CHAPTER 3 AROUND THE REGULATIONS IN 60 MINUTES - PRACTICAL APPLICATION OF THE FEDERAL AND INDIAN OIL AND GAS VALUATION REGULATIONS

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 3
AROUND THE REGULATIONS IN 60 MINUTES - PRACTICAL APPLICATION OF THE FEDERAL AND INDIAN OIL AND GAS VALUATION REGULATIONS
Judith M. Matlock
Partner
Davis Graham & Stubbs LLP
Denver, CO

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JUDITH M. MATLOCK is a partner in the Energy Group of the Denver law firm of Davis, Graham & Stubbs LLP. For thirty-five years she has represented companies in the oil and gas industry. Her practice has emphasized the post-production side of the business. She is involved in all aspects of the gathering, transportation, processing, fractionation, and marketing of natural gas, liquids, and crude oil and representing producers in connection with the calculation, payment, and reporting of royalties and production taxes. Her practice also includes public utility law involving both gas and electric utilities. She received her undergraduate degree (B.A. 1979) from the University of Colorado at Denver and her law degree (J.D. 1982) from the University of Colorado at Boulder. She is a member of Phi Beta Kappa, Order of the Coif, and the Denver, Colorado, and American Bar Associations. She has been named in The Best Lawyers in America® (oil and gas) since 1995. She is an active participant in the Rocky Mountain Mineral Law Foundation and has served on the Executive Committee, as a trustee, and co-chair of the Special Institutes Committee. She has also been the program chair for several RMMLF special institutes and short courses, was the program chair for the 2010 Annual Institute, and is a frequent lecturer and writer on energy topics. She teaches the oil and gas marketing section of the Foundation's Oil and Gas Law Short Courses. She is a frequent lecturer and writer on energy topics including two annual institute papers and over a dozen special institute papers for the Rocky Mountain Mineral Law Foundation, and numerous other papers for various oil and gas associations. Some of her papers include "Natural Gas Processing Agreements," Natural Gas Marketing I, Paper No. 7 (Rocky Mtn. Min. L. Fdn. 1987); "Natural Gas Processing Agreements," Natural Gas Marketing II, Paper No. 7 (Rocky Mtn. Min. L. Fdn. 1988); "Contract Considerations for All Buyers and Sellers," "The Natural Gas Wellhead Decontrol Act of 1989," 19 Colorado Lawyer 655 (1990); "Federal Regulation of Natural Gas," Natural Gas Conference, Handout (Energy Decisions, Inc. 1990); "Gas Marketing, Transportation, and Balancing," 1991 AAPL International Conference & Annual Meeting (Denver, Colorado); "Federal and State Regulation of Sales and Transportation," Negotiating Natural Gas Contracts in the Order 636 Environment, Paper No. 3 (Rocky Mtn. Min. L. Fdn. 1993); Who Rules Interstate Gathering?" Natural Gas: How to Keep Winning (Hart Publications 1993); "Transportation Tariffs and Agreements," Practical Natural Gas Marketing Short Course, Paper No. 5 (Rocky Mtn. Min. L. Fdn. 1994); "Workshop - Nominations, Allocations and Penalties in Detail," Practical Natural Gas Marketing Short Course, Paper No. 6 (Rocky Mtn. Min. L. Fdn. 1994); Overview of Federal Regulation," Oil and Natural Gas Pipelines - Wellhead to End User, Paper 2A (Rocky Mt. Min. Law Fdn. 1995); "Catching up: The Need to Reflect the Current Gas Marketing Environment in Oil and Gas Agreements," Journal of Land, Resources, & Environmental Law, pg. 305 (University of Utah College of Law 2004); Natural Gas Gathering, Transportation and Storage Agreements," Oil and Gas Agreements II (Rocky Mt. Min. L. Fdn. 2005); and "Federal Oil and Gas Pipeline Regulation - an Overview," Oil & Gas Agreements: Midstream and Marketing, Paper 4 (Rocky Mtn. Min. L. Fdn. 2011).

Table of Contents

SECTION

I. Introduction

II. Background

A. The Official Point at Which the Quantity of Production is Determined

B. The Quantities on Which Royalties Are Owed

C. The Monthly Forms Submitted to ONRR

1. The Oil and Gas Operations Report ("OGOR"), Form 4095)

2. The Report of Sales and Royalty Remittance, Form ONRR-2014

D. Recordkeeping Requirements

III. Federal Gas Valuation

A. Establishing the Value of Production - Determining Whether the Unprocessed or Processed Gas Valuation Regulations Apply

1. When the Unprocessed Gas Regulations (§ 152) Apply

2. Reporting for Gas Subject to the Unprocessed Gas Regulations

3. When the Processed Gas Regulations (§ 153) Apply

4. Reporting for Gas Subject to the Processed Gas Regulations

B. Valuation of Federal Gas Production Under the Unprocessed Gas Regulations

1. Gas Sold Under An Arm's-Length Contract

2. Gas Not Sold Under An Arm's-Length Contract (Non-Arm's-Length Sale Contract or No Sale Situations)

3. Exceptions for Marketing Affiliate, Arm's-Length POP Contracts and Warranty Contract Situations

4. Accounting For Comparison (Dual Accounting) When Required By Lease Terms

C. Valuation of Federal Gas Production Under the Processed Gas Regulations (§ 153)

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1. Residue Gas and Plant Products Sold Under An Arm's-Length Contract

