowable costs.
3. Multiply the costs identified by the lease’s royalty rate;
4. Allocate the total to each product and transportation system; and
   1. Transportation costs must be allocated among all products you produce and transport.
   2. See §1206.178(b)(3) for allocation procedures.
5. Limit any transportation allowance to 50 percent of the royalty value of each product under §1206.177(c)(1) without ONRR’s approval.

You are required to submit a copy of your arm’s-length transportation contract(s) and all subsequent amendments to the contract(s) to ONRR within two months of the date ONRR receives your report which claims the allowance on the Form ONRR-2014. You can email contracts and amendments to ONRRindianforms@onrr.gov.

Non-Arm’s-Length or No-Contract Transportation

The regulations provide for two methods of calculating a transportation allowance when production is transported under a non-arm’s-length contract or without a contract.

The first method for calculating a non-arm’s-length transportation allowance is to use your reasonable, allowable, and actual costs of transportation. Under §1206.178(b)(2), actual costs may include the allowable portion of:

1. Certain operating expenses of the transportation system;
2. Certain maintenance expenses of the transportation system;
3. Overhead directly attributable and allocable to the operation and maintenance of the transportation system; and
4. A return of and/or on capital for certain capital costs as described below.

You should only include costs for allowable capital assets. Allowable capital assets are generally depreciable, fixed, and integral to the transportation system under §1206.178(b)(2). You may include either depreciation and a return on undepreciated capital or a return on the initial depreciable capital investment in the transportation allowance.

As with arm’s-length transportation, your reasonable, actual costs of transportation must:

1. Not include those for movement prior to the royalty-measurement point or other costs of gathering, as defined in §1206.171;
2. Exclusively reflect transportation services for royalty-bearing Indian production; and
3. Include only allowable costs under §§1206.178(b)(2) and (f), while excluding non-allowable costs in (g).

Alternatively, you may elect to use 10 percent of your gross proceeds but not to exceed 30 cents per MMBtu under §1206.178(c)(1). Your election to use this alternative transportation allowance calculation must be made at the beginning of a month and must remain in effect for an entire calendar year. Your first election will remain in effect until the end of the subsequent calendar year. For example, if you elected the alternative transportation allowance on June 1 of year 1, then it would remain in effect until December 31 of year 2. The only exception to this is if you make an election effective January 1, then it will only be effective only for that calendar year.

Required Forms for Non-Arm’s-Length Transportation Allowances

You must submit the actual cost information to support your allowances to ONRR on Form ONRR-4295, Gas Transportation Allowance Report, within three months after the end of the 12-month period to which the allowance applies. You can submit the Form ONRR-4295 by mailing it to the address listed on the form or by emailing it to ONRRindianforms@onrr.gov.

Arm’s-Length Processing

A processing contract is arm’s-length when it meets the definition under §1206.171. You have the burden of demonstrating that your processing contract is arm's-length and that the determination is independent of whether the sales contract for the production is arm’s-length.

To calculate an arm’s-length processing allowance, you should:

1. Confirm that you are valuing gas plant products that are eligible for a transportation allowance;
   1. You may not deduct a processing allowance when performing alternative dual accounting.
   2. Under §1206.172(d)(8), deductions for transportation or processing may not be applied against index-based values.
2. Gather and validate your reasonable, actual costs of processing;
   1. Costs should exclusively reflect processing services for royalty-bearing Indian production.
3. Multiply the costs identified by the lease’s royalty rate;
4. Allocate the total to each product and processing plant; and
   1. Processing costs must be allocated among all royalty-bearing products resulting from processing.
   2. See §1206.180(a)(3) for allocation procedures.
5. Limit any processing allowance to 66 and 2/3 percent of the royalty value less post-processing transportation of each product under §1206.179(c).

You are required to submit a copy of your arm’s-length processing contract(s) and all subsequent amendments to the contract(s) to ONRR. The due date for submitting contracts and amendments is within two months of the date ONRR receives your claim for an allowance on the Form ONRR-2014. You can email contracts and amendments to ONRRindianforms@onrr.gov.

Non-Arm's Length Processing

When production is processed outside of an arm’s-length contract or without a contract, you calculate a processing allowance under §1206.180(b).

You must base the non-arm’s-length processing allowance on your reasonable, allowable, and actual costs for processing. Under §1206.178(b)(2), actual costs may include the allowable portion of

1. Certain operating expenses of the processing plant;
2. Certain maintenance expenses of the processing plant;
3. Overhead directly attributable and allocable to the operation and maintenance of the processing plant; and
4. A return on and depreciation expense for certain capital costs as described below.

You should only include costs from allowable capital assets that are depreciable, fixed, and integral to the processing plant under §1206.180(b)(2). You may include either depreciation and a return on undepreciated capital or a return on the initial depreciable capital investment in the processing allowance.

Required Forms for Non-Arm’s-Length Processing Allowances

You must submit the actual cost information to support your allowances to ONRR on Form ONRR-4109, Gas Processing Allowance Report, within three months after the end of the 12-month period to which the allowance applies. You can submit the Form ONRR-4109 by mailing it to the address listed on the form or by emailing it to ONRRindianforms@onrr.gov.