CHAPTER 11 ROYALTY | PRODUCTION REPORTING

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Vol. 1
(Jan 1992)
CHAPTER 11
ROYALTY / PRODUCTION REPORTING
James R. Detlefs

QUESTIONS TO BE ANSWERED THROUGH INSTITUTE ADDENDUM

1. QUESTION: What is the rationale for requiring an allowance filing to be entitled to the allowance?

RESPONSE: The MMS' 1988 revised oil and gas valuation regulations replaced the requirement for preapproval of allowances with a self-implemented reporting process. These regulations removed a substantial preapproval burden from industry. The revised regulations provide for a 3-month retroactive filing period; where the lessee can demonstrate good cause, MMS will approve a longer time period.

2. QUESTION: If transportation or processing costs add value to the product beyond its lease value, what is the justification for denial of the allowance?

RESPONSE: The regulations require that prior to taking a deduction for allowances, the appropriate form must be filed in a timely manner. The consequence of failing to file the form is that the allowance may not be deducted.

3. QUESTION: Does the Minerals Management Service (MMS) allow a deduction for gas storage when the gas is sold to a non-arms-length purchaser (or an arms-length purchaser) when the price received is net of that storage cost?

RESPONSE: Royalty on gas is due when the gas leaves the lease. Therefore, any storage fee imposed when the gas is subsequently removed from storage should not be a factor in the valuation for royalty purposes.

4. QUESTION: Under a sale of gas at the lease under an arms-length percentage of proceeds contract, the plant retains a percentage of the volume for processing. Are processing forms required?

RESPONSE: Currently, a payor may be able to report these royalties as wet gas under the percentage of proceeds rules issued effective November 1, 1991, and no processing allowance form is required. If the gas were reported as residue gas and liquids, i.e., processed gas, the value of the gas retained by the plant may be considered a cost of processing the liquid products.

QUESTION: How are the volumes retained by the plant reported?

RESPONSE: As a cost of processing the liquids.

QUESTION: Do you report residue as liquid or as raw gas?

RESPONSE: All of the residue gas sold is reported as residue gas (product code 03).

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5. QUESTION: We recently received a notice that the minimum royalty payment is due on or before the last day of the lease year. Since the actual royalty is not due until 30 days after the last day of the lease year, how can the minimum royalty payment be calculated?

RESPONSE: We offer the following options for calculating your minimum royalty obligations:

• Determine the minimum royalty obligation by computing the difference in the amount of royalties estimated to be paid and the amount of minimum royalty due for the lease year. If estimated annual royalties are less than the minimum royalties, submit a Report of Sales and Royalty Remittance (Form MMS-2014) and payment to MMS on or before the end of the lease year to report the difference. If, after the lease year has ended, you determine that royalties met or exceeded the minimum royalty obligation, you can recoup the amount of the overpaid minimum royalty payment by following the instructions in the MMS Oil and Gas Payor Handbook (1986) Volume II, Chapter 4.

• Wait to pay and report the minimum royalty obligation, if any, until after the last royalty payments are paid and reported on the Form MMS-2014 for that lease year. If the royalties paid and reported do not meet or exceed the minimum royalty obligation, you will be assessed late payment interest from the due date of the obligation to the date of payment.

6. QUESTION: Can we use an overpayment not recouped due to the 2-year statute to offset interest due relative...