2. Residue Gas or Gas Plant Products Not Sold Under An Arm's-Length Contract (Non-Arm's-Length Sale Contract or No Sale Situations)

3. Valuation for Marketing Affiliate and Warranty Contract Situations

4. Accounting For Comparison (Dual Accounting) When Required By Lease Terms or Processing and Sale of Residue Gas Are Both Non-Arm's Length

D. Determining Authorized Allowances For Transportation and Processing; Operating Allowances

1. Transportation Allowances Overview

2. Arm's Length Transportation Contracts

3. Non-Arm's-Length Transportation Contract or No Contract

4. Processing Allowances Overview

5. Arm's Length Processing Contracts

6. Non-Arm's-Length Processing Contract or No Contract

7. Operating Allowances (When Specified in the Notice of Lease Sale and in the Lease Agreement)

E. Exclusion of Costs of Marketing and Placing Gas Into Marketable Condition

IV. Indian Gas Valuation Regulations

A. Establishing the Value of Production - Overview

B. Value of Gas From Leases in an Index Zone (§ 172)

1. Index-based Valuation of Residue Gas and Gas Before Processing

2. Value of Gas Processed Before It Flows Into a Pipeline With An Index

3. Minimum Value of Gas Sold Beyond the First Index Pricing Point (the "Safety Net") Price

4. Accounting for Comparison (Dual Accounting)

5. Tribal or Allottee Leases Excluded From Valuation Under § 172

C. Valuing Gas Production When An Index-Based Method Cannot Be Used (§ 174)

1. Sales of Gas, Residue Gas, or Gas Plant Products Under Arm's-Length Contracts

2. Non-Arm's-Length Sale Contract or No Sale Situations

3. Accounting for Comparison (Dual Accounting)

4. Minimum Value of Gas Plant Products

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5. Major Portion Price

D. Accounting for Comparison (Dual Accounting) - More Detail

1. Actual Dual Accounting Under § 176

2. Alternative Dual Accounting Under § 173

E. Determining Authorized Allowances for Transportation and Processing

1. Transportation Allowances Overview

2. Arm's Length Transportation Contracts; Requirement to Submit Contract to ONRR

3. Non-Arm's-Length Transportation Contract or No Contract; Form ONRR-4295

4. Processing Allowances Overview

5. Arm's Length Processing Contracts; Requirement to Submit Contract to ONRR

6. Non-Arm's-Length Processing Contract or No Contract; Form 4109

F. Marketable Condition Requirement

V. Federal Oil Valuation Regulations

A. Establishing the Value of Production

1. Arm's-Length Dispositions of Oil By the Lessee Or Its Affiliate- §102

2. Option of Valuing Oil Under Either § 102(a) or § 103

3. Federal Oil Not Sold Under an Arm's-Length Contract - §103; Oil the Lessee Elects to Value Under § 103

B. Determining Transportation Allowances and Location Differentials; Operating Allowances

1. Overview of transportation allowances and location and quality differentials

2. Transportation Allowance Under an Arm's-Length Transportation Contract

3. Transportation Allowance If No Arm's-Length Transportation Contract or Arm's-Length Tariff

4. Location and Quality Adjustments and Transportation Allowances That Apply When Oil Production is Valued Using NYMEX Prices or ANS Spot Prices

5. Operating Allowances

C. Exclusion of Costs to Market and of Placing Oil Into Marketable Condition

VI. Indian Oil Valuation Regulations

A. Establishing the Value of Production; Reporting

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1. Indian Oil Sold or Exchanged Under An Arm's-Length Contract

2. Indian Oil Not Sold Under Arm's-Length Contracts

3. Major Portion Prior to July 1, 2015

4. Major Portion Effective July 1, 2015

B. Determining Authorized Allowances For Transportation

1. Arm's-Length Transportation Contracts; Requirement to Submit Contract to ONRR

2. Non-Arm's-Length Transportation Contracts or No Contract; Form 4110

C. Exclusion of Costs of Marketing and of Placing Oil into Marketable Condition

VII. Overview of the Marketable Condition Rule

VIII. Conclusions

Supplement - Additional Resources

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I. Introduction. ¹

Effective March 1, 1988, the Department of the Interior promulgated new Federal and Indian oil and gas valuation regulations that constituted a major revision of the regulations. At the time, Federal and Indian gas was combined in one set of regulations and Federal and Indian oil were combined in another set of regulations.²

Subsequently, through a series of amendments, the Federal and Indian regulations were separated from each other and all of the regulations were revised to some degree (some more than others). The current Federal gas valuation regulations have been the least revised and retain much of the original structure and substance of the 1988 regulations.

On July 1, 2016, the Department of the Interior published a Consolidated Federal Oil and Gas and Federal and Indian Coal Valuation Reform Rule (the 2017 Valuation...