CHAPTER 5 FEDERAL GAS PROCESSING ALLOWANCES

• Jurisdiction: United States

Federal Royalty Revolution--Oil and Gas
(Nov 1986)
CHAPTER 5
FEDERAL GAS PROCESSING ALLOWANCES
Marla J. Williams
Holme Roberts & Owen
Denver, Colorado

I. Purpose

A. Consistency

1. Establish uniform policy for offshore, onshore and Indian lands

2. Consolidate regulations, written policies (e.g. Conservation Division Manual) and unwritten policies into single set of comprehensive regulations

B. Accountability

C. Administrative ease

II. Background

A. History of Gas Production ¹

1. 1920's: When Mineral Leasing Act of 1920 enacted, gas was produced only in association with oil, had little or no market value and was usually flared

2. 1930's — 1940's: Producers began to recover natural gasoline from casinghead gas. Still no significant market for dry gas, and gasoline plant residue gas was frequently flared

3. 1940's to present: Continuous development of new markets for casinghead and dry gas. Exploration and development of new gas fields. State

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and Federal restrictions on flaring. Most recently, production of gas containing high percentage of non-hydrocarbon gases (CO₂, H₂S, etc.).

B. History of Gas Processing Allowances

1. Regulations of June 4, 1920 (47 L.D. 552):

a. Regulations silent as to valuation of dry gas.

b. Value of casing-head gas "assumed to be one-third of the value of the marketable casing-head gasoline extracted from such gas, but if the lessee receives a higher price for casing-head gas than the equivalent of one-third of the value of the casing-head gasoline manufactured from such gas the royalties shall be computed on that price."

2. Regulations of July 1, 1926 (52 L.D. 1):

a. "Dry gas" defined as natural gas containing so little gasoline that extraction is not commercially feasible, or natural gas from which gasoline has already been extracted (residue gas).

b. "[V]alue of raw gasoline in natural gas as produced is assumed to be one-third the value of the marketable gasoline extracted from such gas..."

c. If lessee derives revenue on gas from two sources (residue gas and natural-gas gasoline), royalty will accrue on both products.

d. If lessee receives a higher price for natural gas as a single commodity, royalty will be computed on that price.

3. "Net Realization Order" of June 7, 1937 (56 I.D. 462)

a. Interpreted 1926 regulations to set value at the greater of:

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i) value of all products (including residue) as fixed by Secretary, less 2/3rds the value of extracted gasoline; and

ii) Gross proceeds received from all products

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